Leaving the Euro Zone: A User’s Guide
IESEG Working Paper No. 2011-ECO-06
13 Pages Posted: 29 Oct 2011
Date Written: October 1, 2011
It is well known that the exit of any country out of EMU would have an extremely destabilizing effect on all the euro zone countries as well as an extremely negative impact on their economy. However this hypothesis is often talked about without thinking of the real legal and practical consequences it could have. So it is important to enlighten the debate in an analytical way so that this kind of supposition is discussed taking the right implications into account.
For a country wanting to abandon the euro the only legal way possible following the European treaty regulations would be to leave the whole of EU using article 50 of the treaty and then try to rejoin but asking for special dispensation with regards to the monetary union. Another legal way would be to negotiate an amendment to the treaty with other member countries. All these options require long negotiations and ratification by all member states. Some people therefore think that, because of urgency, only a unanimous agreement by the European Council leading to the issue of a European regulation, could be sufficient despite the legal uncertainty that this could entail. Some articles from the Vienna Convention on the Law of Treaties could also be used when a country wants to leave the euro zone without leaving the UE, as long as it is accepted that international public law applies to the European treaty, which is however a much debated issue.
The difficulties related to the abandon of the euro by only one country (or a subset of countries) in the EMU arise because the other countries would keep the euro. The new currency of the country leaving the EMU will have to coexist with its old currency, the euro, that would be kept by the other countries. It must therefore not be taken for granted that any debt that the country had in Euros would be converted automatically to their new currency. This situation would be even more critical if the new currency was expected to depreciate and become worth less than its initial conversion rate with the euro.
A description of the procedures to be undertaken by a country when wanting to leave the euro zone allows you to measure the difficulties that you may come across in the process. A crucial question is how to undo the euro denominated debts and claims of the country’s national central bank to or on the other national central banks in the Euro System, including the European Central Bank. To avoid a panic and too strong devaluation in the new national currency value, the saving accounts could be temporarily blocked. Moreover, contrary to the free circulation of capital in the EU, temporary measures of capital movements control may be taken even though this may be illegal under the European treaty.
In the hypothesis of a state wanting to leave the euro zone, it would only be under certain conditions that certain debts that would have been issued in euros by either a public or private institution of the country before the date of exit, or certain payments deriving from contracts in euro’s settled before this date, could be automatically converted into the new currency at the initial conversion rate. In general such a conversion could only apply to debts and contracts for which the involved contractors intended to refer to the “lex monetae” of the leaving country.
However if the withdrawal is unilateral, thus illegal according to the European treaty, courts located in other countries than the country leaving the euro, would probably refuse the right to convert any debts and contracts into the new national currency if they were to be taken to court.
Keywords: Euro, breakup, TARGET2, monetary law, leaving
JEL Classification: E58, F31, F33, F34, F53, E51, K33
Suggested Citation: Suggested Citation
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