Tensions at top EU level over Greek budget cuts

THE EUROPEAN Central Bank (ECB) joined Germany and the European Commission in seeking an immediate round of new budget cuts from Greece but all three backed down when France supported Greek demands for more time.

As opposition to a bailout for Greece intensifies within the German government, the European authorities are keen to prise further austerity measures from Greek prime minister George Papandreou to avert the need for a rescue.

Amid resistance to a bailout in German chancellor Angela Merkel’s Christian Democrat party and her Free Democrat partners, the third pillar of her coalition added his voice to the dissent yesterday.

Christian Social Union leader Horst Seehofer said “not a single euro” should go to Greece.

Sources familiar with the ECB’s stance on the current Greek budget said the bank went into a key meeting of euro-zone finance ministers on Monday strongly supporting demands from the commission and Germany for new cuts straight away.

In the event, however, the ministers declared they would impose new measures on Greece if it could not prove within a 28-day deadline that its current plan was working. They also asked Athens to prepare new measures that could be introduced if required.

Sources briefed on the tensions that surfaced during the meeting said Greek minister of finance George Papaconstantinou found an ally in his French counterpart, Christine Lagarde, in his resistance to immediate cuts.

While giving Greece some breathing space, the compromise brought forward the prospect of external intervention by Brussels in Greek budgetary affairs. The ministers endorsed the commission’s request to invoke new powers enshrined in the Lisbon Treaty to exclude Athens from a vote on the additional budget measures.

This reflects concerns at the top of the EU hierarchy – shared, among many others, by the ECB – that the assumptions in the current Greek plan are too optimistic.

Critics of the plan – economics commissioner Olli Rehn among them – fear that the measures already in train do not go far enough to ensure the country will realise a cut in its deficit equivalent to 4 per cent of its gross domestic product this year.

“We would probably have preferred to have had the additional commitments already to make sure the 4 per cent in 2010 is achieved,” said a source familiar with the ECB’s thinking.

The same sources described as “nonsense” a suggestion in the French newspaper Le Monde that the bank wants Greece to target a 5.25 per cent cut in its deficit.

Nevertheless, it is understood that the ECB’s projections suggest some €2 billion in additional measures may be required this year.

ECB president Jean-Claude Trichet last week endorsed the 4 per cent target when he said he considered “important” a statement from EU leaders urging the Greek authorities to do whatever was necessary to realise that objective.

The euro fell against the dollar yesterday, closing down 1.1 per cent at $1.3608.