After all the negotiations, Greece still does not know whether it should accept the support of the Eurozone countries or ‘go its own way’. The leading international (American) economist Nouriel Roubini has a strong opinion about this. He explains why Greece would be better off going bankrupt and leaving the Eurozone than continuing to muddle through.
The Greek situation
According to economist Nouriel Roubini, Greece is:
- insolvent and therefore unable to meet its financial obligations (the government debt is now approaching 200% of GNP-Gross National Product.)
- unable to compete on the EC market or the International market
- stuck in the vicious circle of a worsening depression: indications are that Greece’s GNP is declining by 7% per year, while debt servicing requires 7%+ per year of GNP.
- is stranded in an excessive and unworkable fiscal system
Nouriel proposes that Greece:
- recognizes its insolvency with regard to government debts in an orderly manner and goes bankrupt
- leaves the Eurozone (EZ).
- returns to the Drachma.
Conversion of Greek Euro debts to Drachmes
This means that the responsibilities that Greece has with regard to the Euro (a large outstanding amount of EZ loans, etc.) will be converted into the new Drachma: in other words, the Greek debt to the EC will be converted into Drachms.
Greece can transition to its own currency in an orderly manner if orderly (economic) mechanisms are used and official appropriate financing is provided for the transition. The latter will limit the contamination of other ‘distressed’ countries.
This does not alter the fact that bankruptcy and leaving the Eurozone will not be painful and expensive, but the alternative of a decade-long deflation and depression is much more expensive from an economic, financial and social perspective. There are precedents of countries successfully taking this route in the past.
Greeks must receive a 50% write-off of the national debt
According to Nouriel, the Greeks must stop accepting the unfair debt relief ‘solutions’ of the EZ. It is necessary that the Greeks receive at least 50% write-off of their debts. The situation as it is now: a deal that seems just acceptable with the hope of a better one in the future, is unrealistic. Continuing to lend huge amounts of money to the Greeks will not only lead to insoluble problems for the Greeks, but also for the financial institutions such as the EU, ECB and IMF because Greece will not be able to pay off the debt-on-debt situation with a only a declining economy, with a return to any form of economic growth unlikely.
Greece exits the Euro zone
According to Nouriel, there are no options available to Greece other than leaving the Eurozone.
Only a switch to their own national currency (Drachma) and a sharp depreciation would return the Greeks to a state of competition and growth. The trade deficits for the entire Euro-zone will then be kept very limited (only 2% of the total GDP of the Euro-zone.)
People like to argue that Greece’s departure from the Euro-zone would spell disaster for Greece’s GNP, due to the depreciation of the Drachma against the Euro. That may be true, but a failing GDP for the next 5-10 years in a worsening depression and recession is worse than allowing Greece to suddenly grow rapidly even from a lower GDP.
In addition, Greece’s GDP will soon be low, whether Greece remains in the Eurozone or not. This is because in recent years labor costs have risen by 30% while productivity has lagged far behind (0%). Depreciation of the Drachma is not so noticeable to the Greeks themselves, but it does solve the problem of excessive wages (which has weakened the competitive position in the EZ).
About the risks of Greece’s exit from the Eurozone
According to Nouriel, the risk of high inflation or hyperinflation for Greece when leaving the EZ is grossly exaggerated. He gives the example of Argentina, which, despite bankruptcy and a floating currency, hardly suffered from hyperinflation. Greece does benefit from an orderly settlement of its exit from the Eurozone.
Leaving the Eurozone does not imply that drastic measures should not be taken in Greece with regard to the failing tax system. The major problem with taxes can only be blamed on the Greeks themselves. It is clear that if not enough taxes are paid by the citizens, the state will not have enough money to meet its obligations.
It is beyond doubt that the withdrawal of the Greeks from the EZ will cause great social unrest.
About Nouriel Roubini
Nouriel Roubini (1959) is
- professor of economics at New York University and
- chairman of the economic consultancy company Roubini Global Economics
- He received his PhD from the Ivy League University Harvard.
- He was born in Turkey to Iranian Jewish parents and is an American citizen.
He made a name for himself because he foresaw the American housing crisis in 2005, warning of the deficit of the
financial system throughout the world. He is considered one of the leading economists in the world.
read more
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- Greece’s selective bankruptcy
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