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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.

Miranda Xafa pointed out that if the Greek rescue programme is read thoroughly it will become clear that it is a project for reforming a post-socialist economy of the 1990s. It includes labour market reform, product market reform and bank restructuring. "All that is positive for medium-term competitiveness and growth, but the adjustment will be protracted and politically difficult." She stressed that the aim of the programme is to gradually balance the difference between consumption and productivity, which was the result of cheap borrowing in the past ten years. This will happen through a combination of adjustment and financing. Immediate default of Greece and exiting the euro area will not benefit the country in any way because of its 20 billion deficit, 12 billion are debt payments and the remaining 8 billion are costs of imported raw materials, fuels, foodstuffs and medicines. The Drachma would force the Greeks to live without these imported goods from the day after the default.

Imbalances in the Greek budget, which relate to the activity of the real economy cannot be addressed through monetary means, said Xafa. She compared the problems of the Greek economy with those of one of the most wretched Greek public enterprises - the railway company OSE. "Greece’s railway company has more employees than passengers," she said jokingly. She cited a statement by Stefanos Manos, who had estimated that it would cost the Greek state less to transport the passengers of the Greek railway company by taxi instead of maintaining it. At present, the losses of the railway company are approaching 10 billion euro. What the railway company needs is restructuring and privatization, not devaluation. The same applies to Greece, concluded Xafa.

Participating in the debate on Greece’s exit from the euro was Costas Lapavitsas – Professor of Economics at the London School of Economics, School of Oriental and African Studies (SOAS) and Denis McShane, a former Minister of State for Europe in the government of Tony Blair and ardent supporter of the Euro-idea. Lapavitsas was part of the team of the world-famous economist Nouriel Roubini and he also supported the idea that Greece should leave the euro area. Although Costas Lapavitsas is of Greek origin and has a direct connection with the Mediterranean country, he defended the thesis that "sudden death with the drachma" is a better option for emerging from the crisis than the recovery programme for Europe is. He presented the scenario of exiting the common currency in detail and only slightly negligently, said that there will be some minor difficulties along the way.

One of the problems Lapavatsis presented and there is no way Greece to avoid it, if it falls into complete financial disgrace, is the recapitalization of banks. After the collapse of the country, they will be permanently isolated from all previously identified sources of funds and the European Central Bank will no longer have to render services to them. Lapavitsas said that in order to be saved, they must all be nationalized until the country becomes stable. With the same vigour, he suggested that the negative trade balance could be ignored and the country could make do with what it produces, without taking into account the fact that Greece spends about four billion every year to import foodstuffs. It became clear from what Lapavitsas had described that the ideal option for Greece, according to him, was the establishment of a Soviet Union type planned economy known during the Cold War period and the financial climate of Bulgaria after the "birth" of freedom and democracy, when coupons were the primary means to procure bread and milk.

On the other side of the debate, the British politician Denis MacShane presented the social and political rather than the economic side if Greece eventually exits the euro area. He compared theoretical economists with men who know 325 different ways to make love but have never touched a woman. McShane said in his speech that it would be a historic mistake for Europe, if it prompted Greece to exit the euro. It is not possible that we, the cold barbarians from northern Europe, deny the right of Greece to be part of the fate of Europe. If the Greek people want to leave the euro area, it is their right, but the powerful states in Europe have no right to put pressure on them. If the Greeks want to return to the drachma, it must be the result of their free will and not under compulsion, he stated.

After the end of the debate, a vote was held and 75% of the people present declared themselves "against" Greece's exit from the euro area and the return of the drachma. The next day, Nouriel Roubini published in his tweeter profile his impressions from the debate, true to what was said on Tuesday evening, "Based on meetings in Athens, most Greeks desperately want to keep the Euro. But the economy is spinning from recession into depression."