EUROPEAN leaders appear to have agreed that Greece can cut its VAT (value added, or sales, tax) rate in a move designed to win support for more public spending cuts as the embattled nation prepares for a crunch decision on a second international bailout.
Athens was offered the olive branch on VAT in a last-ditch effort to win over the conservative opposition, which has been demanding tax cuts as the price for agreeing to more European Union (EU) loans. It believes tax cuts will encourage businesses to expand and help the economy grow.
After days of wrangling, a German source said the so-called troika team of the EU, the International Monetary Fund (IMF) and European Central Bank (ECB) inspectors had struck a deal with the socialist government on VAT cuts as part of a wider agreement that Greece reduces its debts to less than 3 per cent of gross domestic product (GDP) by 2014.
''They have agreed on it,'' the source said. A deal is expected in the next few days, before an EU finance ministers' meeting at the end of the month.
However, political agreement remained elusive after the opposition New Democracy party warned that it wanted more than a VAT cut. ''If correct, it is a good step, but not good enough; it is not sufficient to restart the economy,'' a party official said.
Greece is expected to miss the targets set by the EU last year in exchange for a €110 billion ($148 billion) bailout. Eurozone governments now expect Greece to cut its deficit at a faster pace.
Last year, Greece posted a deficit of 10.5 per cent and at the present rate the EU estimates it will have a funding shortfall of about 9.5 per cent this year. By the end of 2011, its overall debt is likely to reach 150 per cent of GDP.
German and French officials are keen to strike a deal with Greece, to end speculation that the country will be forced to renege on its debts. German and French banks are each owed tens of billions of euros.
A restructuring of Greek debt by either lengthening payment times or cutting the amount owed would hurt the balance sheets of these banks, many of which are already in a parlous financial state.
Guardian News & Media