Lord Wolfson prize: How to escape the euro with the minimum of pain The best way to prepare a plan for euro exit would be to discuss it openly. But this would not be possible without precipitating huge outflows of money, which would cause a banking collapse. Accordingly, preparations must be made in secret. Moreover, once a decision has been made, a government must act straight away. Yet this short time-frame leads to a second key problem: it will be impossible to have new notes and coins available immediately. This is unfortunate, but it is not as serious as is often imagined. Monetary technology has advanced enormously since the key historical examples of when new currencies needed to be introduced. Cash is now the small change of the monetary system. Payments can be made by credit and debit cards, and electronic transfers. For many small transactions, of course, new notes and coins will still be needed. Until these are available, the authorities should allow euro notes and coins to be used. In order to facilitate their convenient use and to boost confidence in the new regime, the new currency, say the drachma, should be introduced at parity with the euro. Accordingly, where a price used to be €1.35, it would now be 1.35 drachmas. Of course, the drachma would be free to fall on the foreign exchange markets and indeed it is vital that it should do so. If any of the weaker members of the eurozone left, their currencies would probably depreciate by something like 30pc to 50pc. International experience suggests that the consequent spike in inflation can be short-lived. Just before departure, some form of capital controls would be essential, including closure of the banks. But after departure, capital controls should be used sparingly, and withdrawn as soon as possible. An exiting country would face a huge problem with its debt - quite unlike the experience of classic devaluations, such as the UK's in 1992. For once it has left the euro, its debt will be denominated in what will then be a foreign currency - and in relation to relevant domestic values, such as tax revenue, the value of that debt will have soared. The government should redenominate its debt in the new national currency and make clear its intention to renegotiate the terms of this debt. This is likely to involve a substantial default - enough to cut the ratio of debt to GDP to 60pc. To restore confidence further, the exiting country should immediately announce a regime of inflation targeting, adopt a set of tough fiscal rules, and outlaw wage indexation. If necessary, the central bank should stand ready to inject liquidity into its own banking system. The monetary authorities should also announce their willingness to recapitalise the banks. The authorities should provide to the private sector guidance on the legal issues, including the impact on international contracts currently denominated in euros and the country's membership of the European Union - which it should seek to maintain. There is no doubt that euro exit would be messy and - if handled badly - extremely damaging, not only for the country concerned, but also for the rest of us. But it needn't be handled badly. Indeed, there are ways of dealing effectively with all the key practical difficulties. If handled well, euro exit could present weak peripheral members with a much better prospect than remaining in the euro. Moreover, their exit could enhance the prosperity of the rest of Europe - and the wider world.