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EU in crisis talks as Greek deficit puts euro at risk

EU leaders are in crunch talks to decide on bailout measures for the Greek economy.

Greece's deficit has spiralled to more than 12pc of economic output in 2009, which is four times the eurozone limit.

The country has been crippled by a raft of public service strikes as the government announced tough new taxes to deal with its burden.

The Greek crisis is a major test for the strength of the euro on the world currency markets and leaders of the countries which use the euro will discuss the country's debt problems.

So far, the EU's largest economies, Germany and France, have said that they are prepared to offer their support to Greece at the summit.

And it is expected that other EU leaders will follow and pledge highly conditional financial support for Greece to prevent the country defaulting on its debt.

Prime Minister George Papandreou's new government has announced widespread measures, including a salary freeze and a two-year increase in the average retirement age to 63.

Market fears over Greece intensified in recent days, dragging the euro down to an eight-month low against the US dollar.

Member states adopting the euro are governed by rules obliging them to keep deficits to less than 3pc of GDP, and debt at no more than 60pc of GDP.

Analysts have criticised the lack of pace from the European Union to deal with Greece's problems which first emerged in December.

And they were sceptical that today's special summit would produce concrete proposals for a bailout, with leaders instead limiting their remarks to guidelines about how a rescue plan might take place.

"A firm commitment is virtually impossible, partly for the reason that bilateral lending would have to be approved by the national parliaments, if it goes beyond small amounts inside their cash holdings for a very short term," said Erik Nielsen, chief European economist at Goldman Sachs.

The European Commission produced various plans but there were doubts about the ability or willingness of the Greek authorities to implement them.

The Greek austerity plan was revealed is expected to lower the budget deficit by 4 percentage points in one year, which is significantly more than Ireland's plan to cut the country's deficit by 1.8 percentage points.