First, damnation (i.e. separation from God) is an act of the human will not the divine will. Your friend, for example, has happily separated himself from God. What remains to be seen is how unpleasant the consequences of that are.
Second, as has already been mentioned, the best motivation for holiness is yearning for eternal communion with Love. The threat of damnation may help turn a person back to God, but it’s the attraction to God that makes saints, not fear of damnation.
Third, your friend has expressed a utilitarian and logically inconsistent view of morality. We follow God through the Church because we believe it is the truth. Whether atheists or religious people are more moral has nothing to do with whether God exists and wants us to be holy. The fact of human sinfulness is not an argument against the Christian worldview. It is, in fact, central to the Christian worldview. How does your friend even pick the examples he does - divorce, incarceration, teen pregnancy? What makes him think these are bad? If there’s no morality defined outside ourselves, there is no morality, only fashion. I’d also challenge him to verify the claim that
In every country and culture where it has been studied, atheists lead a more “moral” life
. It may be, but may also be hyperbole. It’s also not clear what he means by “Christians” in this regard so the comparison is questionable. There is no unified Christian morality at this point, so “Christians” will be all over the map on some measures of “morality.” It’s even more tenuous if he means atheists versus “religious people” (Christians, Muslims, Buddhists, Jews, etc.).
God’s law shows us the very high standards of behavior that God sets for us. One purpose is to reveal our sinfulness. The standard is high and we all fall short to some degree. We all depend on God’s grace to bring us back into relationship with Him. Our sinful flesh needs this purpose, even if we’re trying to follow Jesus. Another purpose is to define holiness so we know in what direction to go as disciples.
All that’s well beyond the fundamental question facing an atheist - whether their faith in materialism is justified. The basis of the moral code is relevant to the question, but not the relative holiness of atheists or believers.