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How to exit the Eurozone?

With 2/3 of the people in Cyprus preferring to leave the Eurozone (Cyprexit or Cexit?), one wonders what the legal avenue would be to give up the Euro.

By Marijn van der Sluis

Much has been said about the economic and political pros and cons of a member state leaving the Euro. Legal academics however, have mostly been silent on this issue (see however here and here). This is deplorable because the legal possibilities and details shape the bargaining process and the strategy of the players involved in this crisis.

There are basically three ways of exiting the euro area: 1) through exit from the Union (and re-entry), 2) through Treaty amendment and 3) through Council decision.

1) The obligations of the euro are linked to the membership of a Member State (MS) to the EU. If a MS exits the Union, the Treaties are no longer applicable to that MS.

The legal route for leaving the EU is laid down in the EU Treaty since Lisbon in article 50. Before the coming into force of this article it was doubtful whether a MS could unilaterally decide to leave the EU. Article 50 has ended this debate and describes the process through which a MS can leave the Union. Cooperation between the exiting MS and the others in this process would be useful, but is not legally required.

After a country has exited the EU, it can of course apply to become a new Member State. New MS do not automatically join the Eurozone, but they become a MS ‘with a derogation’, in accordance with article 139 TFEU, like for example Poland and Sweden. There is an obligation to strife towards entry into the Eurozone, but re-entry is dependent on a (political) decision by the Council. The disadvantage is that, even if exit and re-entry to the Union would coincide, there would be a considerable delay before Cyprus could leave, because national ratification procedures are unpredictable and burdensome.

2) Parallel with article 50 TEU, all MS together could create a new provision in the Treaty that would set out the process for exiting the Euro.

Shaping the process through which a MS could leave the Euro (but stay in the EU), would not be an increase in the competences of the Union and would be an amendment of part 3 of the TFEU. A simplified revision procedure – like the one used for the amendment of article 136 TFEU – could therefore be used. Approval (similar to ratification) of all MS would be required and there is the same disadvantage of option 1.

Another possibility is that a Treaty amendment would add a protocol to the Treaties which would give a MS a special position with regards to the Eurozone, like for example for the U.K. and Denmark. The benefit – or disadvantage – would be that such a protocol would only apply to one Member State and wouldn’t set a precedent (at least not legally).

3) It is possible for the Council to decide (probably unanimously and with the consent of the European Parliament) that a MS will no longer be part of the Eurozone and will become a MS ‘with a derogation’, by withdrawing its earlier decision on entry into the Eurozone.

With regard to the membership of the Eurozone, either a MS is part of the Eurozone, or it has a derogation (or it has a special position, see option 2). So if a MS wants to exit the Euro without leaving the EU or waiting for a Treaty amendment procedure, it will have to acquire the status of ‘MS with derogation’ some other way. Article 139 regulates the terms of this ‘derogation’:

Member States in respect of which the Council has not decided that they fulfil the necessary conditions for the adoption of the euro shall hereinafter be referred to as ‘Member States with a derogation’.”

This looks problematic because for all Members of the Eurozone the Council has decided that it fulfilled the necessary conditions and hence would become a Member of the Eurozone.

So a Council decision on the exit of a MS out of the Eurozone must be framed as a decision on the retraction of the earlier decision. For Cyprus, the Council would have to retract this decision of 19 June 2007.

This is not completely unproblematic from a legal point of view, because what is the basis of the competence for the Council to do this? There are two possibilities: first, one could argue that a competence to decide on a matter always includes the competence to retract that decision. This is quite unconvincing because in most cases where such a competence to retract is recognised, it is on the basis of an explicit provision, which wouldn’t be necessary if this theory was universally recognized.

Second, this retractile power can be derived from the ‘flexibility clause’ of article 352 TFEU, which grants the Council – on a proposal from the Commission and with consent of the European Parliament – the ability to unanimously adopt the appropriate measures to attain one of the objectives set out in the Treaties. These objectives are set out in article 3 TEU:

“(1) The Union’s aim is to promote peace, its values and the well-being of its peoples. (…) (4) The Union shall establish an economic and monetary union whose currency is the euro.”

So, it must be ascertained that for a MS to stay in the Eurozone would not endanger the Union’s values and the continued existence of the Eurozone as a whole. Then it would be possible to take a decision retracting the decision to enter the Eurozone.

Or it could be argued that staying in the Eurozone would be so devastating for the well-being of the people of Cyprus (and the rest of the peoples of Europe) that an exit would be legitimate in light of the objectives Treaties.

Clearly, the ECB thinks (pdf) that an exit is not allowed under the Treaties, as does the Commission. The strongest argument the ECB employs is that the Treaties provide that when the decision is taken to abrogate the derogation, the rate of exchange between the euro and that MS’s currency will be irrevocably fixed. However, this provision (article 140 TFEU) seems to apply only to the phase of the transition to the euro and not to any new currency that MS might introduce. The Commission merely refers to the ‘framework’ of the Treaties as support for the irrevocability of the membership of the euro area.

Would the ECJ block option 3? Probably not, given the involvement of the Commission and the European Parliament in a decision. It would truly be a political decision to let Cyprus exit the Eurozone. It wouldn’t be easy, but it is possible.

Marijn van der Sluis LLM is a PhD researcher at European University Institute, Florence.

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Comments

  1. not much new in this analyisis, shoulda stopped reading at 5th para – Sweden doesnt have a derogation, they are just cheating

    anyways, if I want to make a revolutionary assessemnt, the solution is Article 7 to the Cypriots and maybe to the Swedes as well because staying in the eurozone and even the EU is highly dangerous in the case of some countries (oh, lest we forget, Hungary and Romania and the UK too. lets nuke it down to basics)

    Coming to think of it, BE and LUX with their dirty networks of grand families and smooth operators and tax haven banks and free rider societies should also be kicked out, at the risk of leaving behind Ms Reding and Mr Verhofstadt (cry me a river…)

    #justjoking

  2. Very interesting the search about how can Cyprus get free from EU.
    I noticed that the will of Cyprus people alone wasn’t found in the “search”.
    Very enlightning about the way eurocrats look at democracy.

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