Nouriel Roubini has a new editorial up on Project Syndicate, and his message is simple: a Greek default is obviously coming down the pike, so policymakers might as well seize the opportunity to guide Greece out of the eurozone in an orderly fashion in order to minimize the pain for everyone.The bottom line is that the only way Greece can get back on track to competitive growth given its current state of fiscal affairs is real currency depreciation.
Roubini’s recipe for an orderly exit:
Losses that eurozone banks would suffer would be manageable if the banks were properly and aggressively recapitalized. Avoiding a post-exit implosion of the Greek banking system, however, might require temporary measures, such as bank holidays and capital controls, to prevent a disorderly run on deposits. The European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) should carry out the necessary recapitalization of the Greek banks via direct capital injections. European taxpayers would effectively take over the Greek banking system, but this would be partial compensation for the losses imposed on creditors by drachmatization.
And his counterargument to one’s counterargument:
Some argue that Greece’s real GDP would be much lower in an exit scenario than it would be during the hard slog of deflation, real purchasing power would fall, and the real value of debts would rise (debt deflation), as the real depreciation occurs. More importantly, the exit path would restore growth right away, via nominal and real depreciation, avoiding a decade-long depression. And trade losses imposed on the eurozone by the drachma depreciation would be modest, given that Greece accounts for only 2% of eurozone GDP.
Read the full editorial, entitled “Greece Must Exit,” at Project Syndicate.