Paradise lost: can the European Union expel countries from the Eurozone?

• Author: Dammann, Jens
• Position: Abstract through IV. Expulsion A. The Vienna Convention on the Law of Treaties 1. Applicability, p. 693-720

ABSTRACT

There was a time, not too long ago, when the introduction of the euro was hailed as a tremendous success. Yet the Eurozone now faces an existential crisis. A number of member states have, since 2008, been prevented from defaulting on their sovereign debt only by massive bailouts. Greece has teetered on the verge of insolvency for years despite repeated such measures.

Many observers now belieue that Greece should stay in the European Union but leave the Eurozone, a scenario often referred to as the "Grexit." This would allow Greece to devalue its currency and thereby render its economy more competitive. But just as crucially, from the perspective of Greece's sharpest critics, a Grexit would rid the Eurozone of a member state that may no longer be willing to abide by the Eurozone's austerity-oriented economic policies, which aim at limiting budget deficits and government debt even in times of economic distress. The current Greek government is adamantly opposed to leaving the Eurozone, but this has not put an end to the debate. Rather, a growing chorus of politicians and pundits now argue that Greece should be expelled from the Eurozone.

Of course, this demand raises a fundamental legal question: Is it possible--and should it be--to terminate a country's membership in the Eurozone without that country's consent? This Article argues that in narrowly defined circumstances, a right to expel countries from the Eurozone not only is desirable as a matter of legal policy but also deserves recognition as a matter of black letter law. However, this Article also shows that such an expulsion has to remain an ultima ratio. As of now, Greece does not even come close to satisfying its conditions.

TABLE OF CONTENTS I. INTRODUCTION II. BACKGROUND III. LEAVING THE EUROZONE WITHOUT BEING EXPELLED A. Exit by Treaty Amendment B. Withdrawal from the European Union C. Withdrawal from the Eurozone IV. EXPULSION A. The Vienna Convention on the Law of Treaties 1. Applicability 2. A Fundamental Change in Circumstances? 3. Consequences of a Fundamental Change in Circumstances B. Suspension Clause. 1. A Violation of Fundamental Values 2. Expulsion as a Suspension of Rights? C. The Case for an Unwritten Expulsion Remedy 1. Doctrinal Concerns a. Complexity b. The Irrevocable Fixing of Exchange Rates c. The Irreversible Move to the Third State of the Monetary Union d. Penalizing Citizens e. The Existence of an Exhaustive Regime of Sanctions f. The Rules on Treaty Amendments 2. Expulsion as a Matter of Legal Policy a. The Standard Case b. The Extreme Case c. When Should the Expulsion Remedy be Available? d. Procedural Safeguards e. What about Greece? V. CONCLUSION I. INTRODUCTION

A scenario in which the U.S. government forced one of the fifty states or the District of Columbia to abandon the dollar would plainly be ridiculous. Yet transposed across the Atlantic, where nineteen member states of the European Union now form the Eurozone, such a scenario elicits a mixed response.

The European Commission has traditionally taken the view that no country can or should be forced out of the Eurozone. (1) Those few authors in the legal literature who have addressed the question have generally shared this position. (2) However, at least as a matter of legal policy, this approach is no longer uncontested. German Chancellor Angela Merkel, viewed by many as Europe's most powerful head of state and de facto leader, (3) has made it plain that she believes membership in the Eurozone ought to be contingent on good behavior: in Merkel's view, a member state that persistently breaches the rules governing the Eurozone should be subject to expulsion. (4)

Only a few years ago, this question might have seemed largely theoretical. However, as Greece's economy has descended into a downward spiral of repeated bailouts, ballooning government debt, soaring unemployment, and economic contraction, the question of an involuntary exit from the Eurozone has attained practical urgency.

The voices calling for Greece to leave the Eurozone are legion, and, in light of the Greek government's adamant refusal to contemplate such a step, a growing chorus of pundits and politicians in other member states has been willing to discuss Greece's involuntary expulsion from the Eurozone. (5) These voices have become so loud that, in the summer of 2015, Janis Varoufakis, then Greece's finance minister, found it necessary to threaten legal action if an expulsion were attempted. (6)

Why does Greece face calls for expulsion when other economically troubled member states did not? One reason presumably lies in the sheer depth of Greece's economic crisis. Many observers simply no longer believe that it is possible for Greece to recover from its economic crisis while remaining in the Eurozone, or at least not at a price that the other member states would be willing to pay. (7) Admittedly, the latest bailout, negotiated in 2015 and following on the heels of two prior bailouts, will stave off Greek insolvency for now. (8) However, it is not clear how that bailout will help Greece exit the deep depression in which it now finds itself. (9) Rather, many experts believe that Greece needs to reacquire, and subsequently devalue, its own currency in order for its economy to become competitive again. (10)

However, there exists another, perhaps more important, reason for Greece's facing calls for expulsion from the Eurozone where other member states did not. Unlike other member states that found themselves in economic difficulties, Greece has dared to rebel openly against the legal framework of the Eurozone, which heavily emphasizes budget discipline and monetary stability. (11) The European Commission, the International Monetary Fund, and a German-led majority of other member states want Greece to tackle its crisis through so-called austerity policies. (12) These include slashing the budget and raising taxes. (13) This approach reflects the legal rules governing the Eurozone, which impose strict limits on government debt and budget deficits. (14) By contrast, the current Greek government rose to power after campaigning against the very austerity policies that Greece is now asked to adopt. (15) In a recent referendum, Greece's citizens made it clear that they share the government's skepticism towards austerity-based economic policy. (16) Incidentally, this position is supported by many economists, particularly in the United States, who believe that cutting spending in the middle of a downturn is highly counterproductive. (17)

This clash of opinion between Greece and much of the rest of Europe has yet to be resolved. For the time being, the Greek government has promised to implement austerity-oriented reforms, but it has done so only in order to secure another bailout. (18) Accordingly, many observers doubt the Greek Prime Minister's commitment to such reforms. (19) It also remains unclear whether the Greek government is even able to implement the promised reforms, given that they face massive opposition from within the ranks of the ruling party. (20) Having won a snap election in September 2015, (21) the Greek Prime Minister Alexis Tsipras now looks stronger than only a few months ago, but, in light of the Herculean tasks ahead of him, his current political support may well prove short lived.

Against this backdrop, those who demand Greece's exit from the Eurozone have more on their mind than restoring Greece to economic health. They also view Greece's continued membership as a potential threat to the economic and monetary approach established by the Eurozone, and they worry that repeated bailouts are clearing the way for the Eurozone to become a "transfer union" in which economically stronger states are forced to support weaker economies. (22) For them, such an exit would have the advantage of ridding the Eurozone of a country that may not only require future bailouts but also tempt other member states into abandoning economic austerity, thereby threatening the current order of the monetary union. (23)

Of course, the crucial question is whether European law even allows for a member state to be expelled from the Eurozone. The potential ramifications of this question are enormous. What will happen if no such expulsion is allowed? Will this lead some states to continue to flout the restrictive...