Judy Asks: Can Greece Leave the Eurozone without Leaving the EU?

The European Commission is correct to remind us that the Maastricht Treaty does not foresee an exit from the eurozone without exiting the EU, but what is the implication of the admonishment? The straightforward answer —a Greek exit from the euro would mean Greece’s leaving the EU—is as dangerous for the EU as it is politically naïve. It is dangerous because the Europe-wide political and economic effects of Greek currency devaluation (the ostensible purpose for any reintroduction of the Drachma) would need to be carefully managed. So the EU is damned to negotiate with Athens one way or the other.  But it is naïve to believe that Greece would be forced to leave the EU. The history of European integration is not one of strict adherence to treaties. Rather, when treaties obstruct political solutions they are either ignored or amended. Thank goodness.

In a formal sense, there is certainly no reason why a eurozone exit should lead to Greece leaving the EU. EU membership entails a commitment of all member states to accede to the euro once the economic convergence criteria have been met. Since the Maastricht Treaty in the early 90’s, however, a number of states have agreed opt-outs from this principle. Assuming that the impetus to leave comes from Berlin and Brussels rather than Athens, one could also imagine an opt-out mechanism for Greece.

The problem from a Greek perspective is that leaving the eurozone would not involve an exit for Greece from many of the seemingly insurmountable obstacles that eurozone membership entails. As an EU member, Greece would still be subject to many of the rules of the strengthened stability and growth pact which strictly limits deficits and public debt. It would also most likely want to remain eligible for further EU bail-outs and hence need to accede to the EU’s fiscal compact (which also demand budget capping measures). As Greek politicians have long realized, exit from the euro is likely to be the “end of the beginning” rather than the “beginning of the end” in Greece’s ongoing economic trauma.

The EU should have a provision for countries to leave the eurozone without leaving the EU, just as the EU has a provision for countries being members of the EU without being members of the eurozone. A more flexible EU can also be a more resilient EU. The strategy of building firewalls for other eurozone members in trouble, as eurozone leaders and lenders dealt with the Greek crisis, now gives the eurozone more options towards Greece. Nonetheless, a Greek exit would break new ground, unsettle investors, and require deeper integration of remaining eurozone members in response. This would include specific assistance for other eurozone members in trouble, eurobonds, eurozone bank deposit insurance, a tighter link between monetary and fiscal policies, and other mechanisms.

The question whether Greece can leave the eurozone and remain a member of the EU is emblematic of the struggle Europe has with its larger question: why and how Europe needs to renew its mission. The answer requires adapting to new realities.

The story of the evolution of the EU is one about witnessing Europe put itself together after World War Two. The tools with which that was accomplished were formed out of both the lessons of the war as well as the mission to build institutions and policies to prevent such conflicts in the future. While that was being accomplished, there was a gap emerging between the structures and the peoples served by them. While European institutions were being constructed, there remained a need to nurture European stake holders at all levels of society.

That remains work in progress. Greece illustrates that challenge.

The creation of the euro was perceived as a nutrient and catalyst to transform not only policies but also people with a common stake in the future of Europe. While the goal remains, the tools need adjustment. Greece is a part of Europe's present and future, no less than any other current or aspiring member of the EU. The euro is an important dimension of Europe's continuing evolution but when it was created, there was a rush to a "one size fits all" template. Yet the reality of European diversity is stubborn. Just like the evolution of the United States, the great experiment of European integration has always been a product of trials and errors, and lessons learned. Greece can leave the eurozone but it will not leave Europe. The efforts to solve the specific problems in Greece become part of the larger efforts to reset Europe's ability to continue to evolve. This is not a zero-sum process.

Theoretically, Greece could leave the euro without leaving the EU.

Practically, the real question is if the euro can survive Greece leaving.

If Greece were to leave, a precedent would be created. Markets would quickly test if other countries like Spain or Portugal could follow a similar path.

It could open a Pandora's box with the potential for more countries leaving, similar to the break-up of the currency bond in 1992.

Even from the point of view of economics, it makes sense to pay to keep Greece in the eurozone even if Greece doesn't fully comply with the austerity measures.

The risk and contagion effect is too large with letting even one small country leave. Thus, keep Greece in the euro to secure the common currency for all Europeans.

The debate on Greece the day after the euro is inflaming the wrong crowd. Economists, scholars, and Wall Streeters ponder the pros and cons of Greeks again pocketing drachmas. No political leader seems to consider the devastating effect a Greek debacle would have on the whole European soul, or at least what is left of it. Greek anarchy and hubris joined with European loss of vision, leadership, and compassion cornered us. "Euro is a political project" was the famous verdict of Joschka Fischer, German foreign minister from 1998 to 2005. If Greece leaves the euro, it does not much matter if it leaves the EU as well. The real tragedy will be Europe leaving Europe.

Greece seems bent on leaving the eurozone and the key European players, especially Germany, seem to be willing to let them go rather than to continue to put money into a failing project. This may be a separation which is good for both the Greeks and the eurozone and there is no reason to believe that leaving the eurozone means leaving the EU. Only seventeen of the twenty-seven EU member states are in the eurozone and many are doing quite well remaining on the outside. Greece will continue to have a seat in the European Council and to have a commissioner. It will continue to receive regional development funds and will stay in the Schengen regime. In a couple of years, perhaps longer, its economy will reemerge and grow. German tourists will continue to sun themselves on Greek islands. The bigger question is whether after the sorting out process is completed, with possibly Portugal and Spain also leaving the eurozone, will the result will be a two-tier Europe with an inner core of eurozone countries forming the core and the outsiders remaining on the periphery. This will signal the end of any dream of a federal Europe and a permanent Europe of a variety of circles or zones centered around a Franco-German and northern European core. It will also mean the end of the project which aimed at creating a Europe able play to a cohesive and influential global role.