010, the economist Barry Eichengreen wrote: “The decision to join the euro area is effectively irreversible.” That’s certainly the view of Europe’s politicians, busy again today with their latest plan to save the euro intact. They seem to think that any exit from the euro would bring chaos, not only to the exiting country but to the rest of Europe as well. That may be more scare story than reality.
The lack of detailed work on euro exit proposals has led Lord Wolfson to announce a £250,000 prize for the best suggestion. It is a timely intervention: the costs and risks of remaining within the Eurozone are rising day by day. The two bailouts of Greece (€110bn and €109bn), together with Ireland (€85bn) and Portugal (€78bn) total €362bn (£315bn). The rescue fund, destined to be increased again today, is currently at €440bn. It starts to add up to a strong case for exiting the euro in theory.
Yet an exit does pose technical problems. A consideration of the legal issues demonstrates this, but also shows that such problems are not insurmountable.
The key legal difficulty with a euro exit is the Maastricht Treaty’s lack of an exit mechanism. In a European Central Bank (ECB) working paper from 2009, Phoebus Anthanassiou claimed that a country that exited the euro would have to leave the EU as well. The Lisbon Treaty allows for secession from the EU, so withdrawal from the EU seems the only way to get rid of the euro.
A solution to this legal problem could be an exit from both the euro and the EU, followed by immediate reentry into the EU. In the case of a net contributor to the EU budget such as Germany, other members seem unlikely to quibble over readmission.
Another legal obstacle results from the possible redenomination of contracts in the wake of an exit from the euro. A government may redenominate euro contracts into the new currency (applying the legal principle of lex monetae – that the state determines its own currency). It may do so without problems if the contracts were contracted in its territory or under its law. But private and public bonds issued in foreign countries would be ruled on by foreign courts, who may decide that repayment must be in euros. That would mean one-time losses or profits for the involved parties. However, it is hard to see that these court rulings would constitute important disturbances or insurmountable obstacles for a euro exit.
While the practical complexity of any real world euro exit certainly justifies Wolfson’s prize, my recent survey of all the challenges found that the problems of a euro exit have been exaggerated. Introduction costs, wage inflation, trade losses, political costs, legal problems, procedural costs, problems with disentangling of the ECB – none are insurmountable. With reforms and careful negotiation, these problems are all manageable. It is unpalatable to Europe’s leaders, but exit from the euro is a real option.
Philipp Bagus is the author of The Tragedy of the Euro and an associate professor of economics at the University Rey Juan Carlos in Madrid. His paper Practical Steps to Withdraw from the Euro was presented at the European Parliament on 12 October.