Greece’s austerity drive may pass its first test this week as a European Union-led mission prepares to dole out more rescue funds for a government trying to cut the euro-region’s second-biggest budget gap and weather a recession.
In approving the second tranche of a three-year, $145 billion bailout, the EU and International Monetary Fund are likely to praise Greece’s progress and say more work is needed to lock in the gains, economists said. Greece is battling the highest inflation rate in the 27-nation EU, revenue is trailing targets and the bloc and the IMF forecast the economy will shrink as much as 4 per cent this year.
Prime Minister George Papandreou has raised taxes, cut wages and overhauled the state-run pension system, while braving months of strikes against the measures that helped shrink the budget gap by 45 per cent in the first half. Sustaining the effort and qualifying for another 9 billion euros of EU-IMF funds will be complicated by a recession that has been deepened by his steps.
Finance Minister George Papaconstantinou said last month he’s confident of drawing down the second loan payment and that Greece may beat this year’s deficit target of 8.1 per cent of gross domestic product, down from 13.6 per cent last year. He said the forecast of an economic contraction of 4 per cent was “overly pessimistic.”
