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Victoria Mindova

Greek repression is becoming an economic depression that will last for at least five years and will lead to a revolution. True to himself and known as Dr. Doom - Nouriel Roubini, who took part this week in a debate held in Athens on "Greece should default on its debt and leave the euro" was the one who made this statement. An overall unemployment rate of 20%, an unemployment rate among young people of almost 50% and steadily deepening recession has left Greece with its back up against the wall and there are not many possible outcomes, the famous economist said. He is adamant that the programme of financial savings will only worsen the situation and will lead the Greek people to beggary.
 
Roubini noted that the PSI agreement for the Greek debt reduction and the first financial aid do not stabilize the government debt situation of the country, quite the opposite. They make the debt worse - from 120% of GDP in 2009 to 160% of GDP. The recovery programme, which is currently to be applied will reduce the dynamics between the GDP and the deficit. In the best case scenario, Greece could make about 2% - 2.5% growth after five years at the earliest, which would be insufficient to cover the needs for external financing and internal recovery of the economy. The government will continue to reduce pensions and salaries, which will negatively affect consumption and will reduce tax revenue. Greece will have to take another 130 billion euro at least, but it will continue to reduce wages and pensions and will continue to increase taxes, which will lead to a vicious circle. "Structural reforms in the short term will only make the recession worse so the debt ratio will become larger and the debt dynamics unsustainable," says Roubini.

The world-famous financier paid particular attention to the "voluntary" involvement of private creditors in the process of reducing the Greek debt. He defined it as follows, "It is like somebody coming with a gun to your head and saying, "Give me 50% of your wealth or reduce my debt by 50%, otherwise I’ll shoot you. There is nothing voluntary about it." Roubini assessed that rating agencies will consider it a default and this will trigger this credit default swaps. "If it walks and quacks like a default duck, it is default," said the analyst jokingly.

He said the most important question is not whether Greece should or should not default, but how it should counteract the current recession and activate economic growth. For Roubini, the answer is, "Go back to the drachma." From the four suggestions of how Greece could regain its competitiveness to stimulate economic growth, Roubini supports the model of separation from the single currency. Other options for becoming competitive are: devaluation of the euro against the dollar by 30%, structural reforms that will provide real results only after 10 years (time that Greece does not have), and finally, internal 30% deflation of  pensions and salaries which, according to Roubini, will be destructive for Greece's assets.

"If the euro is not devalued, if competitiveness and structural reforms take too long, if deflation is destructive to economic activity, there is only one other option - this painful, but necessary devaluation and going back to the drachma." The depreciation of the currency and the return to the drachma will make export goods cheaper, which will improve the trade balance.

He supported his arguments in favour of exiting the currency union with an example from the experience of Argentina, which three months after the devaluation of its currency, registered growth of about 8% of GDP. In the end, Roubini defended his thesis that if Greece is doomed to long recession that has already developed into an economic depression, it will inevitably lead to new and dramatic social and political clashes, then the better medicine is the fast but painful exit from the euro area.

Nouriel Roubini’s opponent in the debate on "Greece should default on its debt and leave the euro" was the former alternate executive director of the International Monetary Fund and current chief executive officer of an investment fund. She disputed the comparison of Greece with Argentina, arguing that the growth in Argentina was not due to devaluation after the default, but to the boom in the prices of raw materials, which are plentiful in Argentina (fuels, minerals, etc.).

Xafa stressed that Greece has two problems. The first is the unsustainable Greek debt burden. The other is the loss of competitiveness. Returning to the drachma will not solve any of them. To the contrary, exiting the euro area would mean an immediate complete (not partial) default because Greek foreign debt is in euro, not in drachma. In terms of competitiveness, Xafa insisted that the problem is not so much the level of salaries in the private sector but the regulatory practices that underpin the management of the Greek economy. "These problems cannot be removed, no matter how much the Greek drachma gets devaluated," said Xafa.

"The question is whether a post-Soviet economy like the Greek economy can deflate its way back to competitiveness and the answer is ‘No’," was clear Xafa. What should be done is to remove obstacles to free market activity. She gave the example of legal increases of a large group of salaries in the private sector regardless of performance, as provided in collective labour agreements. She further recalled, "One fourth of the labour force works in the unproductive public sector." Xafa stressed that for this reason the new programme for Greece includes a broad base of structural reforms that will improve labour market flexibility and increase competition in a range of goods and services produced locally.