Catharsis or catastrophe: what next for Greece and the Eurozone?

 

Steve Peers

Yesterday the anti-austerity party Syriza won a large victory in Greek elections and seems certain to become the government, probably in coalition with a smaller party. What is the likely impact upon the EU’s economic and monetary union?

The starting point is Syriza’s election platform. As discussed in more detail in this Open Europe blog post, that party’s aim is not to leave the EU or even the single currency, but rather to renegotiate Greece’s debts and the related austerity obligations. In particular, it wants part of Greece’s debt to be forgiven, and the terms of the remaining debt to be renegotiated, along with an abolition of the austerity demands made upon Greece as condition of previous bail-outs.

But whatever the political and economic arguments for this programme, it potentially faces some legal hurdles. There are limits on forgiving debt or ending austerity, as set out in the EU Treaties and the case law of the CJEU, which I discussed in a previous blog post (which this post updates).

In particular, according to Article 136(3) TFEU, any financial assistance to a eurozone Member State must be subject to ‘strict conditionality’. This is consistent with the CJEU ruling in Pringle, which stated 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 (the treaty between eurozone Member States which governs bail-outs) 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.  And as the Open Europe analysis points out, the bulk of the debt is owed to the Eurozone.

The case law does not rule out a short period of non-repayment of principal or interest, as long as the loans remain payable and subject to interest. Nor does it specifically address the possible conversion of loans into bonds, as some in Syriza have suggested.

Overall, it’s hard to see how the relatively modest renegotiation which EU law would permit would do enough to reduce Greece’s mountain of debt significantly, or to satisfy the voters which supported a Syriza-led government.

The 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, or support for another Member State’s social spending, as long as it would not take the form of paying off another State’s debts as such.

There is the ultimate possibility of leaving the euro, either at the behest of Greece itself or the other eurozone Member States. As I pointed out in the previous post, it isn’t legal to leave the Eurozone (or to force a Member State out) without that State leaving the EU. On that point, while it’s open to any Member State to leave the EU, it’s not legal to force a Member State out. At the end of the day, though, the European Central Bank holds the trump cards, since it could force a Member State to leave monetary union in practice by stopping the supply of money to that State. The independence of the ECB prevents politicians from ordering the bank to take such a radical step, but it might act on its own initiative.

Quite apart from its very dubious legality and severe economic effects, such a move would be a huge political mistake. The result might not be an increase in support for those moderate parties that reluctantly supported austerity, but rather for the far-right neo-Nazi Golden Dawn party, which came third in the elections.

The better course for the EU is to 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. Although this is more easily said than done, it should never be forgotten that the initial rationale for the EU was not austerity, but economic growth which raised living standards for the population as a whole. So in voting for a party which promised the latter, Greeks have reaffirmed, not rejected, the Union’s traditional raison d’etre, reminding it that the Union cannot maintain its social or political legitimacy if it becomes no more than a mechanism for enforcing austerity.

 

Barnard & Peers: chapter 19

Cartoon: Economist.com

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