ECON 2382 European Monetary Policy LOUVAIN SCHOOL OF MANAGEMENT

Term paper 2010

Term paper
Based on a working paper of the ECB :
ATHANASSIOU, P. Withdrawal and expulsion from the EU and EMU : some reflections, 2009.

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Problematic : What is the future of Greece in the EU/EMU after the lowdown (revelation) of its
financial situation in 2009?

Introduction

Greece has finished the year 2009 with a surprise that could have been nicer. The Deputy Prime Minister has officially announced a public debt of 273 billion of euro and foresees an increase for 2010 until 294 billion. The country of democracy lives at present an extremely serious case and the fellow Member States are debating about keeping Greece among the EU. Four months ago, the presidents of the ECB and Eurogroup both said it was unrealistic to expel the country from the EMU or any similar body and Greece would lose too much. But what happens in a country impacts on the other Member State of the Union and in this case, Greece creates unnegligible effects on the EU level. After a long silence in the European Treaties, the idea for a Member State of withdrawing from the European Union or the European Monetary Union has been discussed more than ever and leaded to an taking of position in the article 50 of the Lisbon Treaty. Bringing a controversial situation among European citizens and specialists, people seem anyway to agree on the fact that European institutions havent analyzed it in depth enough since it raised several questions. This paper examines the possibility for Greece of any secession or expulsion from the EU or/and EMU by analyzing the different legal aspects, its economical situation and consequences of such an event within Europe.

1. Legal aspects

1.1. The right of secession from the EMU and EU To get an overview of the legal aspects of a voluntary withdrawal of a Member State, it would be interesting to analyze the different main treaties of European Union, the statements of the European Court of Justice (ECJ), the public international law, the Community primary law and also the Vienna Convention. Before the Lisbon Treaty, ratified in 2009, there wasnt any treaty dealing deeply with the possibility of withdrawal from the European Union (EU) or the European Monetary Union (EMU), unlike the opportunity to access to the EU for any candidate country. Three reasons could explain this silence.

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 To avoid signatories think about it and also because it could have affected their commitments to achieve their common objectives;  Comments about a possibility of withdrawal would have raised the question among all the EU governments and it might have increased the probabilities that it happens;  And third, because the authors should have analyzed and explained all a difficult procedure and very complex consequences of such a right (see supra). About the Community primary law, the opinion about this silence is shared among specialists. Some say that there already was a sovereignty right that enabled any country to withdraw from its international commitments and thought it would have been useless to write such an article while others think that its because its an irreconcilable process and also because as long as EU objectives are to be reach, there would be an impossibility of secession from the EU. This last point is important and created various debates. The participation at the EU level is voluntary for European countries but this fact doesnt work in the other sense since sovereignty is given full expression in the right of any State to join a particular organization, or not; but once a State decides to enter an organization it is no longer free, and its own wishes are no longer decisive1. The European Court of Justice continues on that way by saying that European institutions have been established today to represent the different countries at a international level as a body with its own personality. This limited the sovereign rights of national bodies. EU countries need to know that theres a clear difference between the Community law (EU level) and the public international law that is determined by national law. This means that the Community legal system is separated and consequently, the right of unilateral withdrawal of a Member State from the EU wouldnt be immediately pertinent. According to the Vienna Convention, a Member State can unilaterally withdraw from a treaty either because an article of the treaty allows it, either because an essential change in circumstances modifies radically the parties obligations. Another case to present is the withdrawal as a remedy. A country that doesnt respect the treaties or has difficult to comply with the obligations could assert its withdrawal from the EU or EMU. The EC Treaty may grant to this country a time derogation in order to find its ability back to fulfill EU goals but the Community law doesnt include any right of withdrawal and it has never been considered. Hence, such an assertion would create a controversial situation, it may occur in extreme cases maybe. Before the writing of the Lisbon Treaty, we couldnt imagine such a process and the only mean to approach the concept of secession was establishing an agreement within the European Member States. Besides, if a country assessed it, the EU bodies didnt have any power of punishing.

Feinberg, N., Studies in International Law (1979)., p.159

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1.2. The Lisbon Treaty exit clause The last Treaty of European Union gets a new article dealing with the secession of a Member State from the European Union. Its the article 50 that makes provision for the voluntary withdrawal. The Member State must inform the European Council which is going to provide guidelines depending on the negotiation of withdrawal. After the approval of the European Parliament, the Council, on behalf of the EU, defines an agreement and the Member State would be withdrawn from the treaties and obligations at a fixed date or two years after having notified its intention to withdraw. In case a Member State would like to rejoin the EU, hes considered as another candidate country and just needs to fulfill the conditions of access to the EU by going step by step. Three concerns emerged after the publication of the article 50 of the Lisbon Treaty:  A possibility of negotiating its agreement is recognized but a unilateral right of withdrawal is considered as well and this right is introduced without any restriction. If the negotiation with the Council fail, the MS could withdraw itself.  The exit clause seems to work in case of a withdrawal from one or two countries but no more at the same time  It doesnt provide any provisions in the case of a secession of a Member State from the euro zone. The exit clause is not clear enough to know if a country has the unilateral right of secession from the EMU as it can with the EU. Member States having the right of going out from the EU should have the right of withdrawal from the euro but unlike the secession from the EU, there is a silence about withdrawal from the euro (because the access to the euro is explicitly designed as irrevocable). Experts say the exit clause should be amended. Withdrawal from EMU is too farreaching and complex a matter to be amenable to the exercise of a right of unilateral withdrawal and the EC Treaty is clearly opposed to the possibility of unilateral withdrawal, at least in the context of EMU2. We conclude here that before the Lisbon Treaty, the only legal means to withdraw from the EU or EMU was processing through a negotiated agreement with all the other Member States of the Union. 1.3. The right of expulsion from the EU or EMU In the case of infringements from a country within the EU or if some countries fail to convince a country to withdraw itself, we could think about the possibility of expulsion of a Member State. Again, theres no provision for a signatory of the European Union to be expelled from the EU or EMU. At present, what can be seen as the closest from the expulsion is the fact that the rights of Member State can be suspended a certain time by the Council. Two or three attempts failed before and this generally because of the same reasons. First, an the right to expel needs an amendment of the treaty which requires the unanimous vote of Member States, and because one would try to avoid its expulsion, its impossible to work.
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Main article

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Second, because such an amendment would increase the complexity of legal procedure. We just mentioned that a case of voluntary withdrawal would create a huge confusion, but an expulsion would be much worse : by penalizing ordinary citizens, businesses (the free movement of capital, human, services wouldnt be allowed in this country anymore for example). Alternatives have been approached like creating a new Treaty without the Member State that cant be expelled, dividing the old European Union of the new one but a massive political effort would be needed and specialists drew the same conclusion : convince a Member State to withdraw through the exit clause of the Lisbon Treaty would remain the best option.

2. The Greek case

Greece is one of the countries that were affected the most in a negative way by the financial crisis nowadays. The Greek economy is in a very bad shape having many problems to deal with, from one hand it must restore its own economic difficulties and on the other it must get back in the track of wealth and keep on the same pace with the other European countries. One of the new goals that the European Commission has set, the Europe 2020 for instance, which consists -amongst others- smart, sustainable and inclusive growth with an increase of the employment rate in the EU, is a paradigm to show the multiple challenges that every country has to respond to. Greece is part of the European Union since 1981 and became a member of the EMU in 2001. In order to join the eurozone, Greece and any other Member State candidate had to comply with the convergence criteria which are known as the Maastricht criteria. Those criteria are divided into 4 categories, price developments, fiscal developments, exchange rate developments and long term interest developments. Fiscal developments comprise the two following targets:  The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the fiscal year.  The ratio of gross government debt to gross domestic product (GDP) must not exceed 60% at the end of the fiscal year. The above targets must be respected by the government of each Member State and only special and temporary excesses would be granted for exceptional cases, but even then the ratio must have sufficiently diminished and approach the reference value at a satisfactory pace. 2.1. Greek market and figures Greece is a country with a strategic and geopolitical location, being the link of Europe with the East and has strong business sectors, particularly tourism and shipping. It is also an ideal

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place for investment in the renewable energy resources which become more and more important nowadays and their use becomes imperative. Greece is experiencing the worst financial situation the country has ever seen, with the deficit in 2009 reaching 30 billion and a debt of 300 billion and with a state apparatus whose control of expenditure and revenue collection is mainly based on the pride and the consciousness of a number of persons. Seeing those numbers as a ratio this is what we get: its public debt rising to 121 percent of GDP in 2010 from 113.4 percent in 2009. EU forecasts on Greece for 2010 are worse, with the deficit seen at 12.2 percent of GDP and 12.8 percent in 2011 and its national debt rising to 124.9 percent of GDP, the highest ratio in the EU. The unemployment rate according to Eurostat is at 10.2% in the first months of 2010, which is above but close to the average rate of the EU. 2.2. Greek market and figures What did they do wrong? According to many academics and journalists there were many reasons that brought the country in front of this difficult challenge. Some of those are the changeover of drachma (national currency) to euro without prevention of the upcoming economic impact and consequences, having as result the sudden "bankruptcy" of the Greeks, due to the decreasing of the purchasing power, compared with their respective partners, the other Member States. The lack of proper audit state supervision of banks, tolerating an excessive and unreasonable over-borrowing, without taking into consideration the impending defaults and lack of paying back those loans, leading millions of businesses to bankruptcy and seizure. The state overborrowing by all postwar governments, both from abroad and from within, with an indirect lending and the increased expenditures due to the Olympic games of 2004. The dissolution of the audit and tax administration and disruption of social security funds and finally the responsibility of the Greek citizens, looking for the ephemeral happiness through overconsumption and reckless use of credit cards. But how the Greek figures of deficit and debt soared to such levels? After the elections of 2009, the Socialist party took over and in October the newly elected government upwardly revised the 2009 deficit forecast of the previous government from 3.7 to 12.5 percent, a considerable change that prompted credit rating downgrades and outrage in other EU member states. It was the first time of the European integration history that a member state deliberately cooked its books and presented false figures. Revisions of this magnitude in the estimated past government deficit ratios have been extremely rare in other EU member states, but have taken place for Greece on several occasions. 2.3. Domino effect After the announcement of the new figures, chaos and panic prevailed among the governments of the Member States, European Institutions and the ECB. Since it became public that a MS distorted its figures, the Greek situation is the number one priority to deal with within the EU and EMU. Greece became the black sheep of the union.

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The European Commission in January 2010 published a report, in which it condemned Greece for falsifying its data on public finances. In this report, written by the behest of EU finance ministers, the document talks of "deliberate misreporting of figures by the Greek authorities in 2009". Even if the figures were revised, the document continues that the Greek data is so unreliable that actual debt and deficit figures could be even higher than the revised forecast. Trust and confidence of Europe towards Greece was totally lost after this. According to the Commission, the false data were the result of poor co-operation and lack of clear responsibilities between several Greek institutions and services and because of the ambiguous empowerment of officials, absence of written instruction and documentation, which leave the quality of fiscal statistics subject to political pressures and electoral cycles". One of the main concerns was whether a possibility that other EU governments could also be cooked their public finance figures, the EU's economic commissioner-designate, Olli Rehn, told during a parliamentary hearing that he thought Greece was an isolated case. The Greek government in cooperation with the European leaders and in cooperation with European institutions, are trying to take measures and put pressure in order to resolve this problem and make efforts to reduce their disappointing figures, that have an impact not only in the Greek economy but to all over Europe. This is was we call the domino effect. The EU ministers of finance are afraid that the Greek meltdown could deal a severe blow to the very European idea of a common currency, and set off a domino effect through Italy, Spain, and Portugal. The EUs economy commissioner Joaquin Almunia warned of a domino effect, saying Greeces debt crisis is already hurting other indebted countries that use the euro as nervous bond markets hike borrowing costs on fears that Greece could default or demand an unprecedented bailout from reluctant EU states. The fate of one is the fate of all-he said- stressing the fact that an economic and market integration has not only positive, but also negative effects. In an already difficult time where the subprime crisis has caused an economic regression, the Greek case came to create even bigger erosion and increase the fear of multiple defaults. 2.4. Austerity measures The very credibility of the euro was and is in stake. Eurozone countries are trying desperately to fix up the cracks, to run their economies in a similar way and accepting possible warnings when they go off track, as Greece did. Its up to the Greek government to take the necessary measures but those will have to be decided at a national level and not at a European level. EU officials asked the Greek government to take the necessary actions and apply the so called, austerity measures in order to avoid the bankruptcy of the country. The new government pledges in its 2010 draft budget to save Greece from bankruptcy by cutting the deficit while keeping electoral promises to help the middle class and the poors in the middle of the economic crisis. According to the final budget draft, the government aims to cut the countrys budget deficit to 8.7 percent of GDP in 2010 to assure EU partners and markets it is serious about restoring fiscal health.

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In January, one week after the visit of the EU officials in Athens, the government makes public the stability program saying it will aim to cut its budget gap to 2.8 percent of GDP in 2012 from 12.7 percent. Those measures were a difficult political decision for the government but there was no other option. As the Prime Minister Georgios Papandreou said:we change or else we sink. The measures were very strict and they caused many reactions and manifestations. A few days after the European Commission announced that it backs the plan of Greece. Some of the measures are: increase in VAT rates, which are formed from 4.5% to 5%, from 9% to 10% and 19% to 21%, further increases in excise duties, the bonuses of Christmas, Easter and leaves are reduced by 30% and tucked cap much lower than it is today in salary and bonuses and salaries of public sector employees. Greeces finance minister George Papaconstantinou told reporters that the Greek people realize the seriousness of the matter and that he was determined to implement the austerity program. He faces trouble from the countrys largest trade union groups, who are calling for strikes to protest, against those unfair measures.

3. Implications of a Member state withdrawal or expulsion

Several consequences would emerge, caused by any withdrawal or expulsion from the European Union or European Monetary Union. First, the euro participation and the membership of ESCB would end and consequently, the departing Member State would have to create a new currency or adopt its old one. This would lead to big issues for the withdrawing Member State:  Difficulties with the negotiation of contracts between debtors and creditors of different Member States  Refunding the NCBs contribution to ESCB to support its new currency  The reimbursement of the foreign reserves contributed by it to the ECB  The probability that the refunding would not be enough to support the euro sufficiently and support the creation of a new currency  A very risky and complex monetary situation including legal uncertainties would appear.  Moreover, a secession from the EU or EMU would also affect the background of the country, impacting on the rights and obligations of every citizens.  Finally, the remaining Member States should continue to cooperate with the departing country to bring solutions as soon as possible. But, would it be possible to keep the euro membership without being part of the EU ? If the country has been expelled, its inconceivable that its previous partners would cooperate at the monetary Union. In the case of a voluntary secession, it would still be difficult because of EUs integrity. The EMU has been created within the EU, its one of its subset which doesnt

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require the same criteria to take part of it. They are distinct bodies and thats why its inappropriate to let a departing Member staying at the EMU. And what about keeping the circulation of the euro while seceding from the EU and EMU bodies? We talk here about a concept called euroisation which can be unilateral or consensual. If a former Member State would adopt the euro unilaterally, we consider it as a third country. And, theres no clear position taken by EU institutions about it even though some third countries have adopted it. We can read that unilateral euroisation isnt a process that enables to be formally part of the Euro-zone since it has to occur in a multilateral framework according to the EC Treaty. The monetary policy would surely be negative on that case. Finally, it remains the alternative of consensual euroisation that stays conceivable if the departing country has seceding from the EU and/or EMU unilaterally. Different monetary agreements with EU institutions could be contracted to ensure the circulation of the euro but this situation is unthinkable after an expulsion.

4. Conclusion

As we saw earlier the Greek economy was severely affected by the crisis and is the Member state with the biggest public deficit and debt figures in the whole EU. Its financial situation is in a very bad shape and now the Greek government has to take strict measures in order to reduce those numbers and approach them to the convergence criteria figures. A member state has to keep its deficit/GDP and debt/GDP ratio to a maximum 3% and 60% respectively. Some months after the elections, the newly elected government revised those figures, because they didnt represent the truth. The results were shocking for the EU and EMU officials. The deficit was at 12,7% of the GDP and the debt/GDP was also different from the one that the previous government had presented as official Greek figures. Since the revelation that the Greeks cooked their books, everyone in Europe from national governments to highest officials- is concerned about future of the union and what may be the impact of a possible Greek default for the rest of the Member states. In the first part of our work we saw that there is no provision for a signatory to be expelled from both EU and EMU and the only way that a country leaves, is through a unilateral withdrawal. The Greek government never considered the option of leaving the EMU, so the option of a unilateral withdraw at least from the part of Greece, is not plausible. This is clear from the fact that the Greek government took the necessary austerity measures by taking a huge political risk-, with the hope that in a 3 years period the figures would improve and reach reasonable levels. A possible withdrawal from the Eurozone and the adoption of the old currency, the drachma, would not improve the situation. It is also causing severe stress at Greek banks. By going back to drachma this would make their labor and exports cheaper. But they would still be shut-out of debt markets for some time and any savings left in Greece would be devalued overnight.

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Regarding now the possibility of the expulsion of Greece due to its abuse on the financial obligations, that every Member State must respect, the rest of the Member States and the ECB never consider this as an option. Even if in mid Mars the German Chancellor Angela Merkel stated during a hearing in the German Parliament that In the future, we need a clause in the treaty that makes it possible as a last resort, be expelled from a country Eurozone. The German Chancellor said that even an accelerated assistance to Greece is not "the right answer, but that this problem should be faced from its base. A rush of solidarity cannot be the right answer. We must not "give an early help, but to put everything in order, because anything else would be fatal," said Ms Merkel. Regarding the possibility to exclude a country from the euro area, a possibility which has already been reported by the German Minister of Finance, Wolfgang Soimple, Angela Merkel added: "This could be a last resort if a country does not meet the requirements, again and again. Several days after Mr. Trichet, the head of the European Central Bank, has dismissed as absurd the idea of the German Chancellor that Member States that break budgetary rules, as Greece did, should ultimately be expulsed from the euro zone, showing that is not in the intention of the officials to kick out Greece. But this not means that Greece has to be stress-free, since Jean-Claude Trichet also warned, speaking at a hearing in the European Parliament in Brussels, that the euro area was not 'a la carte', and countries could not pick and choose which Eurozone rules to follow. The other member states are willing to provide help to Greece because a possible default will cause a domino effect, dragging other countries, like Spain, Portugal and Ireland (PIGS), which have similar problems. Those last months the name of the International Monetary Fund was mentioned several times in the case of Greece and the possibility to help the country to get out of the crisis. But the EMU is not so keen to see this happening, because the European officials think that its better to solve the Greek problem without the help of an outsider. They support a solution within the family and not from a USA based institution, as the IMF. Nevertheless, the intervention of the IMF in Greece seems not so distant after some discussions that have been made but there is still nothing official. The last week, the IMF auditors came in Greece in order to provide their knowledge and to check the budgetary policy, stability program and tax collections mechanism of the Greek government, showing that some initial conversations between Greece and IMF had already took place. After the financial issues in Hungary and Romania last year, Europe forbids itself to use different lending mechanisms within Europe. Each Member State is responsible of its debts. At the moment, the European Union cant even assist Greece through conditional loans, what IMF could do. A future financial solidarity from EU could solve partly this issue and EU decision-makers are waiting for Greek reforms. In that case, IMF used to impose strong reforms but grants conditional loans on the other hand. Europeans avoid the help of IMF for Greece but they dont provide to Greece what IMF could. EU institutions are consequently in a bad position; besides, Greece remains a IMF member which means that this country still can turn to the IMF whatever EU thinks.

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In conclusion, the austerity measures that Greece took show their willingness to change the mistakes of the past and that every effort is going to be made in order to get out of this situation. It is obvious that the years coming will be very difficult for Greeks but unfortunately there is no other alternative. From the other hand, European officials want to reassure that an incident like this, the break of budgetary rules and the false figures, would not again be repeated.

5. Bibliography

ECB Working paper : y ATHANASSIOU, P., Withdrawal and expulsion from the EU and EMU : some reflections, ECB publications (online), 2009, No. 10, 50 p. http://www.ecb.int/pub/pubbydate/2009/html/index.en.html (consulted the 18th march 2009).

Working papers references : y THIEFFRY, G., Not so unthinkable : the break-up of European monetary union: the euro is under pressure after the demise of Europe's constitution. Gilles Thieffry assesses the legal risks of a member state pulling out of monetary union, International Financial Law Review articles, 2005, 5 p. EEROLA, E., MTTNEN, N., POUTVAARA, P., Citizens should vote on secession. Helsinki: ETLA, Elinkeinoelmn Tutkimuslaitos, The Research Institute of the Finnish Economy, 2004, No. 939, 19 p. Discussion Papers

Bibliography web sites :

y y

MAS, C., Sortir de lEurope ? Pistes de rflexion et de solutions juridiques. http://www.comite-valmy.org/spip.php?article575 UNKNOWN, La vrit sur lUnion Europenne par un eurocrate de la BCE http://au-service-de-la-france.blogvie.com/2010/01/30/la-verite-surl%E2%80%99union-europenne-par-un-eurocrate-de-la-bce/ MAHIER C., DUVAL, G., Grce : crise et consquences (25 mars 2010) http://www.alternatives-economiques.fr/grece---crise-etconsequences_fr_art_633_48622.html www.reuters.com www.kerdos.gr www.capital.gr

y y y

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y y y y y

http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ (Eurostat) www.ecb.int (European Central Bank) http://www.mnec.gr/el/ (Ministry of finance) www.tovima.gr (Greek newspaper) http://www.rte.ie/business/2010/0322/greece.html

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