The prize is offering a substantial amount of money to the contributor who offers the best idea for a breakup of the Eurozone.
One paper, which we had read previously, is Jens Nordvig and Nick Firoozye’s Planning for an orderly break-up of the European Monetary Union.
Before it was a submission to a contest, it was a Nomura research paper that came out last year.
Anyway, in the paper, Nordvig and Firoozye take a shot at estimating the value of the various national currencies in a post-breakup scenario.
Investors holding EUR assets and obligations are facing risk of redenomination of contracts into new national currencies. To quantify the economic magnitude of the redenomination risk, we develop a transparent framework for valuing new national currencies. The framework is based on: i) current misalignment of the real exchange rate, ii) future inflation risk. The framework quantifies the medium-term depreciation risk associated with a redenomination into new national currencies. For a number of current eurozone member countries, the potential depreciation risk is very material.
Currency risk in a eurozone break-up
We have discussed the importance of legal jurisdiction as a major determinant of redenomination risk in eurozone countries. Here, we discuss potential valuation of new national currencies following a eurozone break-up. The estimates could be relevant both in a limited break-up scenario (for the departing countries) and in a full-blown break-up scenario (for all eurozone countries).
We view these estimates as an initial benchmark for where currencies may trade in a “new equilibrium” following a potentially lengthy and extremely volatile transition period. Such estimates will be “moving targets, influenced by country specific policies, the global environment, and regional political developments in the European Union.
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Photo: Jens Nordvig, Nick Firoozye