Nicolai von Ondarza examines the legal options for a Greek exit from the eurozone, warning against an unregulated Grexit.

Although negotiations are restarting, the erstwhile taboo of Greece leaving the euro is becoming increasingly likely and it is being used as a credible threat in bargaining with Athens. Yet a “Grexit” is not only an economically incalculable risk. Politically and legally the eurozone also faces difficult decisions that will transform the character of its monetary union.

As the euro was originally created “irrevocably” (Article 140 TEU), there is no explicit procedure in place for a state to ever leave. The currency’s irrevocability was designed to prevent financial markets from placing a eurozone state under pressure until it reintroduced its national currency, despite the great costs involved.

Three Options for a Grexit

In view of the impasse over talks with Greece, European Union (EU) institutions and national capitals will now be examining the legal possibilities for taking Greece out of the euro despite Article 140. Three variants come into consideration.

First, Greece could leave the EU (and thus the eurozone) under Article 50 TEU. Although this route would be the most legally solid, there is scant interest in driving Greece out of the union as a whole. But above all, leaving the European Union is a lengthy procedure—time that Greece does not have.

Second, the irrevocability of the euro in EU treaties could be annulled through the simplified treaty amendment procedure. But that too would be a process that is likely to take several years, whereas the introduction of a new Greek currency would need to occur quickly.

Third, there are solutions under secondary law. For one, the decision in 2000 to introduce the euro in Greece could be reversed, returning the country to the status of an EU member state “with a derogation.” Or the EU could make use of its flexibility clause (Article 352 TEU), which allows it to act within the framework of its treaty objectives even where no explicit procedure is provided. The advantage of both these options is that they can be put into effect rapidly. However, unlike a treaty amendment or an EU exit, the legality of leaving the euro by this route is highly contested. Nevertheless, politically, the speed of execution is likely to favor a Grexit via secondary law.

None of the options outlined above permit Greece to be excluded from the euro against its will, even if all other EU member states agreed on a Grexit. On the contrary, all three require Greece’s explicit agreement. The government of Greek Prime Minister Alexis Tsipras has consistently emphasized—particularly when calling for a “no” in the referendum on July 5—that Greece wishes to remain a member of the monetary union and would be prepared to take legal action against steps that undermined its membership.

There is thus no legal route to exclude Greece from the eurozone. Yet it is in the power of eurozone states, and above all the European Central Bank (ECB), to force the issue.

If no new European Stability Mechanism (ESM) is adopted in the coming days and the ECB consequently stops granting emergency credit to Greek banks, Athens faces insolvency and the simultaneous collapse of its banks. The government would quickly find itself forced to introduce a parallel currency (in contravention of European law) in order to save its economy from total failure. This would not, however, provide a stable basis for economic recovery. Even in this situation, the EU would have to negotiate an agreement with Greece to retroactively legitimatize the new currency regime.

Faced with these scenarios, it is conceivable that Greece could decide to negotiate an orderly exit from the euro. The hurdles imposed by European law are considerable. Even a simplified treaty amendment requires the unanimous agreement of all member states followed by national ratification. The same applies to any exit agreement, which would be required for an orderly departure from the EU. Even decisions under secondary law—the most likely route—would require a unanimous agreement.

Although a decision to reverse the introduction in Greece may be taken by a qualified majority, fixing a new exchange rate demands unanimity. Likewise, invoking the more suitable flexibility clause requires not only unanimous consent, but also the agreement of many national parliaments, including the German and British.

Thus, it is clear that a decision as historic as a euro exit can only be taken if all EU member states are solidly behind it. This is unlikely to be the case until they are convinced that all political options for reaching an agreement have been exhausted.

There is a great danger that the European Union and the eurozone are heading for the worst-case scenario, where the Greek government rejects the conditions for a third bailout program but insists on keeping the euro—only to be driven out by force of circumstances and economic collapse. This would immensely exacerbate the already enormous costs of an orderly Grexit.

If negotiations or ratification of a third package fail, the negotiators on both sides should then at least do their utmost to organize a rapid, legally watertight euro exit in order to avert irreversible harm to the eurozone project and to Greece.

*[A German version of this article was originally published by Fair Observer’s content partner, Stiftung Wissenschaft und Politik (SWP), and was translated to English by Meredith Dale.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

Photo Credit: Kostasgr / Shutterstock.com

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