The ways out of the euro

After the Greek crisis in the Summer of 2015, it has been silently acknowledged that a country can abandon the euro. But how would an exit from the Eurozone proceed, what would it cost and from where would the costs originate?

A report by an independent group of researchers, EuroThinkTank , seeks the answers to these important questions. In this blog entry, I detail some general ways for an exit based on our report.

How to leave the Eurozone?

In the EU, laws and regulations are only ways to express the present political will of member states. If the case for exit is politically strong enough, legal issues will prove in large part irrelevant, and decisions will be conducted on a political level.

Legal arguments or constraints will thus not prevent any member nation from exiting the euro, but a country looking to exit may also face stubborn resistance from other member states. Because of this, it will be preferable for the exiting country to link the exit to a generally accepted cause.

There are three international and/or EU law arguments that could be put forward as a valid reason for a unilateral exit from the euro area:

1. National emergency

2. Other force majeure

3. A change or violation of the Acts of the Treaties and/or principles of the Eurozone.

In the case of a national emergency (e.g., epidemics, economic crises), a country may at least temporarily bypass all treaties and pursue actions needed to overcome the emergency. Other force majeure is conceptually close to a national emergency and refers to the effects of events that are abnormal, unforeseeable and beyond the control of the country concerned.

The most credible and legally viable path out of the euro for any member country of the eurozone is based on the transition of the currency union into something different than the one that member states originally joined. For example, turning the ESM into the European IMF and a rainy-day fund offering financing to countries suffering economically could require changes in the Treaty and open a negotiable exit to countries not willing to proceed into tighter union.

Developments in the euro area could also lead to a situation where some of the Articles of the TFEU are breached. This could provide justification for a unilateral exit derived from the legal principle that a contract does not bind its signers if it is breached. For example, debt relief on the loans provided by the European Stability Mechanism (ESM) agreed by a qualified majority (85 % of the votes cast) would, for example, pose a direct threat of member states' funds not being repaid as agreed, formally breaching Article 125 TFEU. Making this assessment is the responsibility of domestic authorities, keeping in mind that there is no certainty that all member states would agree on the legal interpretation.

Payment systems

Regardless of the form and legal basis of an exit, a particular problem arises if a euro area member is no longer able to run an efficient payments system by itself. Joint and efficient payments systems have been developed primarily by the central banks of the European System of Central Banks as part of their mandate to manage the joint currency during the last fifteen years. Many euro countries still operate domestic payments systems particularly for smaller banking groups, but their use is declining because of the greater efficiency of the joint systems and the political will to use them.

Should a member try to negotiate an exit agreement?

Because there is no euro exit clause in the European treaties, there is nobody to negotiate with and nothing to negotiate about at the European level (commission and parliament). This does not preclude informal discussions with European authorities, either before or after any exit decision. Still, opening any kind of negotiations with European authorities and/or member states before the formal exit decision is taken would carry at least three major risks.

First, despite a national conviction to leave the euro, there could be non-existent support for this view among other member states. In the worst case, other member states or European institutions could try to enforce continued membership through threats of political, economic or financial sanctions, including demands to leave the EU altogether.

Second, managing a legally binding exit process could take years. Alternatively, a unanimous agreement with all the member states of the euro area could, in principle, be negotiated, but opening such negotiations runs a risk of leaks.

Third, and most importantly, it could be impossible to keep such negotiations secret. If exit negotiations took place at economically or financially sensitive times, publicity would immediately cause major capital flows and even risks of bank runs.

Could the exiting country remain in the EU?

Legally , there is no clause in European treaties allowing the expulsion of a country from the EU or the EMU. The treaties only allow for a suspension of some of the rights of a member state, like the voting right in the Council. In this sense, there are no obstacles for an exiting country to remain as a member of the EU even after leaving the EMU. To what extent other treaty provisions would be used to effectively create a de facto exclusion of an exiting country through political isolation would be a political decision taken by all other members of the EU and the European courts.

Two ways out

Exit from the Eurozone can be achieved either through a mutual agreement among member states of or through unilateral withdrawal. A jointly agreed secession from the euro area could allow the present payments and stability arrangement to continue to function, supervised at the European level by the ECB, European commission, the European parliament and the European Banking Authority.

In a unilateral withdrawal, the exiting country may need to rely on different temporary and make-shift measures to run its economy while making a robust case for exit both economically and legally. This runs a risk of considerably higher costs of an exit. These can be diminished with sufficient preparations, most importantly, by maintaining a domestic payment system.