End of the euro as we know it


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An 11-year-old boy went viral this week - not an unusual occurrence in itself, but perhaps somewhat more unexpected because his entry into the halls of internet celebrity came in the form of an illustrated solution to the European debt and currency crisis.

Jurre Hermans of the Netherlands submitted  a hand-drawn diagram of a euro-drachma swap, complete with an unhappy Greek citizen, to the Wolfson Economics Prize contest held by noted euro-skeptic Lord Wolfson of the U.K. Jurre's answer to the question "If member states leave the Economic and Monetary Union, what is the best way for the economic process to be managed to provide the sounded foundation for the future growth and prosperity of the current membership?" was  published alongside five more serious entries competing for pieces of a $250,000 grand prize.

Simple as the Dutch boy's entry may have been, it more or less accurately captured the struggle faced by any nation contemplating bailing out of the common currency.

Greece's problems are fairly simple and well-understood, though sometimes obfuscated by foreign reporting. The main issue is a crippling debt load largely owed to German and English banks. Working without an effective tax collection system and crippled by massive corruption, the government couldn't even collect enough money in the good times. As foreign investors bail out, interest rates spiral upwards and unemployment surges, there's simply no money to be had.

The one realistic option is for Greece to return  to the drachma - the currency it should almost certainly never have left, given the serious book-cooking that had to take place with the help of financiers like Goldman Sachs to get the Aegean nation into the EU in the first place. The practical effect of this will be to instantly impoverish Greek citizens and holders of Greek bank accounts, who will try to pile into a more valuable currency such as the dollar, pound or euro. 

The upside will be extremely cheap labor in Greece, relative to the rest of Europe, which in theory will attract a flood of foreign investment and jumpstart growth. In practice, this doesn't always work - a race to the bottom of the pool of marginal labor cost is not only unsustainable but impractical, given the difficulties inherent in trying to adjust European standards of living to those enjoyed by the labor force of China, Indonesia and Bangladesh.

Even after a record debt restructuring  which saw Greece effectively receive forgiveness for more than half of its $206 billion dollars of privately held sovereign bonds , the euro needs to tackle the question of whether Greece will eject from the common currency or receive further support. Farther down the line, as the crisis develops, these same questions may be asked of nations closer to the 'core' of the eurozone: Portugal, Spain, Italy or even France.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: News Headlines , Forex and Currencies

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