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Five ways the eurozone could break up

The Wolfson Prize offers £250,000 to the economist who comes up with the best plan to manage a potential break-up of the eurozone. The five ideas in the running are summarised here.

The conundrum posed is this: "If member states leave the Economic and Monetary Union, what is the best way for the economic process to be managed to provide the soundest foundation for the future growth and prosperity of the current membership?"

Lord Wolfson, whose family charity puts up the prize money, has said there is a serious need for a solution to any euro break-up. Here are the short-listed entries:

Greece - or another country - could go

The most realistic scenario for euro break-up is that Greece, or one or more of the weaker peripheral countries, will leave the eurozone, introduce a new currency which then falls sharply, and default on a large part of their government debt.

Preparations for exit must be made in secret and acted on straightaway. Just before departure, some form of capital controls will be essential, including temporary closure of banks and ATMs. With no time to print new notes, euro notes and coins should continue to be used for small transactions. The new currency should be introduced at a one-for-one rate with the euro. But it will soon depreciate by something like 30-50% giving a boost to Greece's international competitiveness.

The government should redenominate its debt in the new national currency and make clear its intention to renegotiate the terms of this debt. They must announce robust measures to keep inflation in check but, with them, markets may well lend to the exiting country again the medium term. Importantly, the exiting country has an opportunity to break free from a crippling debt strait jacket.

Date: 2015-04-20; view: 587

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