Deal for Greece is not a solution for Europe

Greece has been bailed out yet again – for a while. Other indebted European states should be acting, vigorously, on what they're learning from the Greek ordeal.

Marathon "is indeed a Greek word", Olli Rehn joked at 3am yesterday. The European monetary affairs commissioner was speaking, bleary-eyed, at a press conference announcing that after prolonged talks, yet another crisis meeting had resulted in yet another complex ad hoc deal to keep Greece from insolvency for a while longer.

If governments in other debt-burdened European states have been following the Greek tragedy, Mr Rehn should at least be spared the need to stay up until 3am for comparable negotiations with other countries. Greece's mess should be a powerful caution to others to reform their own economies before they, too, must cede so much power.

Politicians in Portugal and elsewhere cannot envy their Greek colleagues, who are seeking re-election this spring in an atmosphere still thick with smoke from the rioting of citizens irate at the prospect of years of austerity. Indeed, the latest €130 billion (Dh634bn) bailout will be delivered only after the caretaker government of Prime Minister Lucas Papademos formally cuts the minimum wage and pensions, and accepts "enhanced and permanent" EU monitoring of Greece's budget.

In exchange, the Greeks who ran up so much debt have now been given quite a discount on it: private holders of Greek bonds have agreed to settle for only about 25 per cent of net present value (overall payback). This is not the "haircut" of debt-market jargon; it is closer to decapitation.

Paradoxically, however, all this shedding and restructuring of debt will help only slowly - Greece's economy is expected to contract by 4.3 per cent this year, stabilise next year and only then, perhaps, begin to grow. The ugly debt-to-GDP ratio will take years to improve, and that is if you believe the optimists. In some scenarios, the ratio will get worse. Greece's finances remain perilously unstable.

In practice, then, no prudent government would want a debt writedown on such terms. All the more reason, then, for them to tackle their problems while they still have some independence.

The best way out of a nasty debt-to-GDP ratio is growth, which is the real aim of many of Greece's "austerity" measures: lower wages, more competition, better productivity, higher labour force participation rate, less burdensome regulation, simpler tax policy and vigorous tax collection, and so on.

Bailouts buy time. Other European debtor countries have a little more time than Greece; they must use it to create the conditions for economic growth.