Exit From Euro Is Bad Idea for Greece: Bank Head

A Greek exit from the euro zone would not make things better for the stricken country or for Europe, Thomas Mirow, president of the European Bank for Reconstruction and Development (EBRD), told CNBC.com in an interview.

The Parthenon in Greece
Scott E. Barbour | Getty Images
The Parthenon in Greece

Greece is heading towards fresh snap elections as politicians failed to agree on forming a government after repeated attempts, with some parties opposing the country's international bailout deal.

"I can only warn anybody against the belief that by leaving the euro zone things will get better for Greece—they will not," Mirow said. "At the same time there are obviously unknown risks for the euro zone as a whole."

Those who favor a Greek exit from the euro zone argue that the country would be able to devalue its currency, print money and set its own interest rate to get out of its deep recession.

Those who oppose it point out that Greece's debt will still be denominated in euros and will be rendered more expensive by devaluation and its trading partners will still use euros, which would send the cost of Greece's imports soaring.

On Tuesday, European shares fell to their lowest level this year on fears about the consequences of a Greek exit.

Mirow said he hopes the political parties that have agreed with the bailout program will convince the Greeks that they are better off inside the euro zone than outside.

'Artificially Inflated' Living Standard

Critics of austerity measures in Europe have said Greeks' living standards have fallen because of the cuts in spending, but Mirow disagrees.

"Unfortunately, the standard of living was artificially inflated in Greece and proved to be unsustainable. It was not founded on substance," he said.

Countries in the periphery of the euro zone should have taken regulatory measures to prevent asset bubbles; for instance in Spain the government could have had more stringent regulation on mortgages to prevent the real estate bubble, Mirow explained.

"If you have created huge asset bubbles, at one point in time the bubble bursts," he said. "You need to address those problems. It's too easy to say the problems are caused through austerity policies."

"There is certainly an issue about whether the monetary policy fits well enough with very different economic cycles in Europe, but at the same time, we see that there are countries which have avoided these kind of asset bubbles through regulations and others did not," he added.

The EBRD was created in 1991 to help the former communist economies of Central and Eastern Europe, as well as the former Soviet Union, make the transition from the centralized economic model to market-based economies.

Eastern Europe Hit

First-quarter growth figures published by the European Union on Tuesday showed that the Eastern European economies of the Czech Republic, Hungary and Romania all contracted.

"It's quite clear to us that the very fact that there is slow growth or even recession in wide parts of Western Europe is affecting Eastern Europe through the trade channel," Mirow said.

He said that Central and Eastern Europe were hit by a convergence of bad factors, as the region is dominated by Western banks which are now deleveraging to better cope with the crisis.

"Banks have to reduce their balance sheets, they have to increase their capital and deleveraging is what regulators ask them to do," Mirow said.

The southeast of Europe is the region which is most affected, as Greek banks have invested heavily in countries like Romania and Bulgaria; those countries also suffer because remittances from their citizens working in countries like Greece, Spain or Italy have shrunk because of the crisis.

It will take time to bring growth back to Europe, as fiscal measures to boost the economies will be "a fine line to walk" while markets are under scrutiny by investors to see if they can keep their deficits in check. Structural measures work only after a while, Mirow said.

"I think the unfortunate truth is there is no quick fix," he said.

- By Antonia Oprita, CNBC.com