EU confronts Greek legal puzzle

By Matthew Karnitschnig

Needed: A creative solution to keep country in Union in case of Grexit.

As Athens edges ever closer to the precipice of default, a thorny question looms for the European Union’s top lawyers: How to let Greece out of the euro while keeping it in the EU.
The worry is that European law could force Greece to abandon the EU before it can leave the eurozone.
At a time when anti-EU parties are on the rise across much of the Continent and the U.K. is debating its future in the union, Europe’s leaders don’t want to risk letting Greece go.
A departure would raise serious questions about the EU’s viability and cast doubt on the principle of solidarity at the heart of European integration. What’s more, Greece plays an important strategic role in Europe. Forcing the country out of the EU could drive it into the arms of Russia.
“Greece leaving the euro would be a problem. Greece leaving the EU would be a complete disaster,” said Ulrike Guérot, director of the European Democracy Lab in Berlin.
Yet keeping Greece in the EU while letting it out of the eurozone is a path fraught with legal, economic and political hurdles.
There’s little question that if Greece defaults on its upcoming loan and bond repayments, the European Central Bank would have to cut off liquidity to Greek banks, leaving Athens with no choice but to begin printing its own money, a clear abrogation of the treaty governing the currency union. For all intents and purposes, Greece would be out of the euro.
“The minute you do this — drachma, IOUs, coupons — you are out of the eurozone, you are de facto out,” said a top European lawyer who has studied the issue.

“Greece leaving the euro would be a problem. Greece leaving the EU would be a complete disaster.”

Greece’s Central Bank has echoed those fears, warning that a default would force Greece from the euro and “most likely from the European Union.”
From a legal standpoint, however, Greece would still be a member. Even if a country violates the treaty, there’s no mechanism for kicking it out.
That would create a host of legal and administrative headaches for both Athens and Brussels.
Greece would want to take control of its own monetary policy and not be bound to contracts denominated in euros.
Trouble is, there’s no clear legal path for a country to exit the eurozone without leaving the EU first. EU treaties describe the eurozone as “irrevocable.”
A country can leave the EU, however. Under Article 50 of the EU treaty, a country can withdraw its EU membership. Since euro membership is only open to EU countries, Greece would automatically fall out of the currency area if it left the political union.
But here too, there’s a catch: Article 50 stipulates that countries engage in a two-year negotiation with Brussels before they can leave, time Greece doesn’t have.

‘Legally inconceivable’

A Greek lawyer on the staff of the European Central Bank explored the question in late 2009, before Greece’s future in the euro became a serious question. The issue arose in the context of Ireland, which at the time was debating its own future in Europe.
In a nearly 50-page legal analysis, the lawyer concluded: “A Member State’s exit from European monetary union, without a parallel withdrawal from the EU, would be legally inconceivable.” That conclusion rests in large part on the numerous references in the treaty to the “irrevocable” nature of euro membership.
Europe’s leaders at the time didn’t want to sow doubt about their commitment to monetary union and left no option for withdrawal.
Others challenge the ECB lawyer’s view, arguing there is sufficient flexibility in the treaties to get Greece out of the euro without sacrificing its EU membership. Such a solution would force Europe into uncharted territory. It would be messy and complicated, but doable, they say.
“Where there’s a political will, a legal way can be devised,” says Sir Alan Dashwood, a lawyer and former director at the Council.
One such option is Article 352, also known as the flexibility clause. In essence, this is the EU’s panic button. It allows the council, on a proposal from the European Commission and with the consent of the European Parliament, to adopt whatever measures it deems appropriate, even if there is no legal basis for them.
Another possibility would be for the General Affairs Council, made up of ministers from member states who look at institutional issues, to declare Greece a “member state with a derogation,” that is, a country preparing to join the euro. The category was created for EU members that don’t yet meet the entry criteria.

No treaty change in sight

A less controversial option would be to amend the European treaty. But that’s a lengthy process that requires unanimity among all 28 EU countries and referendums in a number of them, at a time when the U.K. is demanding treaty changes that are being resisted by member states.
Europe has sought to avoid treaty change in the recent past by forging agreements outside the framework of the treaty. For example, the eurozone bailout fund, known as the European Stability Mechanism, was established on this basis to avoid referendums across the EU. The treaty applies only to eurozone members. Europe could pursue a similar course to get Greece out of the euro, some legal scholars say.
The problem with all of these scenarios is that Europe would tacitly be acknowledging that euro membership is revocable.
“That makes the euro a revolving door,” said a senior European lawyer, speaking on condition of anonymity.
Europe has a long history of giving political expediency precedence over the fine print. Both the U.K. and Denmark, for example, were granted exceptions to a requirement that EU members eventually join the euro. Why not let Greece leave the euro and stay in the EU, advocates of a compromise argue.
If Greece defaults, it will have left European taxpayers holding the bag for more than €200 billion in aid. Offering Greece a special arrangement is likely to cause a further outcry in Germany and other EU countries.
The only realistic way out of the dilemma is a political leap forward, said Guérot. Just as ECB President Mario Draghi calmed markets in 2012 by vowing to do “whatever it takes” to preserve the euro, Chancellor Angela Merkel needs to articulate the importance of keeping Greece in the EU, she said.
“Merkel needs to find bold words,” Guérot said.