We should let Greece go bankrupt: Ifo's Sinn

Europe needs to allow for bankruptcy within its borders and keeping Greece in the euro zone could be riskier than letting it go, the president of the influential Ifo Institute for Economic Research in Germany told CNBC Monday.

Greece, the recipient of two international bailouts worth 240 billion euros ($260 billion), is currently facing a funding crisis which has raised expectations that the country could be heading towards bankruptcy, default and a possible exit from the euro zone.

But, according to the Ifo's Hans Werner-Sinn, that could be the best possible outcome for the country, following yet another round of inconclusive talks over reforms between Greece and its lenders this weekend.

"I would say, in the end, a (Greek exit) is also desirable, because if one accompanies this exit with the help of the European community, with the promise to keep the gate open for Greece to return at a later point in time, this may well be a chance to regain the competitiveness of the country by devaluation," he told CNBC Europe's "Squawk Box" Monday.

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Sinn, who has consistently spoken in favor of a Greek exit from the 19 single-currency union, said that while a "Grexit" was not "inevitable," it could offer the country a chance to improve its competitiveness and boost employment – a moot point for a country where a half of young people, and a quarter of adults, are jobless.

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"There are not only risks of exiting – there are lots of opportunities – and there are lots of risks by continuing the way Greece has operated thus far," he said, speaking from Frankfurt.

Political contagion

Although speculation of a Grexit has been circulated in financial circles for some time, euro zone leaders have been keen to show their commitment to keeping Greece in the fold – particularly as an exit could set a dangerous precedent for other member states.

Sinn believed there were contagion risks even if Greece stayed in the bloc, however.

"There is contagion of a political kind if Greece stays in the euro because it would tell us that you don't have to obey rules, that money will always be available if you make mistakes and are not competitive. But this cannot be the case," he said.

"We have to allow for bankruptcy in the European Union, just as the Americans do it. If California goes bust, for example, no one will help -- the U.S. Federal Reserve will not come to buy Californian government bonds…We need principles like that in Europe."

Read MoreGreece facing 'Lehman moment' as debt costs soar

Sinn's comments come after another inconclusive and tense meeting between the Eurogroup of euro zone finance ministers and Greece this weekend, amid an impasse over what program of reforms should be implemented in the country.

Increasingly frustrated with Greece's lack of progress over reforms, the Eurogroup warned that without progress, the country would not receive any more financial aid.

The meeting is the latest in a line of discussions since Greece's bailout program was extended by four months in February, in order to give the country's new government more time to enact reforms.

'Long-lasting damage'

Greece's reform plans to date have been rejected by its lenders, and frustration is mounting within the Greek government – and particularly from its outspoken Finance Minister, Yanis Varoufakis.

However, later Monday, Greece's stock and bond markets rallied on reports that Greek Prime Minister, Alexis Tsipras, had decided to change the team of epresentatives that are currently in talks with the International Monetary Fund and the European Union. Deputy Foreign Minister, Euclid Tsakalotos, was appointed co-coordinator of the group, according to the reports. Varoufakis, however, would still be leading negotiations at a ministerial level.

Responding to reports that he was isolated during the debt talks this weekend, Varoufakis tweeted a quotation by former American President Franklin Roosevelt on Sunday that said: "They are unanimous in their hate for me; and I welcome their hatred."

Varoufakis might be content to be out in the cold, but there is no denying that Greece desperately needs financial help.

It is running out of cash and has loan repayments to make in May to one of its lenders, the International Monetary Fund. It could struggle to make those payments, however, as well as meeting its domestic wages and pension bills.

Chief European Economist at Nomura, Jacques Cailloux, told CNBC Monday that despite Greece's increasingly solitary position in Europe, a political solution could come from within the country by June.

"There is a united front against Greece at this stage from…the Europeans (and) the international creditors, so I think that's putting the pressure on Greece," he told CNBC Europe's "Squawk Box" Monday.

He added that a referendum could be held within Greece by June to let the people decide whether or not they should stay in the euro zone and accept austerity as a result.

"Most of the polls are suggesting they would say 'yes' (to saying in the euro)," he said. Contrary to Sinn, Cailloux said a Grexit would have a "pretty long-lasting damaging impact on the rest of the euro zone."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld