Spain cuts deep while Europe faces up to crisis

Spain announced dramatic cuts to public sector salaries and Greece received its first injection of an IMF bailout yesterday as Europeans faced up to the reality of their massive debt crisis.

France announced worse than expected growth figures, Austria admitted that its recovery had stagnated and Greece and Romania confirmed they were still in recession, while Germany put a brave face on weak but positive results.

The formation of a coalition government in Britain cheered The City, but markets within the eurozone were mixed as traders evaluated the effects of austerity measures and Europe's new trillion-dollar emergency fund.

Yesterday's most severe new measures came in Spain, home to the eurozone's third largest deficit after Ireland and Greece, where Prime Minister José Luis Rodriguez Zapatero ordered a five per cent public sector wage cut.

Government salaries and pensions, except for those for the poorest, will remain frozen in 2011, he said, admitting that this would have "an obvious social impact" in a country struggling with 20 per cent unemployment.

Spain's credit rating was cut by Standard and Poor's last month and it has been talked of, along with Portugal, as a possible new weak link in a eurozone already shaken by Greece's massive debt crisis.

The deficit ballooned to 11.2 per cent of GDP in 2009, in the wake of the global financial crisis and the collapse of a housing bubble, and Spain's economy has been the target of speculative attacks on the markets.

Spain introduced a €50 billion austerity package in January, but this has not proved sufficient to quell fears of an eventual debt default, forcing the Socialist government to take new measures.

These included scrapping a €2,500 payout to parents for the birth of children, a key part of Mr Zapatero's social platform. Along with the wage freeze, the new belt-tightening ought to save €15 billion over two years.

Greece, meanwhile, was to receive the first slice of a massive International Monetary Fund bail-out loan designed to prevent it from defaulting on its debt.

"We expect the funds today," a Finance Ministry official told AFP. "The IMF will provide €5.5 billion today and we expect an instalment from the European Union early next week."

The EU has agreed to give Greece €14.5 billion as a first step.

Athens needs to make a payment of €9 billion on a maturing 10-year bond on May 19 and any sign of falling short would be viciously punished by the markets.

But the arrival of the emergency cash will do nothing to quell anger on Greece's streets, where the intervention of the European Union and the IMF is resented by left-wing protesters opposed to draconian cuts.

Greece's two main unions, which represent some 1.3 million civil servants and private employees, were to hold a new rally in Athens later yesterday, after a wave of street protests and three general strikes.

"The country's workers are maintaining the struggle and their opposition to the package of unjust and harsh measures," the General Confederation of Greek Workers, a private sector trade union, said in a statement.

Greece's loan is part of a €110-billion rescue package agreed with the EU and the IMF earlier this month, the first to be issued to a member of the eurozone single currency bloc.

Athens' latest deficit-cutting effort is a pension overhaul unveiled this week to reduce average retirement payments by seven per cent by 2030, while the upper category of pensions would be cut by up to 14 per cent.

Governments across Europe announced new growth figures yesterday with most confirming that their economies are continuing a slow and unsteady crawl out of recession, with little sign of gathering momentum.

The eurozone economy as a whole grew only 0.2 per cent in the first quarter compared to the last quarter of last year.

Germany's economy, Europe's biggest, grew by a modest 0.2 per cent in the first quarter. More than forecast, but still anaemic. Italy's 0.5 per cent growth exceeded both expectations and the eurozone average.

France's growth figure was both lower than Germany's, at 0.1 per cent for the first quarter, and lower than forecast, leading the state statistics agency INSEE to recalculate the public debt to a record 78.1 per cent of GDP.