Roubini: “Greece should default and abandon the euro”

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.

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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

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9 Comments
  1. David Lazarus says

    He is right. A quick exit and switch to the drachma will make things much easier. The alternatives are far worse. Like he said a civil war becomes much more likely when austerity fails.

    1. Alan Harvey says

      German should leave the euro. The so-called “contagion” is the currency advantage the euro gives to Germany. Most of the other euro members have this “competitiveness” problem. Are they all going to become little Germanies?

  2. Tyler Durden says

    There is no path for exit. There is no such thing as a “quick exit” you fool. About 45% of Greeks have moved some savings out of the country already. Its very easy its called Internet Banking and the Euro. Legally they cannot exit and practically there is no exit. All contracts are in Euros; which they will have to honour anyway – in Euros – not in some “other fantasy currency” which does not event exist. It is not possible to exit in an orderly or quick way. Only chaotic exit is possible and then years in the courts.

    Germany are doing the right thing. delay as much as possible and pray for miracle

  3. ErnestJack says

    Tyler Durden has it right..

    What are you all smoking? Leaving the Euro would be a disaster for Greece AND the rest of the Euro area. To add to what Tyler is saying, this isnt the ERM. ALl contracts are in Euros. Private and Public…deposits, loans, trade, debt…you are talking about multiples of Greek GDP. Now, if Greece leaves the Euro…the fear is that the Euros become Drachmas. This will cause major havoc in Greece and all throughout Europe.

    If Greece leaves the Euro, the bank runs on Italy and Spain will be unstoppable. Contracts will stop being made and outstanding contracts will be redeemed for fear of receiving anything but Euros,..In Greece, and the rest of the PIIGS ..and even France.

    It would be an unmittigated disaster. All the pundits who call for Greece leaving the Euro never address this reality. They dont talk about what happens to Euro contracts and Euro deposits. Without the guarantee that they remain in Euros (and WHO is going to give that guarantee?). There is no way on God’s Green Earth that Greece can leave the Euro. Please, someone, explain exactly how it would work….you cant!

    1. David Lazarus says

      The bank runs are happening already. The US banks have withdrawn hundreds of billions already from european banks. As you say the Greeks are transferring money out of Greece. One manifestation of this has been a surge in Greeks buying £1 million houses in London.

      Ireland has also been suffering a bank run for months. It has been bailed out by the ECB.

      I am not thinking of maintaining creditors. They knew the risks when they made the bad loans. The problem is that unless the debt burden for the nations concerned is lowered that is what is holding the periphery back. If Greece defaulted on the vast majority of its debt then it might have a chance of staying within the euro. With the debts that they have that is unlikely.

      1. ErnestJack says

        I reiterate…who can show how an exit from the Euro will be done without immediately destroying the PIIGS and with them the Euro itself as i have outlined above. That is the problem. This isnt a moral choice about punishing creditors..this is the reality that the system will default if Greece leaves the Euro. Greece IS systemic risk..it cannot leave the Euro. Period.

        As for debt levels, thats a whole other story. Greece will get a haircut. How big is it we still need to see. Clearly the proposed 21% is not enough. They will need 40-70% haircuts, and in an orderly way.

        That is all there is too it…None of this “they deserve it” attitude addresses systemic risk. You can reduce Greek debt levels, but it cannot leave the Euro! That is the point we are making. It is irresponsible to say they should or can without thinking through the argument. No one can show how it can be done without tearing apart the system.

        1. Dave Holden says

          Maybe “orderly” isn’t an option.

          Mish gives his view

          http://globaleconomicanalysis.blogspot.com/2011/09/point-of-no-return-will-it-be.html

        2. David Lazarus says

          A debt reduction of closer to 90% would enable Greece to stay within the Euro. The problem that most economists miss is that the population will not tolerate decades of austerity to satisfy bankers. The country would probably erupt into civil war before then. That must be avoided at all costs.

  4. Merijn Knibbe says

    Greece already is in an “illiquidity trap”, there doesn’t seem to be enough money anymore to go round. People are working – but the’re not paid anymore – and are of course stretching their own credit to the breaking point. In a sense, the Euro already has left them. Other curriencies or quasi currencies will arise – but at a high cost.

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