Berlin, 10.07.2015

Legal Avenues for a Grexit

Nicolai von Ondarza
Nicolai von Ondarza

Amid persisting danger that negotiations with Athens may result in a Greek exit from the eurozone, Nicolai von Ondarza examines the legal options and warns against an unregulated Grexit.

Although negotiations are restarting, the erstwhile taboo of Greece exiting the euro becomes increasingly plausible and is increasingly used as a credible threat in bargaining with Athens. Yet a »Grexit« is not only economically a largely incalculable risk, also politically and legally the Union faces enormously difficult decisions that will transform the character of its monetary union. For the euro was originally created »irrevocably« (Article 140 TEU); there is no explicit procedure in the treaty for a state that joins ever to leave again. The currency’s irrevocability was designed to prevent the financial markets placing a euro state under pressure until it reintroduced its national currency despite the great costs involved.

Three Legal Options for a Grexit

In view of the impasse in the talks with Greece, the 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: Firstly, Greece could leave the European Union (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 Union is a lengthy procedure (the treaty foresees two years plus ratification by member states). Time that Greece does not have. Secondly, the irrevocability of the euro in the EU treaties could be annulled though the simplified treaty amendment procedure. But that too would be a process likely to take several years, whereas the introduction of a new Greek currency would need to occur quickly.

Thirdly, there are be solutions under secondary law: For one, the decision of year 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 EU exit, the legality of leaving the euro by this route is highly contested. Nevertheless, politically, speed of execution is likely to favour a Grexit via secondary law.

Legal Euro Exit only with Greek Consent

None of the options outlined above permit Greece to be excluded from the euro against its will, even if all the other EU member states so wished. Quite to the contrary, all three require Greece’s explicit agreement. And the Greek government of Prime Minister Alexis Tsipras has consistently emphasised – also when calling for a »no« in the referendum – 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 the euro states – and above all the ECB – to force the issue. If no new ESM programme 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 collapse. This would not, however, provide a stable basis for economic recovery. Even in this case the EU would have to negotiate an agreement with Greece to retroactively legitimatise the new currency regime.

Any Grexit Requires Agreement of All 28 Member States

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 unanimous agreement. Although a decision to reverse the introduction in Greece may be taken by 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 in Germany and the United Kingdom). It is thus clear that a decision as historic as a euro exit can only be taken if all the EU member states are solidly behind it. This is unlikely to be the case until they are convinced that all political options for reaching agreement have been exhausted.

Prevent an Unregulated Grexit

There is therefore 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 programme 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 fails, the negotiators on both sides should then at least do their utmost to organise a rapid, legally watertight euro exit in order to avert irreversible harm to the European idea and to Greece.

A German version of this »Point of View« was translated into English by Meredith Dale.

Further Reading

Heribert Dieter

Collateral Damage from ECB Strategy

Ultra-loose Monetary Policy Has Little Benefit – and Harms Many

SWP Comment 2015/C 03, February 2015, 8 Pages