Honestly, at this point Greece is probably better off to just default on its debt and bring back the drachma. I don't see any other way out of this for them. There is no possible way that they are ever going to be able to pay down their debt, and the fact that they don't have a currency of their own is certainly not helping the situation. If they default, they'll have a severe recession for a few years; if they don't, they'll have a severe recession indefinitely.
It's a sad situation for them, and there really isn't a good option. But default seems like the least bad.
Were Greece to default, its banking system would collapse. The ECB would rightly sever ties with Greece's banking system and repudiate Greek debt instruments as collateral. Greece's switching to the Drachma, even if no transitional issues existed, would not insulate it from the consequences of its default. Greece would remain shut out of the global credit markets and a depression of much greater magnitude than Greece's current economic difficulties would unfold. With a very weak export sector, Greece would find itself locked out of the credit markets for a prolonged period of time.
IMO, painful as it is, Greece needs to proceed with austerity, including structural reform of its health and benefits systems. At the same time, Greece needs to sell state assets to reduce its outstanding debt and greatly step up its efforts to deal with the tax evasion problem. According to a 2008 Articile IV consultation, the IMF concluded that "tax evasion is firmly entrenched" in Greece. Addressing the tax evasion problem might work if Greece did the following:
1. Offered a brief window of amnesty during which the evaders paid all their outstanding tax liabilities with interest no less than the rate Greece is paying its creditors and then committed to paying all future taxes.
2. Those not paying their back taxes or seeking to push their assets outside of Greece would be subject to prosecution and severe penalties (including punitive forfeiture of assets well in excess of their tax liabilities to realign the incentives that now favor pervasive tax evasion).
3. To establish credibility, visible examples related to the prosecution of prominent tax evaders and significant punishment upon convictions would be provided (names, addresses, any businesses with which they were associated, extent of evasion, fines and penalties, jail sentence, etc.).
4. Made changes in the tax system, placing greater emphasis on difficult to evade taxes and introduced more robust withholding, particularly for the self-employed.
