Ok, lets Grexit, but how? The legal (im)possibility of leaving the Euro

kicked out

Wolfgang Schäuble declared recently that Greece’s position in the EU was the only thing guaranteed (not its position in the Eurozone). But is it? The reason why he said this is because lawyers in the back rooms of the Bundesministerium der Finanzen are modelling Grexit scenarios and have discovered that legally a withdrawal from the EU may be necessary to effect a withdrawal from the Eurozone. The Euro could be indeed like ‘Hotel California’ in the song, one can check out, but one can never leave, as Varoufakis said. Here is what the rules of the EU/EMU prescribe.

The German Chancellor Angela Merkel said before the Bundestag in July 2011 that “the euro is much, much more than a currency… the euro is the guarantee of a united Europe. If the euro fails, then Europe fails.” One interpretation of the Lisbon withdrawal rights is that withdrawal from EMU without a parallel withdrawal from the EU would be legally inconceivable. Unlike EU participation, EMU participation is a legal obligation for all Member States. While a Member State may be free to denounce its EU participation and repudiate its treaty obligations in their entirety, it would not be free to go back on its decision to join EMU without breaching a binding obligation, under the EC Treaty, unless it were also to withdraw from the EU. Consequently, the only way to withdraw from EMU is to withdraw from the EU, using article 50 of the treaty and then try to rejoin the EU, but asking for special dispensation with regards to the monetary union. Of course, another legal way would be to negotiate an amendment to the treaty with other member countries, but as all options require long negotiations and ratification by all member states, it is thought that, because of urgency, only a unanimous agreement by the European Council leading to the issue of a European regulation, could be sufficient despite the legal uncertainty that this could entail.

A genuinely unilateral right of withdrawal would be unthinkable in the context of EMU, not least on account of its open conflict with the plain language of Articles 4(2), 118 and 123(4) EC and Protocol 24 on the Transition to the Third Stage of Monetary Union and, in particular, with the references therein to the ‘irrevocability’ of the substitution by the euro of the currencies of the participating Member States and to the ‘irreversibility’ of the monetary union process. The only alternative interpretation is that there was never intended to be a right of withdrawal from EMU, among other things because of the complex network of rights and obligations that EMU entails for its participating Member States and their NCBs and which cannot easily (and certainly not automatically) be unwound through a unilateral act of withdrawal. The necessary implication of accepting this alternative interpretation is that only an agreed exit from the euro area is possible. However, this argument is also problematic since, reasoning a majore ad minus, to recognise, as the exit clause does, the possibility of unilateral withdrawal from the EU is to also recognise the possibility of unilateral withdrawal from a subset of the EU (namely EMU).

Equally, if one cannot leave, one cannot be expelled. There is no treaty provision at present for a Member State to be expelled from the EU or EMU. The closest that Community law comes to recognising a right of expulsion is Article 7(2) and (3) TEU, allowing the Council to temporarily suspend some of a Member State’s rights (including its voting rights in the Council) for a ‘serious and persistent breach by a Member State of the principles mentioned in Article 6(1)’ of the EU Treaty. If a right to expel Member States from the EU or EMU does not exist, could such a right be asserted or should it be introduced? Article 48 TEU. Given that a Member State’s expulsion would, by definition, be contrary to the presumed wish of that Member State to continue its membership of the EU, a right of expulsion would be inconceivable, since it would have to entail an unauthorised Treaty amendment, in breach of Article 48 TEU. Besides, it is likely that some Member States would object to the introduction of a right of expulsion in the treaties, coupled with an amendment of Article 48 TEU to make that possible, since this would expose them to the risk of being forced out at some future date. While, by and large, these complexities would not differ qualitatively from those relating to a Member State’s voluntary withdrawal, their resolution would be even more complicated in the case of a Member State’s expulsion, because of the risk of legal challenges by disgruntled natural persons, legal entities or even countries, objecting to the loss of the rights that they or their nationals may have acquired from membership of the EU and invoking their legitimate expectation of maintaining these in perpetuity as an obstacle to expulsion. Participation in the European Union gives rise to a wide web of rights and obligations to citizens, companies and governments. To erase all those obligations at a stroke by expelling the member state would create huge confusion and penalise ordinary citizens and ordinary businesses, who rely on their rights of residence and free movement, to name but two. The exhaustive list of sanctions provided for in the treaties does not include a right to withdraw ‘in protest’ against a fellow Member State’s failure to comply with its treaty obligations; the same is true of expulsion, which is not catered for in the treaties, however serious or repeated a Member State’s non-compliance may be and however much its departure may be desired by its partners. On the compatibility of a right of expulsion with the spirit of the treaties, such a right would clearly be irreconcilable with the rationale of the existing body of sanctions for a Member State’s infringements of Community law.

If one cannot expel unwanted member states, can they be marginalised? One possibility would involve the extensive use by the errant Member State’s partners of the ‘enhanced co-operation procedure’ Article 20 of the TEU. If it were supplemented by additional measures including extra-EU treaties or other informal action, the enhanced cooperation procedure could represent a genuine alternative to the treaties’ decision-making mechanisms, helping marginalise more ‘minimalist’, less ‘integrationist’ or otherwise ‘uncooperative’ Member States. An alternative and somewhat more radical possibility would be for the mainstream Member States to agree on a new, treaty-based partnership with ‘an independent institutional structure outside the framework of the “old EU”’ (effectively, a ‘new Union’) to be ‘worked out, approved and ratified solely by the states participating in this new entity’.

Would leaving the EMU mean an end to the use of the Euro? EMU is a sub-set of the EU, which is why the Statute of the European System of Central Banks and of the European Central Bank – lying at the heart of the ESCB and the Eurosystem – is annexed as a Protocol to the EC Treaty. For this reason, a Member State’s exit from the EU would automatically posit its exit from EMU. Whilst a Member State’s exit from the EU would, therefore, entail its exit from the euro area, this does not necessarily mean that the euro could no longer circulate in its territory. Indeed, a distinction should be made between a Member State’s euro area participation, in an institutional sense, and the circulation of the euro in its territory. If Greece or another country were to introduce a new currency, a new Drachma for example, and abandon the euro, this would continue to have value as a currency of other countries in the EMU. There is one main question: can the old contracts and debts in euros be automatically converted to the new currency (new drachmae) in this case or will the receivers take payments only in euros seeing as it still exists. Matters become extremely difficult when it is forecast that the new national currency, the new Drachmas for example, will lose value quickly compared to the euro. Indeed the borrowers would prefer to redenominate the debts in the new currency, while the lenders would demand to keep them in euro.

We seem now to be in a Grexit path for a variety of economic and political reasons. Whatever the trend may be however, the legal framework shows no obvious route out of the Eurozone. The only technically secure way to leave the Eurozone seems to be via unanimous agreement to Treaty changes at EU level, something logistically and politically challenging. The Greeks cannot choose to leave unilaterally, nor can their partners choose to expel them from the Eurozone. For Greece to leave, both the Greeks and their partners need to wish to terminate the relationship. Even then the legal and institutional barriers remain significant.

grexit drama

@iGlinavos

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2 thoughts on “Ok, lets Grexit, but how? The legal (im)possibility of leaving the Euro

  1. Belinda Robertson says:

    Friday, 19 June 2015
    1:19:46 PM
    Hi,

    I am not a scholar or expert by any means, but here are my observations looking at this from “outside the box”.

    The very fact that it is so hard to exit or even evict a nation suggest to me that this was (and is) the greatest fear of the original founders of the EU. Have you stopped to ask yourself why it was done this way?

    These people do not do anything by chance. Indeed it takes long and serious consideration, designed with one thing in mind: To protect their financial interests, even from their own people trying to make changes in the future, for example to evict a nation(!) This is the only thing that could make their original plan fail.

    *NOTE: Their original plan being to hold all EU members beholden to the plan with no exit option for perpetuity, thus ensuring their continued gain from interest on their loans, with absolutely no regard as to how a nation manages to keep their commitments, in order to stay in.

    Who were the beneficiaries from the last “rescue package” when Greece got 10 cents in the dollar and the rest went to pay the interest of the loan providers (loan sharks perhaps?). So please ask yourselves: “Who did they rescue? The achievement of the previous “rescue package” is that the lenders have protected their investment (the interest has been paid) but Greece’s position, is now much worse because the amount of the “rescue package” has been added to their debt.

    Do you really think that Greece should do this one more time??? Borrow money and double it’s debt for the benefit of paying the interest? Please do not make the mistake of getting lost in the labyrinth of legal arguments – they were designed precisely for the purpose of confusing you, so that you cannot see “the wood for the trees”. Once we strip away the fears, the options and required actions are actually quite simple.

    I was born in Greece and I have Greek blood running through my veins. I feel the pain of the despair that my country has been plunged into by the mismanagement and unconscionable decisions and actions of the previous governments (plural).

    In one respect I find it fitting that Greece is the country that will bear the burden of highlighting the injustice and lopsidedness of the EU agreements.

    Greece is credited with giving the “lights of civilization” to the world and had it not been for the blackness that the Ottoman Empire plunged us into for 400 years, we would be leading the world today.

    It is time to, once more, lead the way to the freedom that we have always defended, irrespective of what field it applies to.

    Make no mistake, this is a very poignant moment in our history. It could be the catalyst for the greatest change the world has ever seen. The issue has certainly put the eyes of the world upon us and we must be conscious of that at all times. By making the right decisions now, Greece could regain the respect that has been lost – and the respect that it deserves.

    We need conscientious, inspired and inspiring leaders who put integrity first.

    I don’t know whether the current leaders can measure up to expectations but I will endeavor to find out on my next visit to Greece, shortly, because it is paramount that they are aware of what is expected of them.

    I welcome your thoughts.

    Like

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