Steve Peers

News sources report that during the recent Eurogroup meeting about a potential new bailout plan for Greece, the German government was privately proposing a plan for a temporary Greek exit from the eurozone (“Grexit”). Putting aside any political or economic arguments, the most pressing question is whether this is even legally feasible. The short answer: It’s not.

A temporary Grexit isn’t possible because a permanent one isn’t allowed under the current treaties. The treaties lack any provision for a Member State to leave the EMU after joining or for the EU to expel a Member State, with or without its consent. While leaving the EU automatically triggers an exit from the EMU, there’s no legal mechanism for forcing a country out of the EU or suggesting they should leave.

Recently, Andrew Duff suggested that existing EU treaties could facilitate a Grexit. He argues that Article 140(2) of the Treaty on the Functioning of the European Union (TFEU), which outlines a Member State’s admission to the EU, could be reversed. This viewpoint is legally flawed. Article 140(2) solely addresses joining the euro, not leaving. Article 140(3) further strengthens this interpretation by stating the “irrevocable” nature of fixed exchange rates. A qualified majority vote couldn’t simply overturn a prior decision to join the euro based on Article 140(2). It would also require overturning the unanimous decision made under Article 140(3) regarding exchange rates. Consequently, even if such actions were legally possible, Greece would have to consent.

Some might suggest that the Court of Justice of the European Union (CJEU) would prioritize political reality over the treaty’s clear language, as in the Pringle (concerning the ESM bailout treaty) and Gauweiler (concerning ECB bond-buying) cases. However, those cases involved measures supported by most Member States and aimed at protecting the monetary union. A forced Grexit, temporary or not, wouldn’t fulfill these criteria. Additionally, the rulings in Pringle and Gauweiler do have some basis in the treaties: the treaty didn’t explicitly prohibit loans to member states, and it implicitly permits the ECB to buy government bonds on secondary markets. The argument for a forced Grexit, however, lacks even this minimal legal cover.

Neither can Greece be forced out through actions by the European Central Bank (ECB). Forcing a country out of the EMU is explicitly forbidden, which implies that actions leading to the same outcome are also prohibited. Even the ECB’s current actions, let alone any future ones, are legally dubious and are already facing legal challenges. We can’t presume the CJEU will always endorse the ECB’s actions. For example, the UK won a case against the ECB earlier this year, and the Commission previously defeated it in court regarding the application of EU anti-fraud law.

So, are there any legal avenues for changing the current situation? As previously suggested, amending the treaties is one option. Another is to initiate proceedings challenging the legality of Greece’s EMU membership, Greek debts, or (more precariously) utilizing Article 352 TFEU (the residual powers clause) to govern the consequences of a Grexit that has already occurred in practice.

Another possibility is to adopt a measure based on Article 352 that technically retains Greece’s EMU membership but exempts it from some standard rules. This tactic bends the rules without entirely breaking them. Article 352 requires a unanimous vote, thus avoiding the issues associated with Duff’s proposal, which could potentially damage perceptions of the EU’s monetary union. Using Article 352 would require Greece’s consent for any measure taken.

While the specific details are beyond the scope of this discussion, some have highlighted that Scotland, for instance, lacks official legal tender, but the British pound is accepted in practice. Similarly, the euro could theoretically remain the nominal legal tender in Greece while a parallel currency, not formally legal but accepted for specific purposes, is introduced temporarily.

This isn’t to suggest that this is the optimal solution legally, economically, or politically. A better course of action would be a new bailout deal with less austerity or accepting the current Greek offer (with debt restructuring) overseen by an independent advisory board. Only if this fails, as seems possible, should more radical measures be considered.

While metaphors about Greece abound, the key takeaway is this: Greece can choose to stop participating in the EMU whenever it wishes, but it can never truly leave.

Barnard & Peers: chapter 19

Photo credit: The Eagles