The mood on the ground in Athens has shifted palpably over the past few months. Everyone has firsthand stories of sorrow and bitterness to tell, as austerity measures bite. They speak of retired parents on rapidly shrinking pensions struggling to meet higher taxes and prices, or of young siblings with multiple masters degrees forced to work in call centers or cafes.

Despite this clear sense of despair and anger, the vast majority of Greek citizens and politicians continue to think that the alternative to austerity -- default and a euro-area exit -- would be far worse. But this will -- and should -- change because leaving the euro is the lesser evil for Greece.

Returning to the drachma would be ignominious, an admission of political failure. But, contrary to popular belief, it need not destroy the country and may be the only realistic way of spurring the kinds of structural reforms that are essential if Greece is to make a lasting recovery.

Greece faces a stark choice about how to return to growth. It can continue along its current path of endless austerity aimed at engineering an internal devaluation. For a country that cannot control its exchange rates, this is the only way to regain competitiveness relative to other countries.

Decade of Depression

This option would probably involve a decade of depression and is therefore likely to be politically untenable. Greece has a relatively recent history of profound civil unrest, which could return. The protests currently being staged in Syntagma Square are not nearly the caliber of those Greece knew during its period of military dictatorship. Reforms would be fought at every turn and things could get much worse. The alternative to internal devaluation is for Greece to default on its debts and abandon the common currency. A new drachma would depreciate massively, boosting Greece’s competitiveness almost overnight.

Exiting the euro area is not an easy option. It would spark a sovereign default, a run on banks, bank defaults and capital controls. But increasingly, these things look like they may happen in Greece whether the country sticks with the euro or not. If all the worst effects of abandoning the euro are likely to happen regardless, then Greece may as well benefit from a nominal devaluation.

Many Greeks argue that their country does not have any export industries that could gain from such a nominal currency devaluation. The biggest industry -- shipping -- books almost all of its profits offshore, so making shipping cheaper would hardly benefit the Greek economy.

Still, Greece has a vibrant tourism industry that contributes about 18 percent of gross domestic product and has lost business to cheaper holiday destinations in Turkey and North Africa. Agriculture, manufacturing and pharmaceuticals are also sizeable Greek export industries. All of these sectors -- and therefore GDP growth generally -- would benefit if relative prices on Greece’s products and services were to plummet.

In addition, there’s no reason to believe Greece would be left without a financial lifeline if it exited the euro area. Its departure would be handled like a divorce, in which Greece and the so-called troika -- the European Central Bank, the European Commission and the International Monetary Fund -- acknowledge that their relationship no longer works. The troika would provide some bridge financing to ease the turmoil that an exit would inevitably entail for Greece.

Post Default Lifeline

This financing would continue to be conditional on the same structural reforms that the three institutions are currently demanding. After a default and euro-area exit, however, the Greek government would have much greater incentives to deliver.

Currently, the cost of failure to reform is criticism from the troika and demands for more austerity. After a default and euro exit, failure to reform would probably mean a loss of bridge financing at a time when it was urgently needed to cushion a financial shock. That could trigger dire consequences. Greece could succumb to severe social unrest. The country is not self-sufficient in food - - if hyperinflation were allowed to set in, food shortages and malnutrition could ensue.

The threat of such a prospect might finally provide the impetus for a Greek government to get down to doing the hard work of structural reform, not because outsiders are telling them to, but because Greeks themselves see the options and commit to reforms.

This process is crucial if Greece aspires to healthy and sustained rates of economic growth. Too much of the economy is tied up in red tape. Doing business has to be made easier. One example of the bureaucracy involved in running an enterprise in Greece is a new bookstore-cafe I visited recently in Athens. The owner had spent almost a year jumping through the hoops required to open her business, now a month old. I ordered a coffee at the cafe and the waitress walked immediately over to the bar across the street to pick one up. Despite months of trying, the owner had been unable to get a license to make coffee on the premises. Shortly after, I watched a customer get turned away when she tried to purchase a book. It was 6:05 p.m., and it is illegal to sell books after 6 p.m. in Athens. I was in a bookstore-cafe that could neither make coffee nor sell books.

Doing business in Greece involves layers of bureaucracy, which provides guaranteed incomes for cushioned professions such as notaries, lawyers, tax collectors, architects and inspectors, but produces little value. At least half of the members in the Greek parliament hail from these professions and consequently are incentivized to perpetuate a status quo that impedes launching, running or finding investment for businesses.

On my recent visit to Athens, a number of bright, young, foreign-educated Greeks spoke to me about their hopes of forming new political movements, untainted by the main Pasok and New Democracy parties. When I asked why this has yet to happen, they responded that Greece must sink further before it will be ready to revive itself.

“We are all on the sidelines, waiting for Greece to hit bottom,” one young man said to me. “We do not want to mobilize and get involved now because the house of cards could come crashing down on top of us. We will wait until the collapse has happened and then we can finally start rebuilding anew.”

It is hard to imagine Greece’s current political class facing up to the country’s huge problems without the threat of economic collapse as the alternative. Nor are there obvious signs of new blood coming through the established ranks. But a Greek default and exit may trigger the emergence of a desperately needed new breed of politicians.

(Megan Greene is head of European economics at Roubini Global Economics. Read more from Greene at www.economistmeg.com. The opinions expressed are her own.)

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To contact the writer of this article: Megan Greene at megangreene01@yahoo.com

To contact the editor responsible for this article: Marc Champion at mchampion7@bloomberg.net