Sept. 5 (Bloomberg) -- Greek Prime Minister Kostas Karamanlis, seeking a third term in government, announced plans for immediate spending cuts, including a freeze on public-sector wages and hiring, to defend the country from the effects of the global economic crisis. He said the opposition socialist party hadn’t understood the magnitude of the crisis.

“Today the effects of the crisis leave no room for doubt about the way forward,” Karamanlis said in Thessaloniki, northern Greece, today, televised live on state-run NET television. “We have two very difficult years ahead of us. 2010 will be, in particular, definitive for the economy. If we don’t act immediately and decisively, the risks are great.”

Karamanlis announced a raft of plans he would implement to ensure long-term growth if he is re-elected, including a freeze next year on new public sector workers, no increases for public sector pensions or wages next year and a two-year 30 percent cut in overtime and travel spending. The measures are part of his focus on tightening control of public spending, curbing tax evasion and structural reforms.

Greeks vote for a new government in general elections on Oct. 4, two years before scheduled, after Karamanlis said earlier this week he needed a new mandate to confront mounting economic problems. Karamanlis, 52, sought a quick vote to avoid a drawn-out election campaign that would be “the worst for the economy.’’

Economy Shrinking

The Greek economy is set to shrink this year for the first time since 1993, ending its run as one of the European Union’s fastest-growing, as the global recession hurts shipping and tourism. New taxes to curb a swelling deficit and a series of corruption cases have eroded support for Karamanlis in his second term. New Democracy has trailed the opposition socialist Pasok party in polls for more than a year.

“Greeks are called on to choose policies and a prime minister,” Karamanlis said. “The easy, pleasant road of promises leads only to a dead end. The difficult uphill road of responsible policy is the only way towards prospects and hope.”

With a one-seat majority in parliament, Karamanlis has hesitated to push ahead with far-reaching and permanent reforms that would reduce the budget deficit and improve competitiveness. Greece is under scrutiny a second time from the European Commission to rein in spending as its deficit is set to exceed the EU’s 3 percent limit for a third straight year.

Tax Levy

To shrink that shortfall, Karamanlis’s government adopted a one-time levy on people earning more than 60,000 euros ($85,600) and froze the wages of civil servants. The government also raised taxes on cigarettes, alcohol, yacht owners and gambling to try to bring the deficit under control.

Before the call for elections this week, Economy and Finance Minister Ioannis Papathanasiou was due to announce measures in October that would reduce expenses permanently.

Karamanlis, the nephew of a former prime minister, spoke tonight as the city deployed 3,000 police to maintain order amid protests by union groups. The General Confederation of Greek Workers, the biggest labor organization, called a rally to protest economic policies, include selling stakes in state-run companies such as Thessaloniki Water & Sewage Co. SA to reduce debt.

The prime minister reiterated his commitment to state-asset sales and shrinking the wider public sector.

The country faces a period of “prolonged slow growth” unless it can get its public finances under control and tame the EU’s second-biggest debt as a percentage of gross domestic product, the International Monetary Fund said on Aug.6.

Pasok, led by George Papandreou, 57, son and grandson of former prime ministers, has 31.5 percent support compared with 25.1 percent for New Democracy, a poll broadcast on television station Mega on Sept. 2 showed. If those percentages are replicated on election day, Pasok wouldn’t be able to form a majority in the 300-seat parliament. That could lead to either some form of coalition government, or new elections.

Karamanlis narrowly defeated Pasok in the last election in Sept. 2007 and holds 151 seats in the legislature.

To contact the reporters on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net;

Last Updated: September 5, 2009 15:18 EDT