In a post mirroring the policy prescription that German economist Hans-Werner Sinn recently gave, Nouriel Roubini advises Greece to default and exit the euro zone. Where Sinn is concerned about German taxpayers paying the part of the bill left for bank creditors, Roubini is concerned about Greek taxpayers and workers also paying that bill.
He writes:
The recent debt exchange deal Europe offered Greece was a rip-off, providing much less debt relief than the country needed. If you pick apart the figures, and take into account the large sweeteners the plan gave to creditors, the true debt relief is actually close to zero. The country’s best current option would be to reject this agreement and, under threat of default, renegotiate a better one.
Yet even if Greece were soon to be given real and significant relief on its public debt, it cannot return to growth unless competitiveness is rapidly restored. And without a return to growth, its debts will stay unsustainable. Problematically, however, all of the options that might restore competitiveness require real currency depreciation.
if Greece stays in the eurozone, it will still have a competitiveness problem. In fact it will always have a problem irrespective of whether the Euro moves up or down in foreign exchange markets. As long as many of its major trading partners remain in the eurozone with it, the external value of the euro will have limited impact for Greece as a vehicle for restoring competitiveness.
The only way to deal with this would be to go through the harsh ‘internal devaluation’ route to competitiveness of wage and price cuts of 20 or 30%. And that means depression, social unrest and potentially civil war.
The alternative is leaving the euro zone completely.
Roubini writes:
Make no mistake: an orderly euro exit will be hard. But watching the slow disorderly implosion of the Greek economy and society will be much worse.
Source: Greece should default and abandon the euro – Nouriel Roubini, FT