On the revenue side the government raised the average value added tax rate and

On the revenue side the government raised the average

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hiring freeze. On the revenue side, the government raised the average value-added tax rate and increased taxes on certain commodities (fuel, tobacco, and alcohol). The government aimed to raise additional revenues through strengthened tax collection and higher contribution requirements for tax evaders. The government has begun to implement healthcare and pension reforms deemed vital to consolidating public finances. The Greek pension system, considered one of the most generous in Europe, has long been a target of advocates of Greek economic reform. In July 2010, the parliament agreed to pension reform to increase the average retirement age and reformed how pension benefits would be calculated. Prime Minister Papandreou also launched a similar effort to reduce expenditures and strengthen accountability in what is considered an inefficient Greek healthcare system. Healthcare reforms have included a reduction in total expenditures and consolidation of hospitals. Structural reforms pursued in 2010 to boost Greek competitiveness were focused on the rigid and highly fragmented labor market. Central Bank Intervention The ECB and the U.S. Federal Reserve (the “Fed”) have also played a role in responding to the crisis. The ECB announced in May 2010 that, for the first time, it would start buying 10
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European government bonds in secondary markets to increase confidence and lower bond spreads for Eurozone bonds under market pressure. Between May 2010 and June 2011, the ECB purchased government bonds totaling €78 billion (about $112 billion), with the bulk purchased in the summer of 2010. Market analysts estimate that more than half (€45 billion, about $65 billion) of the ECB’s bond purchases were Greek bonds. The ECB has also provided substantial liquidity support to private banks in Greece and other countries in the Eurozone, and has provided more flexibility in doing so than it did before the crisis. June and July 2011 Starting in the spring of 2011, it became clear that the Greek economy was contracting more severely than expected and would require more assistance in order to avoid defaulting on its debt. After requiring Greece to adopt additional austerity measures, EU officials, the ECB, and the IMF debated for several weeks about what a second package for Greece would include. They quickly reached an agreement after a “speculative attack” on Italy in July 2011 (a rapid sell-off of Italian bonds, resulting in rising bond spreads on Italian bonds). European officials decided that in addition to more austerity measures and financial assistance, the holders of Greek bonds would also share in the crisis response by accepting some losses on their investments. More Fiscal Consolidation and Economic Reform in Greece As economic conditions worsened in the spring of 2011, the Greek parliament approved an additional round of austerity measures and structural reforms in June 2011. These reforms were necessary to get the next disbursement of funds from the original Eurozone-IMF financial assistance package, as well as for securing a second assistance package. The
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