the blades are NOT meant to smash *into each other*.
yes, there are indeed some problems with accelerated flow beyond propellers, HOWEVER prop aerodynamics roughly estimate that the acceleration of the air reaches reasonable differential well beyond the propeller diameter. meanwhile, the counterrotating propellers are usually a fraction of diameter away.
edit: regarding the acceleration and pressure
http://s624.beta.photobucket.com/user/mindworms/media/propellers0.jpeg.html
so, as the flow approaches the propeller, pressure drops, speed of air increases. AT the disc, there's a pressure increase (this IDEAL disc behaves like a hovercraft) and the pressure difference in the theoretical aerodynamics is what creates the thrust of propeller. at certain distance behind the propeller, the airflow compensates the pressure again and resumes ambient pressure, moving at higher speed ... (obviously dissipating after some time).
the theoretical aerodynamics assume that the air pushed through propeller terminally achieves speed equal to the original airspeed plus TWICE the acceleration at the propeller disc.
there are some things to consider (among others, greater pitch of the second set of blades) but that's marginal to the technical aspect of producing the hollow dual shaft and assembly.
it's usually visualised like this
http://lyle.smu.edu/propulsion/Pages/Images/propstep1.gif
the flow ammount through the prop disc is constant (what goes in, must go out)
accelerating the flow is usually visualised by narrowing the volume of the air (also happening in reality, by sucking in ambient nonmoving air)
edit:
now, a little explanation to the Fig III. you need to remember that helicopters (and prop driven aircraft) are RANDOM ASSEMBLIES of parts flying in formation.
thus.. you start with AIR flying against the formation (i.e. airplane). you vector add the rotation of propeller. from now, you see the air from PROPELLER blade element point of view. each prop blade acts like a wing. pushes air little bit down, tilting the vector producing reaction voilla creating lift.. pardon, thrust.
then, we deduct the rotation again. you have the air going against the airPLANE again (in Fig III it's vector labelled 6. compare 6 to 1. the difference is the net influence of the first propeller. the vector is leaning to one side.. that creates the spiralling of the air passing through the propeller (part of what's calle Pi factor). then adding 7 rotation in opposite direction, you see the air from point of view of the second prop blade. again, air is "processed", i.e. pushed, pulled and beaten, leaving even more accelerated and spinning in other direction.
when you compare vector 1 to vector 11, the difference in speed (multiplied by air mass passing through the propeller) makes up the total thrust of the propeller set.