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Greece should default and abandon the euro

By Nouriel Roubini, Professor of Economics and International Business & Robert Stansky Research Faculty Fellow

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Greece is stuck in a vicious cycle of insolvency, low competitiveness and ever-deepening depression. To escape, Greece must now begin an orderly default, voluntarily exit the eurozone and return to the drachma.

September 19, 2011

Greece is stuck in a vicious cycle of insolvency, low competitiveness and ever-deepening depression. Exacerbated by a draconian fiscal austerity, its public debt is heading towards 200 per cent of gross domestic product. To escape, Greece must now begin an orderly default, voluntarily exit the eurozone and return to the drachma.

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.

Read full article as published in the Financial Times A-List series.