Wanted: Plans for the Euro's Demise

A £250,000 reward for the least-bad euro-zone doomsday scenario.

A breakup of the euro zone has been the political and economic nightmare for European policy makers since Greece's troubles began in the spring of 2010. EU leaders are holding yet another summit this weekend in a bid to keep the euro zone together. Yet given the way the crisis has been mishandled so far, failure can't be ruled out.

So Tory peer Simon Wolfson this week offered a £250,000 prize for the best economic work on how a euro zone breakup might work. The idea, according to Lord Wolfson, is to come up with a workable proposal for exit from the currency so that the Continent does not "[descend] into financial chaos."

The prize is intended to spur some serious thought on the mechanics of a euro-zone exit, not whether an exit is the best way out of the crisis. How could the damage from a run on an exiting country's banks be mitigated? How would an exiting country cope with the trade and capital isolation that reintroducing a national currency would induce? How many parking meters and vending machines in Greece would have to be recalibrated? On these and other matters, detailed consideration has been scant, as if the possibility were too frightening to contemplate, the costs too high to measure.

But given the advanced state of the crisis, it's unclear whether even a £250,000 bounty will deliver a solution before policy makers are forced to cross that intellectual bridge. Deposits in periphery nations are fleeing for German and Swiss banks. That accounts for the dramatic run-up in the value of the Swiss franc, but it also means that one euro in Germany is effectively worth more than one euro in Greece or Portugal. The ECB is serving as the primary backstop for Greek banks—the only thing preventing an all-out bank run. There aren't printing presses in Athens producing bits of paper called drachmas, but we're getting closer to the brink.

Much of this might have been avoided, though the fact that it wasn't probably wasn't due to the absence of a £250,000 carrot dangled above economists' heads. Today it is failed leadership—dithering and detached from market reality—that is prolonging the turmoil. This weekend's summit in Brussels also may not to bring Germany and France to agree on the size of the Greek haircut. Though there now seems to be concerted movement behind recapitalizing banks on a nation-by-nation basis, Paris is worried that only a Continent-wide solution will allow French banks to be saved without bankrupting the French government.

It is bad enough that European leaders are doubling down on their ever-expanding bailout patchwork as the right solution for the crisis. To do it in such an unfocused way only extends the suffering. Let's hope the winner of Lord Wolfson's prize has a better idea.