With the Greek parliamentary election just a couple weeks away and the leftist party Syriza maintaining a slim majority in recent polls, we could be close to witnessing the first exit from the eurozone. The problem is, no one knows what that would actually look like. The Maastricht Treaty that established the Economic and Monetary Union (EMU) intentionally doesn’t have a provision for leaving because the new union was supposed to be irrevocable, and Greece may have to leave the EU entirely if it wants to return to the drachma.
Grexit: A euro exit could necessitate leaving the EU as well
“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,” writes Phoebus Athanassiou in the 2009 ECB working paper Withdrawal and Expulsion from the EU and EMU “Consequently, the only way to withdraw from EMU is to withdraw from the EU.”
As a working paper, Athanassiou’s conclusion doesn’t represent official EU policy (there isn’t any on the matter), but it does show how little legal structure there is in place for Greece to leave the euro zone. The mechanism for leaving the EU defined in the Lisbon Treaty isn’t much more specific, saying that a country should notify the European Council of its intention to leave and work out the details from there.
And there is a lot to be worked out. If Greece leaves the EMU, it would probably want to take back its share of the capital being used by the ECB to back the euro; establishing a switchover date to drachmas without a massive capital outflow would be a problem; there is even some question about how Greek-issued, euro-denominated bonds would be handled that won’t be settled without plenty of litigation.
Well informed readers could no doubt add to that list, and we haven’t even considered the implications of a full EU exit.
Grexit: EMU doesn’t have the mechanisms in place for an orderly exit
“Any stresses which arise within the euro zone as a result of differing national or economic priorities would inevitably require a political (negotiated) settlement. They are not susceptible to a purely legal analysis or solution,” wrote Charles Proctor and Gilles Thieffrey in their 1998 essay Thinking the Unthinkable.
At the time they couldn’t imagine the crisis that has made a Grexit look so plausible, but it was clear to them that the legal framework simply wasn’t setup to handle an orderly exit and political negotiations would have to take their place. Since then Thieffrey has followed up the original essay with Not So Unthinkable in 2005 and Thinking the Probable: The Breakup of Monetary Union in 2011, that last of which advocated for a two-tier currency so that the periphery could have the benefits of a weaker currency.
“Better to find the legal and economic tools to create the breathing space necessary for the current Member States’ governments to strengthen or dismantle EMU in an orderly fashion, rather than to await a populist and reactionary tidal wave,” wrote Thieffrey in 2011.
The euro zone isn’t as fragile as it was at the height of the credit crisis, but it’s no better prepared for a member state choosing to leave.