Greece told to speed up austerity measures Commission publishes report on Greek growth as Italy downgrades its growth targets.

The European Commission has urged Greece to speed up privatisations and public-sector modernisation in order to restore economic growth. As the eurozone’s re-awakened debt crisis this week threatened both Spain and Italy, José Manuel Barroso, the president of the European Commission, presented a report entitled ‘Growth for Greece’ to the European Parliament. He told MEPs yesterday (18 April) that the measures were vital to “help Greece to move from a vicious to virtuous cycle”.

The report was published on the day that Italy’s government was forced to downgrade its growth and deficit targets, the International Monetary Fund (IMF) warned of a looming credit-crunch and Spanish authorities held talks on proposals to make cuts in health and education to reduce its deficit and calm the financial markets.

“We are fighting every day to continue to avoid the fate of Greece,” Italy’s prime minister, Mario Monti, said.

The Commission’s report on Greece contains 30 measures to help the country shake off its crippling fiscal problems and return to growth. While none of the steps will come as a surprise to Greek authorities, the intention is to put pressure on Greece’s political parties to keep up the momentum of austerity and economic reform in the run-up to a general election on 6 May.

The report calls for Greece to reduce labour costs by 15%, forge ahead with its plans to privatise gas and electricity companies, fully implement liberalisation of employment law and reform the tax system. The report said reform of tax was “crucial for getting control over public finances”.

Barroso said that the “sacrifices” being made by Greek people “will bring rewards in the near future”, if Greece follows the priorities set out in the document.

“With determination on the side of all the Greeks, and with the full support of the European Union, we can transform Greece for the better,” he said.

As part of the report, the Commission told Greece to make better use of its EU structural funds, saying that less than half of its allocation had been spent.

The report states: “This implies significant unused capacity to boost demand and investment and create employment in the short term.”

Lucas Papademos, Greece’s caretaker prime minister, yesterday sent a letter to Barroso pleading for agricultural and structural funds to Greece not to be cut when the EU makes funding adjustments for 2014-20, saying that it would further damage growth prospects.

Italian contraction

Yesterday, Italy’s government slashed the country’s economic growth targets. Monti said that Italy expected to see a 1.2% fall in gross domestic product (GDP) this year rather than 0.4% as initially forecast. He also said that the country would not balance its budget next year, as it had previously promised. Instead, it would have a deficit of 0.5% of GDP.

The IMF published its global financial stability report yesterday, warning of a potential credit crunch that could do “serious damage” if banks reduce balance-sheets at the same time.

The IMF said that it expected banks in the EU to cut their balance-sheets by €2 trillion over the next 18 months.

“Although some deleveraging is both inevitable and desirable, its precise impact depends on the nature, pace and scale of asset-shedding,” the report said.

It added: “There is a risk that a large-scale reduction in assets by European banks could lead to a credit crunch.”

The IMF called for a greater ‘firewall’ for the eurozone to protect against contagion and for policies on bank resolution.

Spain’s government has been negotiating with the country’s regional authorities over cuts to education and health spending. The government is expected tomorrow (20 April) to approve savings of €7 billion in healthcare and €3bn in education.

In the past few days, yields on Spanish bonds have risen to levels not seen since December, raising fears that it may be forced to seek a bail-out.