European Union (EU) is suffering from a severe leadership problem. They are doing everything contained in the 'not to do list for a financial crisis'. They still could not put into practice the economic program which will relieve a member country with high budget deficit and debt. First they announced in public that they are against bailout plan arguing that it will set a bad example for countries which lived within their means. They said that the EU legislations do not allow bailout operations. On the other hand they also rejected the idea of one EU member country signing an agreement with the IMF.

Despite all rumors that a credit agreement for Greece is about to be concluded spread around two months ago. EU leaders saw even the rumors could drop the risk premium on Greece bills; but they did not take a step. What is more, risk premium was quite lower than the current level when those rumors were talked. When the expected action did not take place, risk premium increased gradually and Greek Treasury had to pay high interest on the newly sold bills. This brought about the risk of rises in future budget deficit and public debt. Thus arguments that the fiscal problems of Greece cannot be solved through this method even if the great majority Greece supports the economic program and even if the Greek government pertinaciously ensures budget discipline became to be voiced more frequently. It was argued that Greece should definitely take measures to stop the contraction in the economy and thus increase the capacity to pay its debt.

In this context the first option that comes to mind was devaluation. However, since Greece did not have monetary policy independence, devaluation was actually not an option. If it could, goods the country exported would become cheaper for the importer countries and thus production level would increase. The second option was reducing the cost of production in Greece. So reducing labor costs was voiced as an alternative. However that this is not doable became apparent upon the response to the decisions about public employees.

It was also discussed that Greece should leave the Eurozone. But when things started to get worse, risk premium of Greece increased considerably, and credit rating was reduced, a comprehensive plan was finally announced. But the response of the public to the plan was also strong this time. So this is the point we arrived: at the weekend EU 'leaders' convened. A new plan is expected to be announced in a few hours from now. It is really unbelievable that lag behind. This is why the term 'leaders' at the title was given in quotation marks. A development that can lead to a crisis; then a step from the leaders, then a stronger sign of trouble, and then another step.

But the EU could have let Greece to sign a deal with IMF way earlier. EU leaders could have made a contribution with a strong credit support along with the IMF deal to be signed. The interest rate on this credit could have been kept slightly above the rate Germany paid for borrowings from the market for instance. Though that would not reflect the real market conditions in Greece, they could have convinced the public that this was not a 'bailout' plan since signs that things are turning around in Greece spread around risk premium would decrease and the market interest rate in Greece would converge to the credit interest rate.

Some other points to mention: At what degree the option to reduce wages in order to decrease the cost of goods Greece produces, as recommended by some economists, works? Let us assume that this way done; will the resultant drops in prices not increase the real value of Greece's debt? Was the main problem of Greece not high debt ratio? So, would not this alternative proposed as a solution intensify the problem instead? Even this option would work, why cuts are only foreseen in wages? A policy which reduces wages on the one hand and decreases prices on the other (as was implemented in Mexico and Israel previously) more feasible in political terms?

This commentary was published in Radikal daily on 10.05.2010