ANALYSIS:In their desperation to avoid the inevitable, European leaders have magnified Greek crisis

THE EU authorities are struggling to prevent toxic fallout from the Greek debt crisis from contaminating the wider euro zone. With fiscally weak countries such as Ireland, Portugal and Spain already in the firing line, in question now is whether Europe can damp down escalating fear of contagion by quickly settling a rescue deal for Athens.

It shouldn't be this way at all. By the time Greek premier George Papandreou capitulated to market pressure last Friday by seeking activation of the rescue, the broad parameters of the plan were already in place.

As they wait now for Berlin to definitively come on board, Europe's top authorities seem to be in the grip of indecision and prevarication.

Even as OECD secretary general Angel Gurria told German radio that the EU should have intervened with aid for Greece "two or three months ago", it emerged yesterday that euro group leaders will convene a special summit to trigger the aid around May 10th.

While this is fully nine days before Greece must refinance an €8.5 billion bond, it's not far off the very last-minute in currency terms.

The key point, however, is that the summit would take place one day after an important regional election in Germany.

As EU and IMF officials hone a three-year austerity plan in Athens, at issue is the requirement to craft something severe enough to bring on board German chancellor Angela Merkel without ruining the recovery prospects of the Greek economy. Cut too deep and Papandreou's ability to service his €300 billion debt without unrest on the streets is curtailed. Cut too little and Berlin won't play ball. An overriding concern is to avoid any Greek default, a debt restructuring being seen to be an invitation for trouble elsewhere in the euro zone.

There are no easy answers to these difficult questions, but they are questions that loomed for months as Athens sought to avoid the humiliation of external aid. That they should remain unanswered at this late stage smacks of an inability to take decisive action quickly when the moment of truth comes.

With a 16-country currency on the line, this is something which can be exploited by the markets. They have been happy to do so, forcing Europe's hand at each stage in the crisis. Only at gunpoint did EU leaders kill off the no-bailout clause in early February. It was the same every other step of the way.

"The onus is now on governments to ensure that the crisis that initially affected the financial sector, and subsequently the real economy, does not lead to a full-blown sovereign debt crisis," said European Central Bank executive board member Jürgen Stark.

He is not a man given to over-statement.

In their desperation to avoid the inevitable, EU leaders have magnified the problem they are trying to confront. This is linked to basic politics, for no country wants to assume the financial burden of profligacy elsewhere.

It is especially so in Germany, where acute public antipathy to a bailout for Greece has been fanned by dire tabloid headlines. As the election approaches, Merkel's reluctance to play the part of paymaster has intensified uncertainty. If confidence is a core condition for stability on markets, uncertainty can be a killer.

Even if the economic fundamentals in Lisbon are superior to those in Athens, all it takes for borrowing costs to rise is a simple souring of sentiment. While the Greek crisis and its spill-over brings into the sovereign debt arena the turbulence that took global banks to the abyss in 2008 and 2009, it seems a key lesson from that episode has been missed.

EU leaders have tried to avoid moral hazard, rewarding Greece for its bad fiscal behaviour. But as the Lehman catastrophe demonstrates, the moment sometimes comes in a financial meltdown when moral-hazard worries become subordinate to the requirement to confront the problem at hand.

The Greek problem shows the ease with which the markets can exact pain and profit when uncertainty about the political response to crisis takes hold. The country is a minnow, but its weakness has exposed key flaws in the euro's design.

That 14 of its 16 members are defying - to various degrees - the 3 per cent deficit rule further illustrates the currency's vulnerability.

The time for action is nigh.