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Greek economy suffers, government rules out euro zone exit

By Harry Papachristou

ATHENS (Reuters) - Greece ruled out quitting the euro on Thursday, shrugging off warnings by its biggest creditor Germany and yet another set of bad economic figures showing it is struggling under the weight of EU/IMF-imposed austerity.

Anger at Greece's failure to meet fiscal targets that are a condition for its international bailout is nearing breaking point in Berlin and other European capitals, with senior German politicians now talking openly about the possibility of Athens exiting the euro zone.

But Athens ruled out any chance of quitting the single currency, pledging to make every effort to qualify for a 109-billion euro bailout agreed by euro zone leaders in July, the second rescue package for the debt-laden country in little more than a year.

"There is no threat of Greece exiting the euro zone," government spokesman Ilias Mosialos said. "We are proceeding with reforms quickly."

Greece is missing fiscal and reform targets set out under the first, 110-billion euro bailout it obtained in May 2010, despite the spending cuts and tax hikes it took to comply.

Faced with the threat of its EU partners blocking an 8-billion euro bailout tranche due next month if it does not get its act together, the country's socialist government pledged on Tuesday to step up long-promised budget cuts and asset sales.

But economic figures released on Thursday show austerity is stretching the economy to the limit, making it more and more difficult for the country to meet its 2011 budget deficit target of 7.6 percent of GDP, from 10.5 percent last year.

GDP contracted at an annual pace of 7.3 percent in the three months to June, from 8.1 percent in the previous quarter, according to seasonally unadjusted figures by statistics agency ELSTAT, while unemployment stayed near record highs.

The figures confirm austerity is taking a bigger-than-expected toll on the economy, which is in its third consecutive year of recession.

"Domestic demand is incredibly weak, exports do not benefit from global economic growth ... A 2011 deficit of 8.5 percent to 9 percent doesn't seem implausible," said Ben May, a London-based analyst at Capital Economics.

The GDP data showed private consumption dropped by an annual 6.1 percent in the second quarter while investment shrank by 17.9 percent, according to the ELSTAT figures. Construction, once one of the country's strongest growth engines, slumped by an annual 47 percent in terms of volume between January and May.

Unemployment fell slightly to 16.0 percent in June, helped by seasonal tourism jobs. But it remained close to a record 16.6 percent it hit the previous month, well above its 11.6 percent level in June 2010.

"It appears the rise in the unemployment rate will continue. There are no convincing signs of an imminent peak," said Platon Monokroussos, an economist at EFG Eurobank.

Greece blames the fiscal slippage on the worse-than-expected recession, but EU/IMF inspectors point at slowness in the implementation of reforms.

Rules that make it hard to hire and fire workers have helped make joblessness among the Greek young more than 15 percentage points higher than the euro area average, according to OECD figures. Unemployment in the 15-24 age category stood at 43 percent in June, almost twice as high as three years ago.

Reacting to earlier pressure from the inspectors, Greece has taken steps to make its labor market more flexible, including below minimum-wage salaries for people getting their first job.

But before agreeing to new aid disbursements, the inspectors insist that Greece remove hurdles to the introduction of company-level wage contracts, cut the number of civil servants and open up closed professions, such as taxi owners and pharmacists.

Taxi drivers and doctors went on 24-hour strikes on Thursday to protest at the measures. Students opposing university reform have occupied more than 100 faculties across the country as the school year begins.

Analysts expect a compromise to be found for the next aid tranche to be disbursed, averting a disorderly Greek default. But this will not remove the possibility of a Greek default or even an exit from the euro down the line, they said.

"If the (euro zone's) core economies demand that Greece passes further fiscal measures, it could prompt Greece to try to implement another debt restructuring as soon as next year," May said. "Exiting the euro zone is a real possibility."

(Additional reporting by Renee Maltezou and Tatiana Fragou; Editing by Stephen Nisbet)

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