Tuesday, 30 December 2014

The beginning of the end for the Euro? EU Law constraints on leaving EMU or defaulting on debts


 

Steve Peers

After a couple of years without any (apparent) crisis, the future of Economic and Monetary Union (EMU) is threatened again, following the decision to call snap Greek elections in January. What would be the consequences if the anti-austerity party Syriza becomes the government?

First of all, such an outcome is not yet certain. As Open Europe’s analysis points out, Syriza has only a modest lead in the polls, and even if it becomes the largest party, it may well fall short of having a majority of seats, in which case it would have to form a coalition with another party.

Secondly, it’s necessary to realise that Syriza has, in principle, relatively modest ambitions. Its policy is not to leave the EU or even the single currency, but rather to renegotiate Greece’s debts and the related austerity obligations. Even in previous elections, it sought to default on the debt, rather than leave the EU or EMU.

Having said that, it is possible that Syriza might decide to threaten more decisive action if renegotiation does not go well. Or that party’s more radical elements might take charge.  Or, in the view of some (see this Washington Post commentary), Greece might be forced out of the euro by other Member States, particularly Germany.

While the main issues arising from this situation are political and economic, there are also legal constraints that cannot be overlooked. Some key measures taken to save the euro in recent years were litigated before national courts (particularly in Germany and Ireland), as well as in the CJEU, notably the Pringle case (concerning the treaty establishing the European Stabilisation Mechanism) and the pending Gauweiler case (discussed here), concerning the European Central Bank policy of buying government bonds. The Advocate-General’s opinion in the latter case is due in mid-January – in the midst of the Greek election campaign.

Let’s start with the most radical outcome. Every Member State has an option to leave the EU, set out in Article 50 TEU. It would be unwise to invoke that provision unless a Member State genuinely wants to leave (see my earlier blog post on that provision). Conversely, however, it’s entirely impossible to force a Member State out of the EU against its will. The most that the other Member States can do is to suspend its membership in the event of a ‘serious and persistent breach’ of EU values, in particular human rights and democracy (Article 7 TEU).

What about departure from EMU? The Treaties contain detailed rules on signing up to the euro, which apply to every Member State except Denmark and the UK. Those countries have special protocols giving them an opt-out from the obligation to join EMU that applies to all other Member States. But there are no explicit rules whatsoever on a Member State leaving the euro, either of its own volition or unwillingly, at the behest of other Member States.  There’s an obvious reason for this: the drafters of the Maastricht Treaty wanted to ensure that monetary union went ahead, and express rules on leaving EMU would have destabilised it from the outset. Put simply, legally speaking, Greece can’t jump or be pushed from the single currency.

But other currency unions have fallen apart in history, despite any legal prohibitions that may have existed against it. So it’s important to consider also the practical constraints: it’s not realistic to imagine forcing Greece to leave or to stay in EMU against its will, short of invading and occupying the country. How would Greece be forced out exactly? By printing drachmas in Frankfurt, dropping them from the air over Greece and hoping that Greeks use them?

In the event that Greece did choose to leave EMU in practice, EU law would have to be amended (probably with retroactive effect) to regulate the position. Although there are no express provisions on this issue, arguably Article 352 TFEU (the default power to regulate issues not expressly mentioned in the Treaties) could be used. This would require a unanimous vote of all Member States: it wouldn’t be possible to use the EU’s ‘enhanced cooperation’ rules (allowing a group of Member States to go ahead without the others), since those rules can’t be used where an issue falls within the scope of the EU’s exclusive competence, and the single currency falls within the scope of the exclusive competence over monetary policy. If Article 352 was not legally possible (someone might bring a successful legal challenge if it was used, or one or more Member States might have purely legal objections), it would be necessary to amend the Treaties.

The least radical outcome is that Greece’s debt and austerity obligations are simply renegotiated. But there are legal constraints here too. Most significantly, Article 136(3) TFEU states that any financial assistance must be subject to ‘strict conditionality’, consistent with the CJEU ruling in Pringle. The CJEU also made clear in that judgment that the ‘no-bailout’ rule in the EU Treaties (Article 125 TFEU) allowed Member States to offer each other financial assistance on the condition that it took the form of loans, rather than a direct assumption of Greek government debt by other Member States. Moreover, the CJEU pointed out, the ESM Treaty required that in the event of non-payment, the loans would remain payable, and had to be charged an appropriate level of interest.

So it’s not possible for Member States to drop all conditionality as regards loans to Greece, to forgive debt as such or to loan money interest-free. But it is open in principle to reduce the stringency of the conditions somewhat, to reduce the interest rates payable and to lengthen the repayment period – although there is always the risk that some litigant will try to convince a national court or the CJEU that this is going too far. Moreover, the rules in the EU Treaties only bind EU institutions and Member States, not private parties, third States or international organisations (although it might be argued that Member States are constrained as members of the IMF not to violate the no-bailout rule indirectly). So any renegotiation or default as regards such creditors is not subject to EU law rules in principle, although of course other legal rules might be applicable.  

Whether such fairly modest renegotiation would do enough to reduce Greece’s mountain of debt significantly, or to satisfy the voters which supported a Syriza-led government, remains to be seen. The greater impact may be longer-term, in the event that a Podemos-led government comes to power in Spain, or that new or current governments in other Member States which have been bailed out demand a similar renegotiation.

Finally, it should be recalled that renegotiation of loans might not be the only possibility to help out Greece. For example, arguably the Treaties do not rule out a form of (supplementary) unemployment insurance system as between Eurozone Member States, since it would not take the form of paying off another State’s debts as such. Admittedly, such a system would provide indirect financial support to another State, since it would reduce costs which that Member State might otherwise have. But the same might be said of loaning money to that Member State, at interest rates far lower than it would be offered on the free market, via means of the ESM Treaty – and the CJEU has already found that this didn’t violate the no-bailout rule. Moreover, the previous Commission has already done a lot of preparatory work on this issue (see the fuller discussion here). Such a scheme could probably be launched either inside the EU legal framework, or outside it.  

It’s up to Greek citizens to decide if they want to vote for Syriza or not, and the EU institutions and other Member States should leave them alone to make their choice. But if Greeks do decide to vote for that party, it would be tiresome and counter-productive to react with bluster and threats. Why not take this opportunity to re-engage with the millions of EU citizens who are affected or angered by austerity, and re-orient the EU towards ending that austerity, instead of generating more of it? That’s more easily said than done, of course. But an unemployment insurance system would not only have an economic rationale (as an automatic stabiliser) but also a political one, demonstrating that the EU can assist those who have suffered from the economic downturn directly.

 
Barnard & Peers: chapter 19
Photo credit: Xendpay.com

8 comments:

  1. I do not understand your proposition of a "supplementary unemployment insurance system". As doubtless you know, Greece has many social insurance systems (which are now forcibly being merged, as their operation was linked with political corruption). What it does not possess is any form of social assistance, as found in all of northern Europe (although Cameron and the other far right politicians across Europe are trying to destroy such schemes).

    So, if you comment is about social assistance: then yes, it would make a big difference to unemployed Greeks and their families. However, you can be sure that the mindset of the current politicians across Europe is fundamentally opposed to the welfare state even in its current form, let alone extending its coverage and programmes. This is non-starter, both in terms of ideology and German voter sentiment.

    To answer one of your points, how could Greece be forced out of the eurozone? Well, the answer is quite simple -- as it nearly happened in the recent past. The ECB would simply refuse to provide liquidity to Greek banks, and the ATMs would dry up overnight. The Greek state would then be obliged either to do as the Germans instructed (as in the last few years) or, if they had prepared adequately, announce overnight the reintroduction of the Drachma with notes and coins already minted. The problem with this would be the near-impossibility of printing currency and the news not leaking out. Conversely, if they had no prepared currency, then the economy would collapse immediately with shortage of cash, goods, food, etc and loss of all imports (and possibly exports too).

    So, the problem with a legal analysis of this mess is that the Germans and the ECB are basically able to do as they like in the short-run, because you can destroy a country's economy within hours. There is no rule of law in the eurozone, just post hoc adjustments to the law made by the dominant European powers.

    ReplyDelete
    Replies
    1. The unemployment insurance proposals are explained further if you follow the links. They would be supplementary in the sense that the main unemployment insurance systems would run at national level and there would be an additional EU component. Unemployment insurance is not social assistance, but social security, as it is usually based on contributions by employers and workers. But doubtless there would be political problems, which is why the idea has not been pushed further. I wasn't suggesting that it was an immediately realistic suggestion, although in a crisis the political goalposts can change quickly. In 2009 it wouldn't have been realistic to imagine bail-out funds, the fiscal compact treaty and the economic governance legislation of the next few years.

      You are right, I had not considered the possibility of the ECB trying to force out a Member State from the euro. Andrew Glencross and Ioannis Glinavos have also pointed out this possibility to me on Twitter. But would such actions be legal? Certainly such an objective would be illegal; it is ordinarily hard to prove such a 'misuse of power' in EU law, but in the political context of a Syriza-led government and a renegotiation of loans and austerity it should be rather obvious. It could in any event be questioned whether such actions would be legal in terms of the detailed law of EMU.

      I am assuming, of course, that there is a rule of law in the Eurozone (furthermore, I doubt whether the ECB would be willing to take such an extreme course of action even if it were legal). Of course, not everyone agrees with the treaties and EU legislation in this area adopted in the last few years, or with the various national and CJEU judgments upholding them. And it's undeniable that the political and economic forces influencing the interpretation and application of the law are stronger here than in other areas of law. But I'm not the only one who agrees that judgments like Pringle are essentially correct as a matter of law, even though the Court's interpretation of the no-bail-out rule in that case was not the commonly accepted one in Germany.

      Delete
    2. Thanks for your detailed reply. I am still a little puzzled by the unemployment insurance idea. There are several reasons for my saying this. First, with unemployment over 25% and youth unemployment at over 50%, there is an enormous part of the labour force with no current connection to the labour market. Add to this, the very high rate of self-employment (mostly in subsistence level sectors, such as corner shops) along with the historically rather low participation rate in the labour market, and you might understand that the Greek economy bears no comparison with those of northern Europe. Indeed, these issues are part of the problem in global competitiveness (along with weak capital investment, massive political corruption and systemic inertia that makes change difficult). Furthermore, the Greek social insurance schemes have massive debts owed by both private and public sector employers; these debts were worsened by the operation of the "haircut" which deliberately shifted the debt burden from German and French banks onto Greek state institutions. Taking all of this together, only a social assistance programme could work.

      On the ECB, I agree with you about Pringle. I also doubt that Gauweiler will get anywhere, simply because it is not the business of courts to make economic policy. The CJEU correctly seems to see its role as accommodating the normal and necessary actions of economic institutions -- whereas the Germans have a very funny idea of how to run the world. Idiosyncratic and unique, largely shaped by their history since 1930. The peculiar thing for most Europeans is why the losers of WWII (and the country that invented Nazism) are being allowed to shape the future of Europe, against the will of the great majority of European voters.

      On the misuse of power idea, I had not thought about that. I suppose it comes under the general category of post hoc adjustments: if the ECB thinks it can get away with it (and there is no case law to worry over) then they may succumb to various political pressures to act in such a way.

      Delete
    3. The unemployment insurance idea is a suggestion for the longer-term future of the Eurozone. For the reasons you suggest, some form of social assistance programme may make more short-term sense for those Member States (not just Greece) where unemployment is exceptionally high.

      I think the influence of Germany comes from being a large state, having a successful economy and being a major net contributor. But I agree that a better balance between different Member States' approaches would be desirable.

      I have my doubts that the ECB would compromise its independence by responding to political pressure directly (for one thing, that would be a valid legal ground to challenge its actions). The smartest thing for Syriza to do (if it does take office) would be to try to split up the common front against it, perhaps by taking a less aggressive view towards the ECB (which has the biggest weapons in this battle) than towards the EU political institutions.

      Delete
  2. "In the event that Greece did choose to leave EMU in practice, EU law would have to be amended (probably with retroactive effect) to regulate the position. Although there are no express provisions on this issue, arguably Article 352 TFEU (the default power to regulate issues not expressly mentioned in the Treaties) could be used...."

    But this would have to be if the Greek government chose to leave the EMU and was so supported by the Greek population wouldn't it? Because if the Greek government chose to leave the EMU via Article 352 but without widespread support from the Greek public then come the next election (which might be forced early via riots and strikes), that government would be voted out.....

    And in the event that a Greek government decided to leave the EMU but without the support of the Greek population and despite the legal constraints (entirely ignoring the Article 352 procedure and Article 50 procedure)...well wouldn't the legal constraints actually prevent Greece from leaving by mere fact that unlike previous monetary unions, this monetary union is enshrined in an international treaty and domestic law and Greek citizens could sue the Greek state into bankruptcy through Greek and European courts for violating Greek and EU law in establishing another currency as legal tender in place of the euro and attempting to redominate bonds/debts in this (illegal) currency?

    As far as I know previous monetary unions did not have these kinds of legal safeguards. The Latin Monetary Union was formed via a Convention rather than a treaty incorporated fully into the domestic legal system of each state. Thus all a country like Belgium had to do was to denounce the Convention and that was the end of that - it left the Union.

    ReplyDelete
    Replies
    1. But if the exit from EMU went ahead in practice before the election voting the Greek government out, then it would be fait accompli. Greek would have to reapply to join the single currency. I don't think a legal safeguard is enough if there are enormous economic and political pressures leading to reintroduction of a currency.

      Delete
    2. No. If the Greek government left the EMU in practice but not legally through either articles 352 or 50 then Greece would not have to reapply to join since it never legally left. It would just have to reintroduce the euro. And as I note before any Greek government that attempted to fully leave the euro in practice but not legally and while great majority of Greeks still favoured the euro ids unlikely to last long enough to see the attempt through to the end and would very likely collapse in the face of strikes and widespread protests. If as is likely it was a coalition govt then the coalition partners would probably jump ship thereby forcing new elections.

      Delete
  3. Please see my latest post on the ECB's options in case of Greek non-compliance on http://iglinavos.wordpress.com/2015/01/31/the-explosive-scenario-can-europe-switch-off-funding-to-greece/

    ReplyDelete