This post is archived. Opinions expressed herein may no longer represent my current views. Links, images and other media might not work as intended.
The European Treaties provide no legal way for a country to exit the Economic and Monetary Union, while remaining part of the European Union. The architects of the single currency considered it prudent to omit such an option, in order to render concrete the claim that monetary integration is irreversible.
By having accessed the Union, nation-states committed to a division and subsequent transfer of part of their sovereignty to the Community level. As the Treaties themselves imply, “transfer” is not equivalent to “forfeiture”. Under the present order, member states have not forfeited the substantive aspects of their sovereignty. They remain the loci of sovereign will-formation.
Hence the right to withdrawal from the Union, which is enshrined in Article 50 of the Treaty on European Union (pdf):
- Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.
Strictly speaking and from the point of legality, Grexit—the [dis-]orderly exit of Greece from the Euro Area—is not an option. For Greece to leave the euro, it has to abandon the EU.
Grexit is not the stated topic of the Greek referendum, nor could it be. No sovereign people can vote on a Community-level issue that is not envisaged by the Treaties, much like a given electorate cannot, by means of popular vote, decide on fiscal transfers from other EU member states—it is beyond its binding power.
De facto exit
Though there is no legal and orderly process for a member state to exit the single currency, there exists a certain set of conditions that could force it into reconstituting its national currency:
- Insolvent banks;
- Severe monetary contraction (lack of liquidity);
- Insolvent sovereign, with external debts denominated in a foreign currency.
In the case of Greece, the key variable that would determine whether the aforementioned criteria apply, is the liquidity injections provided by the European Central Bank (ECB). These currently occur within the confines of the Emergency Liquidity Assistance (ELA) mechanism.
The ECB has agreed to these provisions under the following three-fold assumption:
- Greece is solvent, not least because of the actual fiscal support of its European partners, as manifests in the bailout programme;
- In light of its ultimate solvency, Greece’s debt can qualify as collateral for the purposes of monetary operations;
- Greek banks holding Greek sovereign debt can be considered as maintaining sufficient capital that renders them solvent, in line with the evaluation process that took place in the Asset Quality Review (pdf).
Against this backdrop, the ELA is a key determinant for establishing the solvency of Greek banks and, a fortiriori, for appreciating the context in which a new currency may become necessary. To put it simply, an abrupt termination of the ELA, would qualify Greece as being in desperate need for an alternative to the Euro. Such deus ex machina would presumably be the drachma.
The termination of the ELA is but a working hypothesis. Though it is hard to anticipate the decisions of the ECB, it is safe to assume that July 20, where a €3.5bn payment is due, will be the final day of ELA operations. If Greece does not succeed in meeting its debt obligations to the ECB, which is most likely going to be the case, then it tacitly admits to be insolvent, with the expected deleterious ramifications this will have on the capital adequacy of Greek banks.
The ECB cannot inject liquidity into undercapitalised financial institutions, nor is it allowed to make implicit fiscal transfers. It will be forced to cut the ELA or any other operation that could provide Greece with fresh money.
As the Financial Times’ Brussels bureau chief put it:
July 20 is the new June 30. #Greece
— Peter Spiegel (@SpiegelPeter) June 29, 2015
The Euro as a political project
The single currency was conceived—and remains—a grand political project; a catalyst in the greater scheme of achieving an “ever-closer Union”. Though there certainly exists a nexus of technical mechanisms, rules and processes, encompassing monetary and fiscal policy, the fact remains that the single currency is a functional legal-economic driver for the formation of a genuine political union.
For as long as an otherwise technical instrument such as the ELA can potentially put at an existential risk the ulterior motives of the Euro—to unify Europe—and can, by that token, determine the future of the European integration process, it is my modest expectation that higher-level politics will not let things deteriorate beyond the point of no return.
If the political leaders of this Union remain oblivious to the gravity of the matter, clinging on to relatively minor fiscal issues of a cyclical sort, then they may well be incompetent to complete this project or, conversely, this project may have degenerated to a degree where it is not worth completing.
As a citizen of Europe, and with all due respect to everyone concerned, I would begrudgingly have to condemn a political project that failed to meet its stated ends because of the circumstantial lack of agreement among some ministers of finance, or due to the narrowly-focused technical operations of a group of central bankers. Systemic political meltdowns, such as the ones that caused two World Wars must not be allowed to happen again.
The NO vote is a new beginning
A negative vote in the Greek referendum will establish a sovereign people’s outright disenchantment with a technical-political mechanism that has led to a dead-end. The troika mechanism has been unsuccessful on both the economic and political fronts. It’s inner contradictions threaten to jeopardise the European project.
The failure to complete the second Greek bailout programme does not amount to an inability to continue to do politics, to negotiate further. Exaggerated fatalism aside, Greece will continue to be a member of the European Union, while its currency will still be the Euro.
What will change after the referendum, is the context and underlying assumptions. European leaders will have to revaluate the set of conditions that brought things to a stalemate. Deliberations will have to take place on how to deliver [ad hoc] solutions to a new problem: of furnishing support to Greece in a manner that is compliant with existing rules, though deviating from the established troika norm.
To that end, it could be the case that a special arrangement is introduced, under which all of Greece’s debt obligations towards official entities are put on a hold. Such is a political decision that will need to be ratified by all national parliaments involved. Further, the new setup will have to include measures for dealing with the liquidity crunch. These will have to include a moratorium on Greece’s debt to the ECB and, most likely, the introduction of a _parallel _currency.
Under technical provisions and with support from its European partners, Greece may constitute an administrative currency, whose dual purpose will be to: (a) provide for all government expenditure, as concerns domestic spending, and (b) supply banks with the liquidity necessary for their unencumbered operations.
This administrative currency, call it “Greek Euro”, will not be used to cover for any external debt, including whatever is due to the ECB and the International Monetary Fund. A regime of partial defaults and debt re-profiling must compliment this scheme, in order for it to have any chance at being viable.
Such an alternative course of action, the content of which is but mere speculation at this stage, achieves a couple of important objectives at once: (i) it offers a mutual agreement in line with the Treaties, and (ii) it provides a context-aware, credible solution to Greece’s economic asphyxiation.
Politics, all too politics
It is at times such as this one where the EU is put to the test. This is a make or break moment. Greece’s, the Euro’s, and the Union’s future cannot be decided at a technical level, nor can it be left to chance, exposed to the vicissitudes of international capitalism.
Given the manner in which things have unfolded, the referendum in Greece must take place, even if that may bring forth the prospect of dealing with the realities of a negative vote. Any act of involvement in the decision of the Greek people will be perceived as an [implicit] disdain of democratic conduct. European leaders have no legal or moral right to interfere. Their duty concerns the integrity of the Union, its preservation and continuation qua union.
I do not purport to have insight into the future. Based on all of the above-mentioned, I may only restate my belief that a political programme will be provided as a solution to a technocratic dead-end. Democracy in Europe will not reach a terminus.