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The Legal Mechanisms of a Greek Exit

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About The Author

Alex Hitchcock (Former Writer)

Alex is a graduate of the Universities of Sussex and Cambridge. He attained a first-class degree in History from the former before graduating with an MPhil in Modern European History with Distinction from the latter in 2014. He is currently undertaking a full-time internship in the Westminster Office of a Member of Parliament.

Since January 2015, the possibility of a Greek exit, or Grexit, from the euro zone has resurfaced. Greece is in the midst of a severe sovereign-debt crisis and is struggling to find friends willing to lend to it. Hence one drastic option out of the financial mess is to leave the euro, return to its own currency and take full control of its economic policy.

With debate surrounding the legality of a Grexit, this article will explain the causes of the Greek sovereign-debt crisis before exploring the circumstances under which Greece might legally leave the euro zone.

The Sovereign-debt Crisis: A Very Greek Tragedy

The Greek sovereign-debt crisis came to light in November 2009. It was caused by three major factors: reckless government spending, corruption, and dodgy financial bookkeeping.

1. Reckless Government Spending

Greece joined the third stage of the Economic and Monetary Union (‘EMU’) in January 2001. This meant it entered the euro zone and adopted the euro as its currency. This gave Greece access to cheap credit (with interest rates around 10 percentage points lower than before its entry) on the condition that it ran a budget deficit of no more than 3 percent and a debt level below 60 percent of GDP as stipulated by the Stability and Growth Pact, a set of rules implemented in line with the Maastricht Treaty to ensure fiscal discipline.

However, Greece used the opportunity to borrow vast sums of money, which it largely spent on public services. For example, in the 12 years approaching 2010, public-sector wages doubled and the average government job paid three times the average private-sector job. However, this did not mean better services, rather expensive and inefficient ones. For instance, in 2010 the nationalised railroad had annual revenues of €100m and an annual wage bill of €400m.

When these figures surfaced in 2009, it was clear Greece was in trouble. A country of 11 million people had accumulated a national debt of €262bn, up from €168bn in 2004. The government revealed that instead of running a budget deficit of 3.7 percent of GDP in 2009, it was actually 12.7 percent, which would later be raised to 15.7 percent, the highest in the EU. It also owed $800bn in pensions.

2. Corruption

Simultaneously, widespread corruption meant the Greek government was not collecting tax revenues. Financial journalist Michael Lewis suggests up to 40 percent of taxable labour went unreported. For example, two-thirds of Greek doctors declared incomes of below €12,000 — the level at which Greeks begin paying income tax. 

Corruption was estimated to be costing the Greek economy around €30bn, or 12 percent of GDP, every year. This starved the public purse of revenue to pay for its profligacy; a black hole ultimately filled with extra borrowing.

3. Dodgy Bookkeeping

But how could Greece borrow so recklessly and stick to its economic commitments?

The answer is that Greece cheated; it manipulated the books to meet targets. In November 2004, Greece all but admitted it cooked its books to get into the euro zone, as its budget deficit had not been below 3 percent since 1999. To show a low deficit, Greece removed substantial government expenditures from the books, including pensions and defence. To lower inflation, the government fixed prices of electricity and water and manipulated the consumer price index by removing products with rising prices.

Greece continued this charade once in the euro zone. investment banks created complicated financial swaps to hide Greek debt from auditors. However, since the debt would have to be repaid one day, it was inevitable that this house of cards would come tumbling down.

The Greek Meltdown

The watershed moment was October 2009. The newly elected Pasok government admitted previous governments had falsified the national accounts.

This news sent already wary creditors berserk. Lending had stalled during the financial crisis and Greece’s admission sent its bond prices skyrocketing. Due to its weak growth prospects, ratings agency Standard & Poor’s downgraded Greek bonds to ‘junk’ status at the end of April 2010.

This effectively shut Greece out of international markets. Additionally, as a member of the euro zone, Greece did not have the option to devalue its currency to initiate an export-led recovery or unilaterally default on its debts and restart, as Argentina did in 2001 and 2014.

However, Greece needed to pay its creditors. In May 2010, it agreed a three-year €110bn bailout loan from euro zone countries, European Central Bank (‘ECB’) and International Monetary Fund (‘IMF’). The legally binding conditions of this loan were that Greece would follow a policy of austerity to remedy the deficit, it would sell government assets totalling €50bn to pay the debt and it would implement structural reform to enable growth.

Unfortunately, Greece struggled to follow the austerity measures, which led to another rescue package in October 2011, worth around €130bn. Greece aimed to be reintroduced to private markets in 2015, with the ECB and IMF covering financial needs until then.

In May 2012, the term ‘Grexit’ was coined by commentators who felt Greece was on the verge of leaving the euro zone because of a political crisis. However Greece persisted, and in November the bailout conditions were renegotiated again.

Good news followed. A stronger Greek economy in 2014, with an increase in GDP growth and fall in unemployment, hauled it out of a six-year recession, and allowed Greece to re-enter private markets. Consequently, real GDP growth was forecast to be 2.9% in 2015 and 3.7% in 2016, with an increase in exports causing a fall in the deficit. 

However, political chaos undermined this recovery. The anti-austerity Syriza Party won a snap election in January 2015 and formed a government committed to renegotiating the terms of the bailout. It drew red lines against cutting pensions, raising value added tax, privatising nation’s energy and transport grids and promised to raise the minimum wage. However, these demands proved fruitless and Syriza’s inflexibility has raised doubts over whether it can agree to reforms necessary for the next tranche of bailout money. This led to Greece standing on the brink of defaulting on its debts, with a long list of looming repayments, including €2.5bn to pay salaries and pensions in May and €6.7bn owed to the ECB.

Greece is at a crossroads: either Syriza commits to a host of austerity measures it was elected to defy, or it drops the euro in an attempt to control its own finances. 

But what are the legal mechanisms for the latter event?

A Legal Grexit

All in all there is a myriad of exit possibilities for Greece — both from the euro zone per se and the European Union. This may include Greece unilaterally deciding to introduce a parallel currency, a de facto forced exit (if the ECB cuts off lending, for example), and a host of accidental exits.

However, my intention is to focus on a planned Grexit, undertaken in agreement with EU law. This is tricky because a Member State exit runs contrary to the central EU notion of an ‘ever closer union’, committed to in the Preamble of the Treaty on European Union (‘TEU’).

First, I will explain the two processes through which Greece cannot leave the EU nor the euro zone: expulsion and via international law. Then I will evaluate two ways through which Greece may leave the euro zone: EU exit and treaty amendment.

1. No way out

1.1. The Impossibility of Expulsion

As it stands, there is no treaty provision for a Member State to be expelled from either the EMU or the EU. The closest a treaty comes is Articles 7(2) and (3) TEU, which enables the suspension of certain rights for ‘a serious and persistent breach by a Member State of the values referred to in Article 2’ TEU. There is also no right of expulsion under international law. The only other way for Member States to expel a Member would be through treaty amendment (under Article 48 of TEU). However, this would require the consent of every member state, including the one up for expulsion — which renders it unlikely.

1.2. International Law

It has been suggested that Greece could use the Vienna Convention on the Law of Treaties 1969 (‘Vienna Convention’) to leave the euro zone.

Article 62 of the Vienna Convention allows parties to an international treaty to cite a ‘fundamental change in circumstances’ as a ground for terminating or withdrawing from a treaty. This change cannot have been ‘foreseen by the parties’ and may be invoked only if (a) the circumstances in question were an essential basis of the parties’ consent to be bound by the treaty; and (b) the change radically transforms the extent of the parties’ obligations under the treaty.

However, this would not apply to Greece for a number of reasons.

The key reason is because the Greek sovereign debt crisis would not meet the criteria for ‘fundamental change’. The crucial phrase of Article 62 is ‘[a fundamental change of circumstances] which was not foreseen by the parties’. Scholars also argue that ‘the same is true for changes that the parties should have anticipated.’ A sovereign-debt crisis is not a new phenomenon and the Greek government could have foreseen their change in circumstances. So while it could be argued that the euro affects Greece’s ability to deal with a sovereign-debt crisis, a crisis could have been envisaged when Greece adopted the euro.

Moreover, Article 62(2)(b) states: ‘[i]f the fundamental change is the result of a breach by the party invoking it either of an obligation under the treaty or of any other international obligation owed to any other party to the treaty,’ a ‘fundamental change of circumstances’ cannot be invoked. Because Greece manipulated data on its deficit to satisfy the Maastricht Treaty, which partly caused the economic crisis in which it now finds itself, it cannot invoke the Vienna Convention.

2. Legal Grexit Routes

Greece therefore cannot be expelled from the EU or EMU, nor rely on the Vienna Convention to leave the eurozone. Yet, there are two options open for a Grexit, both of which are complicated.

2.1. Greece Leaves the European Union

Article 50(1) TEU explicitly allows Member States to leave the EU. It states: ‘Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.’ This ‘exit clause’ was introduced by the Treaty of Lisbon in 2009. 

A Member State wishing to leave the EU must follow a set procedure. They must first notify the European Council of their wish to leave (Article 50(2) TEU). Second, the EU and Member State will negotiate an agreement on the terms of the withdrawal. This agreement has to be passed by a qualified majority in the Council (Article 238(3)(b) TEU). The Member State would cease to be bound by treaties on an agreed date.

Failed negotiations will not result in a failed withdrawal. Instead, the withdrawal will come into effect after two years (in line with Article 50(3) TEU).

Hence the exit clause gives nations both a negotiated and a unilateral route out.

However, Article 50 does not provide explicit guidance as to whether withdrawal from the EU is inextricably linked to a withdrawal from EMU obligations. This must be clarified by the EU, particularly since it runs contrary to the ‘irrevocability’ of the euro (found in Articles 4(2), 118 and 123(4) Treaty Establishing the European Community (‘TEC’)) and ‘irreversibility’ of the monetary union (referred to in the Transition to the Third Stage of Monetary Union).

Regardless, a full EU exit is a difficult sell. If committed, Greece would need to withdraw swiftly since an exit will make creditors nervous at the prospect of it defaulting, and it may induce a run on the banks as citizens worry about the safety of their money.

However, negotiated exit is unlikely to happen quickly. Member States holding Greek debt will want guarantees that Greece will not default. Equally, however, the unilateral option seems impractical since it entails a two-year wait. Greece would struggle to get credit within this time if investors fear it would default after its exit.

Should Greece leave the EU, it may, after economic reconstruction, want to rejoin the single market. To do so would require a full application to become a Member State in line with the criteria outlined in Article 49 TEU and the ‘Copenhagen criteria’. Any entry into the EU requires a commitment to join the EMU, as stated by Article 3(4) TEU and so Greece would have to negotiate an opt-out of stage three (entry into the euro zone), as the UK and Denmark have. 

2.2. Treaty Amendment

A route to leave the euro but remain part of the EU might be found via treaty amendment, set out under Article 48 TEU.

This would not, of course, be unprecedented. The EU is recognised as a work in progress and there have been at least five fundamental treaty alterations: the Single European Act, the Maastricht Treaty, the Treaty of Amsterdam, the Treaty of Nice and the Lisbon Treaty.

Treaty amendment allowing a Grexit could take a number of shapes. An opt-out of the euro could be agreed, either temporarily or permanently. This would require treaty amendment to reflect that Member States may withdraw from aspects of the EMU after having joined. Member States might also agree to treaty amendments allowing Greece to break EU rules, such as the free movement of capital (to stop bank runs). Greece would also have to agree debt repayment plans with Member States, including, for instance, what currency Greece pays its debts in. Artificial currency control could also be agreed between the euro zone members and Greece since a Greek devaluation of its subsequent currency would create huge volatility and cause a rise in the price of its debt held in euros.

Failing a negotiation to remain in the EU, Peadar ó Broin points out, Greece could agree to remain ‘a member of the European Economic Area, or it could create a special ‘semi-detached’ status that extends internal market rules to the exiting state, but that state would be removed from the EU institutions that shape internal market rules.’ Another possibility, discussed by Professor Larry Eaker, would be to introduce a weaker second currency for debt-laden Member States (with a fixed exchange rate) to enable them to regain economic competitiveness.

Yet treaty amendment is complicated, and difficult to achieve in practice. Article 48(4) TFEU dictates that amendments must be ‘ratified by all the Member States’. A full consensus is hard to achieve, as evidenced by the failure of Member States to agree to the Treaty establishing a Constitution for Europe and the difficulties surrounding the ratification of the Lisbon Treaty. Furthermore, any previous German appetite for a treaty change (which was flatly rejected by the European Commission, anyway) has long since disappeared as it has taken a particularly tough stance when negotiating with Syriza.

Again, concerns will be raised by Member States who would lose money should Greece leave the euro and default on its debts. The spectre of this will complicate, and, crucially, elongate, any treaty amendment negotiations. In the case of Greece, time is of the essence, and protracted negotiations will undermine the success of a treaty change.


Any pathway for Grexit would involve a vast range of considerations: political, economic and legal. Greece’s decision-making will also be affected by the prevailing economic and domestic political conditions.

All this aside, I have outlined the key EU legal issues that will affect a Grexit. These are highly complicated, not least because there is a paradox at the heart of any exit: namely that the EU is designed to form an ever closer union. Nonetheless, there are two mediums through which Greece can legally leave the euro: a full-flung exit of the EU or a negotiated treaty amendment.

The only way Greece may unilaterally leave the EU is by announcing an exit and then waiting two years. A speedier route will be via negotiations, but this will be fraught with difficulties.

The unlikelihood of Greece negotiating a swift exit promises to cause profound problems should it fail to come to an agreement over further bailout conditions with its creditors. This position will become clearer over the next weeks and months, but do not expect talk of a Grexit to diminish anytime soon.

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Tagged: Banking & Finance, Commercial Law, European Union

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