We normally would not over-trouble readers with the thoughts of Professor Francesco Giavazzi of Bocconi University, in Milan. After all, he is one of those who co-sponsored the theory that is to economics what phlogiston was to physics – ‘expansionary fiscal contraction’.
This is the idea that your economy grows when you slash public spending; it seems to apply only where you can export your way to ‘growth’ because your recession luckily coincided with others’ upswing, and especially if you could also devalue your currency.
That is not however why I now put finger to keypad. In today’s Financial Times, the good Professor has written a particularly obnoxious article entitled “Greeks chose poverty, let them have their way”. His thesis, interestingly, seems to reject the notion of homo economicus, given the (normally) less than rational expectation that people tend not to opt for poverty, given the choice.
But the bit that caught my attention most forcefully was this:
We should ask ourselves whether it is really so important to keep Greece inside the EU. (Barring a treaty change, leaving the euro entails leaving the EU.)
What? Where on earth does he get the notion – which he in no way seeks to justify – that leaving the euro entails leaving the EU? The obvious place to look is in the EU’s Treaties. To remind ourselves, there are two key legal texts, the Treaty on European Union (TEU), and the Treaty on the Functioning of the European Union (TFEU).
Under Article 50 of the TEU,
Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.
But Greece, we may assume, has no wish at all to take such a step itself.
The most we find in terms of action against a member state is in Article 7, which provides
1. On a reasoned proposal by one third of the Member States, by the European Parliament or by the European Commission, the Council, acting by a majority of four fifths of its members after obtaining the consent of the European Parliament, may determine that there is a clear risk of a serious breach by a Member State of the values referred to in Article 2.
Before making such a determination, the Council shall hear the Member State in question…
2. The European Council, acting by unanimity on a proposal by one third of the Member States or by the Commission and after obtaining the consent of the European Parliament, may determine the existence of a serious and persistent breach by a Member State of the values referred to in Article 2, after inviting the Member State in question to submit its observations.
3. Where a determination under paragraph 2 has been made, the Council, acting by a qualified majority, may decide to suspend certain of the rights deriving from the application of the Treaties to the Member State in question, including the voting rights of the representative of the government of that Member State in the Council…
So a Member State in serious breach of Article 2 can see some of its rights suspended, but cannot be forced to leave the Union.
There is absolutely nothing in Article 2 that could he held against Greece if it left the euro – in particular if it were forced out, but even if it chose to leave. The “values” set out are classical human rights ones, not in any respect those of economic obligation. Here is what Article 2 says:
The Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities. These values are common to the Member States in a society in which pluralism, non-discrimination, tolerance, justice, solidarity and equality between women and men prevail.
Next, let us look at the Treaty provisions concerning the euro. Under Article 3.4 of the TEU,
The Union shall establish an economic and monetary union whose currency is the euro.
The details are set out in the TFEU. Article 119 sets out the broad duties of Member States on economic policy, without direct reference to the currency:
…the activities of the Member States and the Union shall include… the adoption of an economic policy which is based on the close coordination of Member States’ economic policies, on the internal market and on the definition of common objectives, and conducted in accordance with the principle of an open market economy with free competition.
Article 120 adds to this an obligation on Member States to
conduct their economic policies with a view to contributing to the achievement of the objectives of the Union, as defined in Article 3 of the Treaty on European Union, and in the context of the broad guidelines referred to in Article 121(2)…
There is no direct provision making membership of the eurozone irrevocable, though this is to be implied, as a normal reality, from the Treaty provisions taken together. But Greece’s position is not normal, and if she has to leave the euro, she is back in the same position as other Member States not (yet) in the eurozone.
Article 139(1) of the TFEU applies to states that have not (yet) adopted the euro. It says
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’..
Thus being a ‘Member State with a derogation’ is an automatic state that applies to non-euro states, and requires no positive decision from the EU institutions. It comes under a heading “transitional provisions” (which implies progress to euro adoption), and applies to all Member States that do not fulfil the criteria for adoption on the euro – which would include Greece, by definition, once she ceased to adopt the euro. (And importantly, the punitive provisions on rule-based issues like excessive deficits do not apply to non-euro states, so Greece would avoid the fines to which she is theoretically potentially liable within the eurozone!).
Finally, under Article 140,
At least once every two years, or at the request of a Member State with a derogation, the Commission and the European Central Bank shall report to the Council on the progress made by the Member States with a derogation in fulfilling their obligations regarding the achievement of economic and monetary union.
This is fascinating, since there is one prominent EU Member State that does not (as the UK and Denmark do) have an opt-out from the “obligation” to join in EMU, i.e. to adopt the euro. That state is Sweden, which deliberately, year after year, ensures that it does not comply with one small rule – thereby avoiding meeting the requirements for joining! Yet no one has yet suggested that Sweden should be forced to leave the EU as a result of this blatant “cheating.” So let us put this right, and argue that what is legally good for Greece under the Treaties must also be good for Sweden – ‘good’ here meaning bad.
It seems clear from the Treaties that, if Greece left the Euro, it would fall into the category of a Member State with a derogation, which in theory obliges it to try again to comply – and with the Commission and ECB having the duty to review progress, every two years, until it does again comply. Sweden is under the same obligation to try in good faith to meet the conditions for adoption, which it currently flouts.
There is no provision at all that, without some extraordinary interpretative twisting of the Treaties, could lead to Greece being forced out of the Union simply because she was unable to sustain euro membership, or was unwilling to accept the conditions being imposed for any further financial support.
And if Greece were (as is unthinkable) to be forced out of the EU for not remaining in the eurozone, then surely Sweden must suffer the same fate for its cynical, long-standing refusal to comply with its Treaty obligations to do what it can to move towards euro membership.
Which is to say, Grexit from the EU cannot and will not happen, even if there is Grexit from the euro. And the good Professor Giovazzi has used the Financial Times – which should surely exercise some modest editorial standards of accuracy – to make an entirely false statement about Greece’s legal rights and standing in the EU.
There is an ECB study on this matter, you can see it here: