Leaving the Euro

Would you like to win 250,000 British pounds? Predicting that a nation’s euro zone exit would be catastrophic unless properly managed, a UK businessman has sponsored a contest. To win the prize money, you just need to submit the best departure plan. The deadline is January 1, 2012.

For Greece, here are some of the issues:

Greece would have to create and print “new” drachmas. Contractually, loans and mortgages, wage agreements, bonds, all would need to change. For everyday practicality, what about ATM machines, candy vendors, computer programs? Even wallets might be too small or large.

Meanwhile, financial institutions would have to “mark to market” the value of their Greek bonds. Worldwide, few would be willing to loan Greece money and creditors (as with Argentina) would try to seize accessible Greek assets. For weaker euro zone economies, borrowing would become ever more challenging.

And this is only the tip of the iceberg.

Other issues noted by contest officials include how to restructure international contracts, transitional timetables, legal implications, lessons from history.

Here, the BBC describes the contest while this 2007 study, “The Breakup of the Euro Area,” presents a detailed discussion.

The Economic Lesson

Countries typically use monetary and fiscal policy to affect domestic economic conditions. Monetary policy involves the supply of money and credit. Fiscal policy relates to spending, taxing and borrowing.

Within the euro zone, monetary policy is shared by 17 nations. By contrast, each individual country controls its fiscal policy. And therein lies the problem.

An Economic Question: Describe how you might have to adjust if you had your current dollars replaced by new money.