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Some say back to the drachma for a Greek reboot

(Clarifies which unit of Dutch group in paragraph 11)

By Jamie McGeever and Patrick Graham

LONDON, June 26 (Reuters) - Mainstream economic thinking may hold that Greece should stay in the euro zone, but there are those who argue that abandoning the single currency will give the cash-strapped and debt-laden country just the boost it needs.

Greece's economy is so depressed, they argue, that unless it regains the competitive edge that a massive one-off currency devaluation could offer, it will remain lifeless.

Until then, the idea of a euro zone exit - either by accident or design - will keep on returning.

Roger Bootle, the founder of London-based markets and economic analysis group Capital Economics, won an economics prize of 250,000 pounds ($395,000) three years ago for drawing up a guide on how an ailing nation would exit the euro.

"If Greece were to leave the euro, it is presented with an opportunity. That doesn't mean to say it will take it," he says, arguing that the current negotiations about Greece's debt miss the point.

"How does a debt deal bring about an increase in aggregate demand in Greece? No one seems to be grappling with the economic issue."

Greece and its creditors are locked in talks to secure a deal that would see Greece undertake further economic reforms in return for more aid, thereby averting default on debt repayments to the International Monetary Fund on June 30.

The new proposals currently on the table include further long-term cuts to pensions as well as additional taxation that, while encouraging change in the economy overall, would have the effect of further weakening demand.

There are major caveats to Greece departing from the euro, not least the fact that no legal mechanism exists for a country to leave the currency union.

It would probably create a huge political and financial mess, including a default on all private and public external debts, soaring prices of imported goods and an end to a river of EU money which has pumped billions into infrastructure since Greece joined the bloc in 1981.

So what, says the head of investment for Dutch pension and investment fund manager NN IP, Hans Stoter, if you can get strong growth within a year or so of leaving the euro, when between times the economy has shrunk 30 percent.

"If you have a sore thumb and the infection keeps getting bigger and bigger, you can medicate it, you can deal with it," he says. "Or you can cut off your arm."


The most immediate and tangible consequences of leaving would be a sizeable, one-off devaluation in the currency which Athens adopts, possibly the drachma.

Bootle suggests a one-off devaluation of 30 percent could be worth anything up to a 20 percent boost to Greece's economic output, although that would hinge on many other fiscal, regulatory and tax policies being adopted too.

Devaluation is no panacea and wouldn't address the fundamental problems of the Greek economy like the lack of reforms, corruption and a bloated public sector, Bootle said. But it would give a huge boost to the Greek tourism industry and other service sectors.

He attaches an 80-90 percent likelihood that Greece will ultimately leave the euro zone, and points to Argentina, Russia, Iceland and South Korea as examples over the past 20 years of economies that did "extremely well" out of major currency devaluations.

Neil Record, founder and chairman of Record Currency Management, another of the finalists for the Wolfson award in 2012, assumed the wholesale collapse of the euro and provided for both a 40 percent devaluation of the drachma, as well as a 30 percent revaluation of a new Deutschmark.

Under that scenario, drawing parallels with Argentina, Record said Greece could easily register real growth after inflation of 5 percent annually from 2016.

"It's reasonable to suppose they would have a really awful, torrid 2015," he said. "But in the sort of magical way of these things they could easily then be the best performing country in Europe in 2016 and 2017."


Paul Krugman, Nobel laureate and professor of economics and international affairs at Princeton University, has been a highly vocal critic of the euro project, saying its inflexible monetary structure has strangled growth in weaker countries like Greece.

He had never advocated "Grexit" and argues that leaving the euro isn't the same as never entering. But he wrote in The New York Times on June 19: "Grexit would produce a rapid improvement in competitiveness, at the cost of possible financial chaos."

A year ago, the IMF predicted that the Greek economy would contract by 0.6 percent in 2014 before growing almost 3 percent this year and more than 3 percent every year through to 2019, when the country's huge output gap would finally be closed.

But 2014 growth has come at -0.1 percent, making the forecasts for the rest of the decade look decidedly optimistic.

(Reporting by Jamie McGeever and Patrick Graham Editing by Jeremy Gaunt)