Greek fiscal plan needs stimulus back-up: Papandreou

BERLIN/ATHENS Mon May 17, 2010 6:41am EDT

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BERLIN/ATHENS (Reuters) - Greece's austerity drive to return to fiscal health will only work if it is combined with measures to stimulate growth and investment, the country's prime minister said on Monday.

Greece's economy, which slumped 2.0 percent last year, is projected to contract by 4.0 percent in 2010 and by 2.6 percent in 2011, declines that are set against plans to cut the deficit from 13.6 percent of GDP to 3 percent by 2013.

Greek opposition parties and some economists are concerned the drastic belt-tightening agreed in exchange for a 110-billion euro ($140-billion) emergency EU-IMF loan package may plunge the economy into an even deeper recession and make key fiscal targets harder to reach.

Fears that deficit-cutting in Greece and elsewhere in the euro zone will hurt growth were at the forefront of investor concerns on Monday, sending the single currency to a four-year low and fuelling fears it may face freefall.

"This savings program was the only way to avert the threat of a state bankruptcy," Prime Minister George Papandreou told Germany's Handelsblatt newspaper. "The program can be sustainable only if we stimulate investment and growth."

Large, sometimes violent street protests against the pay cuts and tax rises have hit the Greek capital and labor unions have called a general strike and major demonstration for May 20. The social cost is likely to rise as the austerity measures begin to bite.

SAFETY NET

Papandreou admitted the government's austerity program, demanded as a condition for a bailout by the EU and IMF, could cause a deep recession, but insisted the plan was achievable.

"I believe we can implement our program. But we must ensure that the weakest in our society don't fall into the abyss," he said. "We can't push people below the poverty line.

"Part of our savings program is therefore a safety net. That will cost money but we have to do it."

According to Monday's Financial Times, the German government is to press other euro zone countries to adopt tighter fiscal rules to match Berlin's balanced budget law, which prohibits the federal government from running a deficit of more than 0.35 per cent of GDP by 2016. The newspaper named no sources.

Asked to comment on market concerns over implementation risks and whether the belt-tightening would be too much to bear for the economy and the government, Papandreou said: "We now have the chance to prove that we can achieve it. If everyone says the Greeks can't achieve it, then they will condemn us to fail.

"We're not begging for gifts of money, but asking for loans which will be paid back with high interest rates. I'm sure Greece is a good investment."

Papandreou also criticized financial markets for overreacting to Greece's debt crisis and accused speculators of helping to provoke panic reactions.

"Angela Merkel, Nicolas Sarkozy, Jean-Claude Juncker and I have suggested in a joint letter to Barack Obama whether the markets for credit default swaps ... should not be closed. The G20 countries want to discuss this," he said.

On Sunday, Papandreou told CNN that Greece may investigate U.S. investment banks and their role in the run-up to the Greek debt crisis which has shaken faith in euro zone economies. [nLDE64F0BB]

(Writing by George Georgiopoulos; Editing by Jon Hemming, John Stonestreet)

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