What are the legal implications of leaving the economic and monetary union according to EU law?

Steve Peers

Greece’s upcoming referendum on accepting its creditors’ offer brings uncertainty. It’s unclear if rejecting the offer means Greece automatically leaves the EU or EMU, or defaults on its debt. Accepting the offer doesn’t provide clarity either, as negotiations were ongoing during the referendum announcement, potentially making the offer outdated.

Given the range of possibilities, examining the legal framework for departing economic and monetary union (EMU) is crucial. A key question is whether Greece must leave the EU if it exits the single currency.

Joining the euro is clearly defined in EU Treaties, applicable to every Member State except Denmark and the UK, which have opt-out protocols. This emphatically means the UK cannot be forced into the single currency, regardless of the Brexit outcome.

Conversely, no explicit rules exist for a Member State voluntarily or involuntarily leaving the euro. This deliberate omission by the Maastricht Treaty architects aimed to solidify monetary union, as departure rules could have been destabilizing. In essence, Greece cannot legally exit the single currency, nor be forced out.

However, as Ioannis Glinavos points out, Greece’s continued participation could be challenged by the ECB restricting or ending emergency assistance (ELA) or limiting Greek access to payment systems. Such actions might face legal challenges from Greece, arguing violations of EU monetary law or an implied rule against forcing Member States out of monetary union.

Imagine a scenario leading to Greece’s departure from the official EMU framework. This could involve introducing a new national currency or maintaining an informal link with the euro, akin to Montenegro using the euro without participating in EMU’s legal structure. All such actions are illegal for EU Member States under EU law.

Similarly, Greece defaulting on its debts without leaving EMU, if practically feasible, lacks provisions in the Treaties. Furthermore, other Member States and EU institutions might be legally obligated to refuse debt relief due to the Treaties’ no bail-out rule. The CJEU in Pringle clarified this rule permits lending to Greece with conditions and interest but not assuming responsibility for Greek government debts. Forgiving debts would be seen as indirectly assuming them. However, arguing that a Greek default constitutes force majeure, acceptable to creditors without violating the no bail-out rule, might be possible.

Importantly, the no bail-out rule doesn’t apply to the private sector, explaining the “haircuts” imposed on private banks. This also applies to international bodies and third states. Thus, Greece could, without infringing the no bail-out rule, default on IMF loans, although likely violating other legal rules. Ironically, the IMF strongly advocates for Greek debt relief. Similarly, Greece could refuse repayment of any loans from Putin without breaching the no bail-out rule.

The current situation stems from legal breaches: Greece joined the single currency using allegedly inaccurate economic data and faced no consequences for exceeding debt and deficit limits stipulated by EU law.

If Greece exits the EMU framework and/or defaults on debts, violating EU law, is leaving the EU obligatory, as some suggest? While leaving EMU without leaving the EU is clearly illegal, there’s no legal obligation for Greece to leave the EU if it defaults or exits EMU.

Article 50 TEU, outlining withdrawal from the EU, clearly states it’s a “voluntary choice” made by a Member State “in accordance with its own constitutional requirements.” No Treaty rules mandate withdrawal under specific circumstances.

Expelling a Member State is also not possible. Article 7 TEU allows suspension for breaching principles like human rights, democracy, and the rule of law, but lacks provisions for expulsion.

The Treaties, therefore, implicitly but definitively, prevent expulsion from the EU under any circumstances. However, they are also silent on Member States leaving EMU or defaulting on debts. If these actions don’t mandate leaving the EU, what’s the legal solution?

Solutions to the Tragedy

Greek tragedies often used a “deus ex machina” – a radical plot device resolving seemingly impossible situations. A god or goddess would appear, using divine power to solve the characters’ problems, suspending normal narrative rules.

Greece’s participation in the EU’s single currency mirrors this. A new legal framework is needed, regardless of whether Greece remains in EMU.

Four possibilities exist. First, Treaty amendments could retroactively regulate the situation, potentially granting Eurozone States in the Council and/or European Council new powers to address the consequences of Greece leaving EMU. Legally this is the cleanest solution, but politically, it’s tricky. Greek and British issues could intertwine, potentially causing the amendment process to collapse.

Second, the EU’s implied powers, specifically Article 352 of the TFEU, could be invoked. This is complex since the Treaties consider EMU “irrevocable.” However, the CJEU has broadly interpreted measures to safeguard EMU, like financial assistance in Pringle and the ECB’s bond-purchasing program in Gauweiler. This broad interpretation could extend to measures addressing a “Grexit.”

Third, some Greek lawmakers propose an “odious debt” argument, claiming Greek debts violate human rights, thus are illegal. However, the CJEU emphasizes the conditionality of financial assistance and hasn’t addressed the legality of those conditions in national court cases. While not explicitly ruled on, this argument seems unlikely to succeed under EU law.

Fourth, a novel argument posits that Greece’s euro participation was initially invalid due to allegedly inaccurate economic statistics. The CJEU could, in a single ruling, declare past legal commitments related to Greece’s EMU participation as legal to uphold legal certainty, while simultaneously ruling that: a) if still in EMU, Greece’s participation must be maintained for legal certainty, or b) if Greece has exited EMU, the departure is legal due to initially invalid participation.

Crucially, the “legal certainty” exception allows for Greek debt relief. The inherent illegality of the framework surrounding Greek debt potentially negates the full application of the no bail-out rule, allowing creditors and Greece to negotiate realistic debt relief. While the no bail-out rule applies to non-Eurozone states, Greece borrowed significantly more due to its potentially illegal euro participation. A Greece outside the euro could access different financial assistance mechanisms available to non-Eurozone states.

Although Greece would be formally obligated to pursue future euro membership, the EU typically doesn’t pressure reluctant countries, like Sweden. Realistically, pressure for Greece to rejoin wouldn’t surface for a long time.

All these solutions essentially suggest “it was all a dream”: either the debt or euro participation never legally existed, Treaty/EU legislation retroactively addresses the issues, or the Treaty’s interpretation differs significantly from common understanding. While such legal approaches are generally undesirable, they appear unavoidable in this case. Legally, Greece shouldn’t have joined the euro, shouldn’t have accumulated such debt, cannot leave EMU, and cannot be forced out of the EU. Economically and politically, Greece has suffered tremendously, can’t repay its debt under austerity measures, yet other Eurozone taxpayers understandably demand their money back.

These legal and economic-political conflicts necessitate a radical framework revision. The fourth solution seems the most appealing. It aligns with the classical Greek tragedy tradition while minimally disrupting the legal framework. It offers solutions – a legal “Grexit” and effective debt relief – aiming to achieve the best possible outcome. While no solution satisfies every demand, this approach appears to be the least harmful option.

Barnard & Peers: chapter 19

Cartoon: Peter Schrank, Independent on Sunday

Licensed under CC BY-NC-SA 4.0