Merkel's Plan to End the Euro

Written by Jeff Cimbalo on Monday November 14, 2011

Whatever political settlement the Lisbon Treaty created to allow for the permanence of the euro is about to change. Chancellor Merkel will propose a significant change in the existing treaties, which will finally allow Greece and perhaps others to leave the euro but not the EU, and likely bestow on the eurozone effective authority to negotiate those exits without a vote of the entire EU.

(Update: Merkel's party, the CDU, has voted to allow member states to voluntarily leave the euro.)

Broadly speaking, the changes will be some sort of variation of this sentence: “If a member state is consistently unwilling or unable to stick to the rules that come with a common currency, it can voluntarily leave the Euro zone without leaving the European Union.” This would embrace and address the ECB’s legal stance that “a Member State’s exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable.”

A German proposal to allow the EU to boot out a eurozone member involuntarily has been rejected by Merkel’s party, at least for the moment. So, Merkel and Sarkozy seem content with coaxing Greece and others to volunteer to get out of the euro until the new euro is rightsized.

It is likely that Merkel will shape the clause to keep the arrangements for Greece’s (and others’) departure inside the eurozone. Euro membership’s irrevocability has always been a philosophical underpinning of accession, which explains why the treaties do not provide for an exit from the euro, and why it has been interpreted by the ECB and others as tantamount to seeking exit from the EU itself. How a euro exit will be negotiated and which member states get a say is all virgin territory, since this upsets the existing practical settlement of the mandatory eurozone. Even the Danish and British opt-outs are themselves reversible.

The Lisbon Treaty's provisions set forth an agreed procedure for an exit from the EU alone that is an effective check on Commission largesse toward the exiting member state.

Article 50 of the Lisbon Treaty for the first time explicitly allowed a EU member to give notice of intent to exit the EU, after which the Commission would negotiate a separation agreement with the member state, which would be voted on by a qualified majority of the entire EU. Of course, exiting a treaty is always possible under the Vienna Convention on the Law on Treaties (Article 56(1)(b)), as Greenland showed in 1985 when it withdrew from the EU's predecessor, the European Economic Community. The Lisbon Treaty just settled how that would come about.

This is why non-euro member states should be circumspect about the likelihood that Merkel’s plan is to allow the eurozone alone to negotiate and effect a euro separation agreement with Greece. Such a move would dilute the EU-wide check on Commission behavior, and would create incentives within the eurozone to try to spread the nature and amount of the bribe to get a member state to “ask” to leave the euro over the entire EU without non-euro members ever having a vote on that deal.

Merkel’s reported call to Cameron seeking pre-approval of her unfinished euro-exit plans may be the last time she has to ask him for anything pertaining to the euro’s status in the EU.