Grexit: How?

by George Hatjoullis

Greece debtThere is much talk of Grexit. It is easy to say but hard to do. It is even difficult for Greece to leave of its own accord. It should emphasised that EU law is governed by Treaty and there have been no amendments to the Treaty of Lisbon, which governs EU law at the moment. All the Treaties that have emerged since the start of the eurozone crisis have been intergovernmental treaties. These are not EU law which is why treaty change appears in the news and why David Cameron thinks he might be able to squeeze some reforms out of the EU and satisfy the UK electorate. Changes to EU law must be unanimous.

IN 2009 an ECB lawyer published a paper called Withdrawal and expulsion from the EU and EMU: some reflections ( The tentative conclusion of this paper is that forcible expulsion is impossible and even voluntary exit from the euro alone is impossible. If a country wishes to leave the euro it must also leave the EU. The reason is that the Treaty of Lisbon, the basis for all EU law, does not include any mechanism for leaving the euro voluntarily or otherwise. It does include a procedure for a negotiated departure from the EU. In reference to the euro it says:

Art 140. Para. 3 Treaty of Lisbon “irrevocably fix the rate at which the euro shall be substituted for the currency of the Member State “.

If the drachma rate is irrevocably fixed to the euro then how does Greece exit the euro?

If the Syriza administration simply dig in their heels and insist on a new arrangement they cannot forcibly be ejected from the eurozone. If they default they cannot forcibly be ejected from the eurozone. The euro will continue to be the currency of Greece unless Greece unilaterally prints its own currency, and even this act would not be legal under Treaty. So, in the extreme situation, what might happen?

As I have noted repeatedly in recent blogs, the ECB could stop the Greek Central bank from extending Emergency Liquidity Assistance to the Greek banking system. Starved of liquidity, the Greek banking system would be unable to function and a run on the banks would ensue. Greece would need to impose strict capital controls and freeze access to all deposits. This would present Greece with serious economic difficulties but it would still be in the eurozone, in principle! De facto, it would have left. A euro in a Greek bank would not be the same as a euro in any other bank, though cash euros in circulation would still be euros and these would be circulating. Greece would be cut off from euro liquidity but not formally out of the eurozone. The impact on the Greek economy would be severe and it is not a situation to allow if it is at all avoidable.

The casual view is that if Greece defaults then it will somehow be expelled. It is not obvious that this is even possible and, if it is, it would take a long time if Greece chose not to cooperate. The disruption to Greece would be huge but the impact on the eurozone hard to assess. The confident tone taken by the authorities is bluster as no one knows how this might evolve. Greece might be sanctioned but this merely exacerbates the situation. It would not resolve anything. The interesting question is could Greece selectively default and yet continue to receive ELA for its banks. It is unlikely that the governing council would allow ELA if Greece defaults to the ECB. The response of the ECB to a selective default to, say, the ESM, assuming this is legally and logistically an option, might not result in suspension of ELA. The ECB is concerned with Greek banks and the eurosystem. The ESM is governed by intergovernmental treaty and consists of bilateral intergovernmental loans, by construction. This has little to do with the ECB. The latter has obligations and procedures governed by EU law. An interesting situation could arise.

ELA is ultimately the liability of the Greek state so any loss has no direct impact on the ECB. The concern of the ECB is the solvency of Greek banks and the stability of the eurosystem. Withdrawing ELA might be judged more disruptive to both than continuing, provided Greek commitments to the ECB are met. Syriza might drive a wedge between the ECB, a pure, apolitical, EU institution, and the ESM, which is an intergovernmental construct. It could certainly get very messy for all concerned and not simply Greece. The often heard refrain that this is a problem just for Greece is clearly not the case.

Post script:

The question has come up as to how the ECB technically disengages Greece from the euro. It suspends TARGET2 access for the Greek central bank. This effectively means Greek banks cannot clear transactions through the eurosystem via their central bank and would have to use another institution e.g. a German bank. Of course, there is risk and the other institution will exact a pound of flesh and hence a Greek euro ceases to be a euro.