Europe News

Greece should quit euro 'temporarily': Ifo's Sinn

Greece is insolvent - why delay saying it? Sinn
Greece is insolvent - why delay saying it? Sinn

Cash-strapped Greece should be allowed to leave the euro zone temporarily, the president of Germany's influential Ifo Institute for Economic Research told CNBC on Thursday.

Talk that Greece is on the brink of a debt default that could trigger its exit from the euro zone has grown this week. A senior ruling party official said on Wednesday that Greece would be unable to make a payment to the International Monetary Fund on June 5 unless it received more aid from its creditors.

Read More 'High likelihood' of Greek capital controls: Moody's

"Greece is insolvent… and we are delaying the process of declaring insolvency which would be illegal if it was a private company," Ifo's Hans Werner-Sinn told CNBC Europe's "Squawk Box."

"It is time for a big (debt) haircut and more radical measures to help Greece."

Sinn, who has spoken in favour of a Greek exit from the euro zone in the past, said it was difficult to see how Greece could resolve its problems while remaining in the single currency bloc, but added that any exit -- or "Grexit" -- did not have to be permanent.

Greek Prime Minister Alexis Tsipras
Ayhan Mehmet | Anadolu Agency| Getty Images

"Isn't it better to have a more flexible euro where someone can leave temporarily and return later with a devalued currency, rather than trying to impose the devaluation internally?" he said. "This is a recipe for maximising unemployment and turmoil."

Slow progress

Talks between Greece's anti-austerity government, led by Prime Minister Alexis Tsipras, and its international creditors over unlocking 7.2 billion euros ($8 billion) of aid have been deadlocked on the subject of reforms.

If the talks collapse, the government has said it will prioritize the payment of wages and pensions over meeting its debt repayments. Payments totalling about 1.5 billion euros ($1.7 billion) are due to the IMF next month, with a 300 million euro payment due on June 5.

The grim state of Greek finances was underlined last week when the government said it emptied an IMF holding account to repay 750 million euros due to the global lender.

Read MoreHistory tells us how the Greek drama could end

"What is clear that is Greece is unlikely to be able to repay its debt and it's a question of some kind of rollover period, where interest payments continue to be reduced in a way that you can't recognise this as a default," Ashok Shah, investment director at London & Capital, told CNBC Thursday.

Valdis Dombrovskis, vice-president for the euro and social dialogue at the European Commission, highlighted the importance of completing the bailout program.

"From a European Commission point of view, we are working on the assumption that the best scenario is the successful completion of the current bailout program," he told CNBC. "This is what would allow a turnaround in the Greek economy and allow jobs to be created."

A step back

Greece still needs to complete bailout program: Official
Greece still needs to complete bailout program: Official

Greece's economy, which emerged from six years of recession in 2014, slipped back into contraction territory in the first three months of this year amid political uncertainty.

"If there is an effort to restore stability, Greece can return to growth quickly," Dombrovskis said.

In a sign that prominent European officials have shifted their stance on Greece, Germany's finance minister said on Wednesday he could not rule a Greek default.

Asked whether he would repeat an assurance made in late 2012 that Greece would not default, Wolfgang Schauble told the Wall Street Journal and French newspaper Les Echos: "I would have to think very hard before repeating this in the current situation."

Given this, Ifo's Sinn added: "He (Schauble) has been supporting Greece for the last five years…Germany is the biggest financial supporter of Greece so if he says that it is a significant statement."