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Sunday could see EU leaders drawing up plans for Greece to leave the euro. But how can this be achieved while keeping Greece in the wider EU. Open Europe's Stephen Booth looks at some of the possible legal avenues available and what the implications are for the Eurozone and the UK.
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.
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:
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?
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.
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.
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.