9 July 2015

The EU treaties do not currently provide a mechanism for a country to leave the euro, either unilaterally or in a negotiated manner. Indeed, the process for joining the Eurozone as set out in the treaty “irrevocably” fixes the rate at which national currencies are replaced by the euro. Nor do they provide for a member state being expelled. They only provide for voluntary withdrawal from the entire EU.

Greece leaving the EU outright would not only pose a major geopolitical challenge for Europe, it would substantially increase the economic pain for the country. However, as ever in the EU, political expediency often leads to creative legal solutions and it is likely that a way can be found for Greece to exit the single currency but remain in the EU.

Why is a solution within EU law preferable to an agreement outside it?

Theoretically, Greece could be ‘forced’ or ‘elect’ to move into a type of legal limbo, by establishing a parallel/new currency without any changes to EU law – particularly if the printing of a new currency is the only way to reopen Greek banks.

However, this is unlikely to be anything more than a temporary solution or a step towards full exit, not least because, as long as Greece’s currency is the euro under EU law, re-denominating public and private contracts into a new currency would be very difficult. Of course, Greece could start using a different currency, but without legal certainty it is unlikely to be trusted by international institutions or investors, and the country would be constrained by a number of factors:

  • Firstly, it would be harder to access transitional aid. Greece would not meet the conditions for Eurozone bailout funding from the ESM, and since it would technically still be a euro member it would not be able to get funding from EU mechanisms such as the Balance of Payments Assistance facility. It is clear that the Greek economy would need such funding, not least to help recapitalise the banks and stabilise the government.
  • Secondly, its new central bank would not have any legal certainty as the Bank of Greece would technically still be part of the Eurosystem. EU members may not recognise the new currency and therefore Greece would not be able to use international and European payment systems. Greece may also not be able to reclaim its reserves which it has posted to the ECB/Eurosystem as part of its euro membership. All this would make it almost impossible for the new currency to be established as a method of payment for anything beyond small domestic transactions.
  • Thirdly, with the euro still the official currency of Greece, it could be impossible to legally re-denominate all deposits and contracts from euros to the New Drachma since technically everyone would still have a claim on their euros. Obviously, legally challenges would take a long time and may not practically make much difference, but would add to the uncertainty.

Therefore, in order to avoid a disorderly exit and default, it is in both Greece’s and the creditors’ interests to provide some legal certainty under EU law.

The neatest legal solution would be to change the EU treaties to allow for a euro exit mechanism, negotiated or otherwise, and/or retroactive powers to deal with the legal and financial implications of exit. However, there simply isn’t enough time for this to be an immediate solution. It would require the unanimous approval of EU leaders and need ratification in all member states. So, what are the immediate options in this situation?

The EU’s ‘flexibility clause’ – Article 352

One option would be to invoke the EU’s so-called ‘flexibility clause’ under Article 352 of the EU treaties, which can be used to achieve EU “objectives” when the treaties “have not provided the necessary powers.” This article could potentially be used to provide a temporary legal avenue for Greece to leave the euro within the framework of the EU treaties.  Use of Article 352 requires unanimous approval of all 28 EU governments (and some national parliaments) and it is perhaps telling that Sunday’s emergency summit will be attended by all 28 EU leaders.

In theory, EU leaders could ask the Commission to table a proposal involving the use of Article 352. The proposal would then have to get the consent of MEPs and be approved by unanimity in the Council of Ministers.

This is an option my colleagues looked at back in 2012, but the exact form an Article 352 decision would take is unclear. One option would be to grant Greece the same status as those EU countries currently outside the euro but with an obligation to join, which are known as ‘member states with a derogation’ (this ‘transitional’ status applies to all non-Euro countries, with the exception of the UK and Denmark, which have opt-outs). Changing Greece’s status to a ‘member state with a derogation’ would remove it from Eurozone measures such as the governance of the ECB, fines for excessive deficit, and the rules on issuance and use of the euro currency.

The process would still be far from easy and there would likely still be legal challenges against the move. Allowing Greece to exit the euro under Article 352 ‘temporarily’, or establishing a permanent mechanism to enable a state to leave the euro, would clearly contradict the ‘irrevocable’ nature of the euro as set out elsewhere in the treaties. While the ECJ is unlikely to rule against such a move outright, there would undoubtedly be pressure to resolve this tension through a formal treaty amendment in the medium term. For example, the establishment of first Eurozone bailout funds, the EFSF, which seemingly contradicted the EU treaties’ ‘no bailout clause’ eventually led to a dedicated Eurozone fund, the ESM, and an accompanying treaty change. Furthermore, Article 352 cannot be used as a substitute for treaty change – meaning that the treaties would likely have to be amended at some point anyway to accommodate for the new situation.

Pros:

  • Avoids need for immediate treaty change.

Cons:

  • Use of Article 352 to reverse the ‘irrevocable’ EU treaty commitment to the euro is a legal stretch. Treaty change still likely to be required in the medium term.
  • Requires unanimity so Greece has a veto (as do others).
  • Some national parliaments (including in the UK and Germany) must vote to approve an Article 352 decision, which – from the perspective of national governments – could delay or frustrate the decision.

Reinstate Greece’s ‘derogation’ from the euro via qualified majority voting

Another option that has been suggested would be to reverse the process for adopting the euro, as set out in the treaties, which might enable a decision over Grexit to be taken by qualified majority (QMV) of all EU member states, including the UK.

The current procedure for admitting a member state into the Eurozone (once the economic conditions have been met) consists of two votes, which act to remove the transitional derogation from the euro described above and set out the terms for euro adoption. First, there is a QMV vote among all member states (including non-euro members) to abrogate the member state’s transitional derogation. This is followed by a unanimous vote of Eurozone states to decide the appropriate rate at which to ‘irrevocably’ fix the exchange rate of the old domestic currency to the euro.

Theoretically, reversing this procedure could see Greece’s ‘derogation’ reinstated – removing it from its euro commitments as described above. Similarly to the Article 352, the ECJ might permit it as a temporary measure in response to the crisis but a treaty change would likely be required in the medium term as this procedure is clearly set out in the treaties as a one way mechanism to euro membership.

Pros:

  • From the perspective of the most hawkish Eurozone members, it would circumvent unanimity and a Greek veto.
  • It would avoid national parliaments, which – again from the perspective of some national governments – could ‘complicate’ the process.

Cons:

  • Using this procedure to reverse the ‘irrevocable’ treaty commitment to the euro is a legal stretch, even more so than using Article 352. Treaty change still likely to be required in the medium term.
  • Crucially, it would establish a precedent whereby Eurozone states could effectively be ejected by QMV vote, rather than by unanimity. This would further call into question the ‘irrevocable’ and ‘irreversible’ nature of the single currency. While countries like the Netherlands have long argued for such a mechanism, it would be politically very difficult (and probably impossible) for countries such as France, Italy or Spain to agree to such a proposal.

Implications for the UK

The UK would need to approve any action undertaken under Article 352, since it requires unanimity. In addition, under UK law, the Government cannot agree to an Article 352 decision of this kind without the approval of Parliament, and many Conservative MPs are likely to demand that the Prime Minister use the leverage he would have to secure commitments to EU reform. While there would be limited scope to tack on any UK demands to such a decision in the immediate term, the UK could insist that the decision be underpinned by a future treaty change that also addressed UK concerns.

If a decision was taken via QMV, this would remove David Cameron’s immediate leverage. However, as noted above, treaty change is likely to be required in the medium term under any exit scenario.

A Greek departure would raise obvious questions about the relationship between the Eurozone and non-Eurozone countries, and in particular the obligation for every country other than the UK and Denmark to join. A Grexit is also likely to increase the pressure on the remaining Eurozone countries to shore up the Single Currency and avoid contagion with further integration in areas (such as fiscal, political and social) not provided for in the current treaty setup. All of which would enable the UK to seek changes in its own and other non-Eurozone countries’ interests.