Nouriel Roubini: Greece needs to default and return to the drachma

Greece is caught in a vicious circle of insolvency, low competitiveness, and increasing depression, says Professor Nouriel Roubini, the president of Roubini Global Economics, in article published by Financial Times. In his opinion, in order to escape this cycle, Greece must begin now with a controlled default, a voluntary exit from the Eurozone and a return to the drachma.

Roubini considers that the recent agreement on Greece"s sovereign debt, provided by Europe, was a bad financial deal, which only erases a very small part of the debt, much less than what the country needs. Essentially, the real debt exemption is almost nil, and the best choice would be to reject this agreement, and to negotiate a better deal under threat of default, according to Roubini.

The economist states that, even if Greece were to receive a real and significant reduction of its public debt, the country will not be able to return to growth unless its competitiveness is restored soon. Without a return to economic growth, the country"s debt will remain unsustainable, warns Roubini, who mentions that the options which would reestablish competitiveness require a true depreciation of the currency.

But Roubini claims that the best solution for Greece would be for Greece to leave the Eurozone, since the return to the national currency (drachma) and its sudden depreciation would quickly restore its competitiveness and growth, like it happened in Argentina and many other emerging markets, which abandoned the pegged exchange rate.

This process will be costly, says Roubini, but he stresses that it would be the best alternative.