Today the Bank of Greece published its Report on Monetary Policy (see here for summary in English) where Stournaras dropped the following bombshell:
Failure to reach an agreement would, on the contrary, mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and – most likely – from the European Union.
This was swiftly followed by a series of similar pronouncements by a number of commentators including Martin Schulz, the president of the European Parliament, who said (see here):
I think that leaving the euro is also leaving the European Union.
A number of people on social media are asking the same question. Does a Euro Grexit mean also EU Grexit? Is this discussion a firework aimed to scare Greeks into submission or is it true?
Hang on to your hats… It is true. The legal framework for EMU does not allow for exit. Therefore one of the ways (perhaps the first option) for leaving the Eurozone is to leave the EU. I have written extensively about this in my book. I am offering below a summary of what the exit options will be for Greece.
It seems that Greece’s position in the EU is no longer guaranteed (despite what Wolfgang Schäuble had declared a few months ago). Everyone modelling Grexit scenarios has discovered that legally a withdrawal from the EU may be necessary to effect a withdrawal from the Eurozone. 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. Do you think that Mr Tsipras, after having failed to negotiate a deal on financing, will manage to negotiate an exit/re-entry deal with ALL other member states?
You could argue that if agreement can be reached on ‘Grexit’ with everyone while maintaining Greece’s place in the EU, Tsipras could negotiate an amendment to the EU Treaty with other member countries, to create a right of exit from EMU. This would require long negotiations and ratification by all member states. Does anyone see this happening in the current conditions. If Mr Cameron is finding his limited ‘renegotiation’ to be a bit of a pickle, how would Mr Tsipras manage to pull a comprehensive change that alters fundamentally the nature of the Euro as a permanent structure? 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 ‘irreversibility’ of the substitution by the euro of the currencies of the participating Member States and to the ‘irreversibility’ of the monetary union process.
It has been suggested that, because of urgency, a unanimous agreement by the European Council leading to the issue of a European regulation, could be sufficient to allow for Grexit, despite the legal uncertainty that this could entail. Again this necessitates wider agreement that all things considered will be more difficult to achieve than agreeing the conclusion of the bailout negotiations currently in progress.
You may now be wondering: If Grexit is so difficult, why can’t the Greeks just stay? The Europeans could not kick them out could they? 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.
Even if Greece cannot be kicked out, staying (unwanted) will not be an option. A lot of people (my students included) have been asking me why can’t Greece default on the debt and stay in the Euro. The answer is that while technically exit cannot be forced (as explained above), an exit will become necessary to prevent collapse of the banking system. If the ECB no longer supports the banking system via ELA, then Greece can either try to continue ELA in violation of the rules, forcibly drawing liquidity from Target2, or give up and print its own currency (see this infographic). No economy can operate without a banking system.
The conclusion is that:
Grexit from the Euro can very plausibly mean Grexit from the EU
Anyone up for that?