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Ways to Leave the Euro – Does the Eurozone Need an Exit Clause?

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Ways to Leave the Euro – Does the Eurozone Need an Exit Clause? FORUM Clemens Fuest sions over the content of such a clause take place under sufficient uncertainty about whom it may potentially [Art 50] Ways to Leave the concern. Of course, this “veil of ignorance” is never per- Euro – Does the Eurozone fect because it is clear, for instance, that countries whose currency would probably devalue after exit Need an Exit Clause? would have different interests to those of countries with strong currencies. Section 2 of this paper discusses why existing fed- erations usually do not have exit clauses while the EU Clemens Fuest does. Section 3 discusses whether exit from the Euro- ifo Institute. zone is possible under the existing institutional rules. INTRODUCTION Section 4 discusses the economic benefits and costs of introducing a euro exit clause, as well as aspects of its Over the course of the Euro crisis the possibility that optimal design and section 5 draws some conclusions. one or various member states may leave the currency union has been discussed intensively. During the stand- WHY DO SOME UNIONS HAVE EXIT CLAUSES off between Greece and the rest of the Eurozone the WHILE OTHERS DO NOT? German finance minister Wolfgang Schäuble suggested that Greece should leave the Eurozone.1 The current Most federations do not have exit clauses, but the EU economic recovery has eased the pressure of the crisis does.5 Why is this the case? Rational thinking about and Grexit is no longer on the agenda. But the funda- constitutional design will usually lead to the conclusion mental question of whether a euro exit clause is needed that some provisions for ending membership of a union and how it should be designed needs to be clarified. are desirable because the absence of any such exit Recently the Dutch government argued that a proce- arrangement can easily lead to destructive uncertainty dure for euro exit is missing.2 In the academic literature and conflict. So why are exit clauses absent from many on this topic, the issue of euro exit has been discussed constitutions? for a long time (Sinn 2014 and Scott 2012)3 and it should Firstly, discussing exit clauses in unions or other certainly be included in the current discussion over types of clubs is delicate because it may be perceived Eurozone reform. as undermining the spirit of cooperation or solidarity. This paper aims to discuss some of the key institu- Secondly, exit clauses could be avoided because there tional and economic aspects of a euro exit clause. What is a concern that countries could invest too little in are the pros and cons of introducing an exit clause for political debate and negotiation (“voice” in the termi- the Eurozone and how should it be designed? Clearly, nology of Hirschman (1970)) if exit is easily available. an open and rational discussion about exit clauses One should note, however, that “voice” may also be among governments would be difficult because even more effective if exit is available and not too difficult. putting this issue on the agenda of the next European Thirdly, constitutions are not always the result of a pro- summit could be seen as a signal that a member state cess whereby members of a union maximize progress may be about to exit. A balanced and constructive towards a common long-term goal. Constitutions may debate about introducing an exit clause in a monetary be imposed from the outside. The rules may be written union is only possible in a situation where no country is by powerful members who do not want to give weaker close to exit.4 This is the only scenario whereby deci- members the opportunity to leave while hoping that they will be powerful enough to achieve a good result 1 “Anmerkungen zu den jüngsten griechischen Vorschlägen“, Handelsblatt, 12 July 2015, http://www.handelsblatt.com/politik/international/schaeu- through ad hoc negotiation if they want to exit them- bles-griechenland-papier-im-wortlaut-anmerkungen-zu-den-juengsten-grie- selves. The politicians involved in setting up unions chischen-vorschlaegen/12044368.html. 2 “Following the request by member Schouten to the Finance Minister and may also want to tie the hands of their successors. the Prime Minister (issue number 2013Z01025) for a letter about the exit from None of these reasons implies that not having an exit the eurozone, we report as following. The cabinet introduced in its coalition 6 agreement that it should be possible under mutual consideration to exit clause is efficient or rational. from the community arrangements (Schengen, eurozone, European Union). It is interesting to ask why the EU introduced the This requires in the case of the eurozone and Schengen a treaty change as 7 the current EU treaty does not foresee this possibility.” (Rijksoverheid 2013, exit clause of Article 50 TEU. Andrew Duff (2016) offers translation by the author). the following explanation: 3 For instance, Scott (2012, p.4) puts this as follows: “establishing a with- drawal framework now makes sense (…) After all, the true threat to the long- “The need to include a secession clause in the Con- term viability of the euro area does not come from the current debt crisis in stitutional Treaty (2003) and then the Treaty of Lisbon Greece, but from the looming crises in Italy and other large Member States. Establishing the withdrawal framework today ensures it will be in place when (2007) was upheld both by the federalists and by their it is truly needed.” 4 Unfortunately, on May 15, 2018, a preliminary version of a coalition contract between the Italian 5 Stars Movement and the Lega Nord was 5 Huysmans and Crombez (2016) highlight the fact that the Latin Currency leaked according to which the coalition will demand the introduction of a Union between Belgium, France, Italy, and Switzerland, which existed from euro exit clause, debt relief, and a relaxation of fiscal rules in the Eurozone, 1865 to 1927, introduced an exit clause in 1885. see https://www.huffingtonpost.it/2018/05/15/un-comitato-di-conciliazi- 6 See also the discussion in Huysmans and Crombez (2016), p.29. one-parallelo-al-consiglio-dei-ministri_a_23435353/?utm_hp_ref=it-home- 7 Note that the Draft Treaty establishing a Constitution for Europe pro- page. This has given rise to a renewed debate about Italy’s membership in posed by the European Convention (2003) also contained an exit clause for the Eurozone. voluntary withdrawal of member states (Article 59). ifo DICE Report 3 / 2018 September Volume 16 25 FORUM FORUM opponents. Federalists saw the need to have a safety the currency of the Member State concerned”. The Greek government immediately threatened to take ECB could have stopped its emergency liquidity assis- clause in the new treaty that would allow a let-out for European Commission has adopted the view that the legal actions to avoid expulsion from the Eurozone.12 tance (ELA) for Greek banks. In this case the country any current member state which fought shy of accept- Eurozone is indeed irrevocable: “The irrevocability of The case of Greece in 2015 demonstrates that a would have been forced to introduce its own currency ing the leap forward in European integration that was membership in the euro area is an integral part of the currency union may need to deal with individual mem- and exit from the common currency to avoid a collapse at that time postulated. The UK government, aware of Treaty framework and the Commission, as a guardian ber states that refuse to comply with commonly agreed of its banking system. The ECB did not choose to pur- the risky nature of its ever-increasing exceptionalism, of the EU Treaties, intends to fully respect it.”8 rules and procedures. Of course, the Greek standoff sue this course of action, but at some point, refused to wanted a clause that would prevent the abrupt expul- Along similar lines, the European Central Bank was not just about the Greek bailout programme. The further increase the level ELA, forcing the Greek gov- sion of an awkward member state by the mainstream (ECB) has argued that the euro is irrevocable. In corre- Greek government had openly challenged the rules ernment to introduce capital controls. This could have majority. That said, none of us in the Convention ever spondence with Claudio Morganti, a member of the and principles of the Eurozone, and particularly the been a first step towards expulsion. expected the provision actually to be used – which European Parliament, ECB President Mario Draghi puts no-bail-out clause and the principle that member might explain its relatively sketchy character. So it is this as follows: states in financial difficulties can only have access to Unilateral Decision to Withdraw vital to analyse very carefully what the clause says, why “The irrevocability of the euro has been part of the credit from the European Stability Mechanism (ESM) if it says it, and how it is now to be deployed.” EU framework since the Treaty of Maastricht, which they accept conditionality, including painful measures As mentioned in the introduction, a country may uni- This explanation is interesting because its logic included a Protocol on the Transition to EMU whereby to bring down the budget deficit. laterally decide to leave the EU. Article 50 TFEU can be applied to the Eurozone too. Those who think the Member States declared “the irreversible character There is currently no legal rule in the treaties requires a country to make the exit decision “in that the sustainability of the Eurozone requires deeper of the Community’s movement to the third stage of underlying the Eurozone stating that a country that accordance with its own constitutional requirements” integration may support an exit clause because it EMU”, inter alia stating that all preparatory work should rejects the common rules about economic and fiscal and to “notify the European Council of its intention”.
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