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There is no Grexit

Oliver Pahnecke iunie 11, 2015 Economie, Macro, Opinie, Orientul Mijlociu
18 comentarii 4,498 Vizualizari

Greece cannot legally be forced out of the Euro in case of a default.

Greece is likely to keep the Euro as currency even after bankruptcy.

Forcing Greece out of the Eurozone is discriminatory, since other states use the Euro without being members of the Eurozone.

Even if voices in Brussels, Berlin, Frankfurt, London or in Washington, D.C. and New York City claim the only response for Greek bankruptcy was the Grexit, they ignore the legal basis for the EU and the Euro-zone.

The Treaty on the European Union and the Treaty on the Functioning of the European Union with their protocols govern the mechanisms of EU and Euro-zone. And while leaving the EU is now clearly regulated in Article 50 of the EU-Treaty, all other provisions aim at further integration. This means it is already doubtful whether a right to leave only the Euro-zone exists at all, unless a Euro-zone member declares to leave the EU.

The treaties oblige all Member States to introduce the Euro, except the ones who explicitly opted out at the time of negotiations. As Article 140 of the Treaty on the Functioning of the EU stipulates, the Euro will replace the domestic currency as soon as the convergence criteria are met. At this point the consent of the Member State is not necessary any longer. The relevant treaties regulate access to and membership in the Euro-zone in detail but there is no provision in any treaty or protocol that provided for an expulsion mechanism in case a member declared bankruptcy. Even the European Central Bank confirms in its 2009 paper “Withdrawal and Expulsion from the EU and EMU: Some Reflections” that “a Member State’s expulsion from the EU or EMU, would be legally next to impossible“.

But if there is no legal duty to leave the Euro-zone and no EU-institution has the legal ability to force Greece out of the Euro-zone, what are the various institutions and government officials talking about?

If Greece ended up bankrupted, the Greek government would be unable to pay its domestic expenses such as the salaries of public servants and could not satisfy creditors any longer, either. In this situation, the argument of Troika and several governments goes, the logical and only option for Greece was to resort to its former currency as it could print as much of it as necessary. The German Government and other vocal proponents of institutions involved ranging from EU over economic think tanks to finance claim the Drachma increased competitiveness by devaluation which led to economic growth and thus the ability to pay back credits. Others warn the Drachma would be an obstacle in trading with the Euro-zone, make imports much more expensive and make it impossible to ever repay any of the debt in Euro with the devalued Drachma.

Contrary to this scenario, a much more rational response was if Greece kept the Euro as legal tender also after bankruptcy since it would be obliged to re-introduce it again, anyway. Montenegro, Kosovo, Vatican City, Monaco, San Marino and Andorra are proof for an established practice of non-EU states using the Euro. These are not isolated cases limited to the Euro, using foreign currency as domestic legal tender is a common phenomenon. Currently the US Dollar is used as official currency in East Timor, Ecuador, El Salvador, several microstates and Zimbabwe and US Dollar banknotes are used in Panama.

If Greece cannot legally be forced out of the Euro-zone, it is only logical that a bankrupted Greece cannot be put into a worse position than any of those non-EU states that use the Euro without having ever been members of the Euro-zone or possibly never having met the convergence criteria. Instead, the Euro-group and Greece could agree on a suspension of voting rights in Euro-related fora and a ban on the right to mint coins and print paper money until Greece meets the convergence criteria again. This is probably the only way how the treaties are not going to be violated, enormous expenses for the re-introduction of the Drachma are going to be saved, Greece maintains unrestricted access to the markets of the EU and keeps the chance to pay back some of its debt. The only parties losing in this constellation are those who already bet on Greece losing the Euro and on the unavoidable devaluation of the Neo-Drachma. In return, the EU under the Junckers-administration would act in the spirit of Articles 2 and 3 of the EU-Treaty, according to which the EU’s aim is to promote peace, its values and the well-being of its peoples. Based on the rule of law, it shall work against discrimination, achieve economic growth, price stability, full employment, and social progress. And as Article 119 of the Treaty on the Functioning of the EU specifies, for the purposes set out in Article 3 of the EU-Treaty, the activities of the Member States and the Union shall include the adoption of an economic policy, including a single currency. Keeping Greece in the Euro-zone is as close as the EU can get to fulfil its own goals as defined in its own treaties. Not discriminating against Greece vis-a-vis those states using the Euro without being members of the Euro-zone would be an important first step.

Greece cannot legally be forced out of the Euro in case of a default.

Greece is likely to keep the Euro as currency even after bankruptcy.

Forcing Greece out of the Eurozone is discriminatory, since other states use the Euro without being members of the Eurozone.

Even if voices in Brussels, Berlin, Frankfurt, London or in Washington, D.C. and New York City claim the only response for Greek bankruptcy was the Grexit, they ignore the legal basis for the EU and the Euro-zone.

The Treaty on the European Union and the Treaty on the Functioning of the European Union with their protocols govern the mechanisms of EU and Euro-zone. And while leaving the EU is now clearly regulated in Article 50 of the EU-Treaty, all other provisions aim at further integration. This means it is already doubtful whether a right to leave only the Euro-zone exists at all, unless a Euro-zone member declares to leave the EU.

The treaties oblige all Member States to introduce the Euro, except the ones who explicitly opted out at the time of negotiations. As Article 140 of the Treaty on the Functioning of the EU stipulates, the Euro will replace the domestic currency as soon as the convergence criteria are met. At this point the consent of the Member State is not necessary any longer. The relevant treaties regulate access to and membership in the Euro-zone in detail but there is no provision in any treaty or protocol that provided for an expulsion mechanism in case a member declared bankruptcy. Even the European Central Bank confirms in its 2009 paper “Withdrawal and Expulsion from the EU and EMU: Some Reflections” that a Member State’s expulsion from the EU or EMU, would be legally next to impossible“.

But if there is no legal duty to leave the Euro-zone and no EU-institution has the legal ability to force Greece out of the Euro-zone, what are the various institutions and government officials talking about?

If Greece ended up bankrupted, the Greek government would be unable to pay its domestic expenses such as the salaries of public servants and could not satisfy creditors any longer, either. In this situation, the argument of Troika and several governments goes, the logical and only option for Greece was to resort to its former currency as it could print as much of it as necessary. The German Government and other vocal proponents of institutions involved ranging from EU over economic think tanks to finance claim the Drachma increased competitiveness by devaluation which led to economic growth and thus the ability to pay back credits. Others warn the Drachma would be an obstacle in trading with the Euro-zone, make imports much more expensive and make it impossible to ever repay any of the debt in Euro with the devalued Drachma.

Contrary to this scenario, a much more rational response was if Greece kept the Euro as legal tender also after bankruptcy since it would be obliged to re-introduce it again, anyway. Montenegro, Kosovo, Vatican City, Monaco, San Marino and Andorra are proof for an established practice of non-EU states using the Euro. These are not isolated cases limited to the Euro, using foreign currency as domestic legal tender is a common phenomenon. Currently the US Dollar is used as official currency in East Timor, Ecuador, El Salvador, several microstates and Zimbabwe and US Dollar banknotes are used in Panama.

If Greece cannot legally be forced out of the Euro-zone, it is only logical that a bankrupted Greece cannot be put into a worse position than any of those non-EU states that use the Euro without having ever been members of the Euro-zone or possibly never having met the convergence criteria. Instead, the Euro-group and Greece could agree on a suspension of voting rights in Euro-related fora and a ban on the right to mint coins and print paper money until Greece meets the convergence criteria again. This is probably the only way how the treaties are not going to be violated, enormous expenses for the re-introduction of the Drachma are going to be saved, Greece maintains unrestricted access to the markets of the EU and keeps the chance to pay back some of its debt. The only parties losing in this constellation are those who already bet on Greece losing the Euro and on the unavoidable devaluation of the Neo-Drachma. In return, the EU under the Junckers-administration would act in the spirit of Articles 2 and 3 of the EU-Treaty, according to which the EU’s aim is to promote peace, its values and the well-being of its peoples. Based on the rule of law, it shall work against discrimination, achieve economic growth, price stability, full employment, and social progress. And as Article 119 of the Treaty on the Functioning of the EU specifies, for the purposes set out in Article 3 of the EU-Treaty, the activities of the Member States and the Union shall include the adoption of an economic policy, including a single currency. Keeping Greece in the Euro-zone is as close as the EU can get to fulfil its own goals as defined in its own treaties. Not discriminating against Greece vis-a-vis those states using the Euro without being members of the Euro-zone would be an important first step.

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Currently there are "18 comments" on this Article:

  1. r2 spune:

    It is great news indeed that somebody found a solution to the important question of how to stay within the bounds of existing treaties once Greece defaults. It was really bothering me for some time. But, only as a minor detail, once default happens, does it say somewhere in the treaties who’s going to come up with the Euro to pay for the Greek pensions and the salaries of the public servants? Greece has been struggling to have a primary surplus even when the government was responsible. I guess we will find out.

  2. Adam spune:

    Please, think again!

    Greece is not printing Euros. Then, if ECB wll stop
    providing Euros to Greek banks, the only Euros
    available in Greece will be those already existing
    in Greece and those brought by turists. Greek
    government runs a large budget deficit and has
    no monetary reserves. Actually, the existing
    euros in Greece are dissapearing quickly,
    going abroad and under mattresses.

    The first thing will happen when ECB will stop
    providing Greece with Euros, it will be that the entire
    Greek banking system will go bankrupt. The government
    will have to nationalize all banks, particularly that
    Greece has virtually no subsidiaries of foreign banks.

    Consequently, the Greek government will be forced to
    print money (call it the New Drachma) or some
    value-government-revognized paper.
    Otherwise, the population will resort to barter!!

    Any new currency will be introduced, it will quickly
    devaluate, bringing huge inflation. Salaries, pensions,
    all prices will quickly lose value. The economic situation will
    eventually, after 2-3 years, start improving, though from a
    completely different basis. Nevertheless, nobody will lend
    any money to Greece and most likely Greeece would
    not join the Euro area again in the foreseable future!

    BTW, UK is seeking to enshrine in law that EU is a
    multi-currency union, and the policy of the government there,
    is that UK will never join Euro area … and they have just
    won the ellections! Moreover, there is no appetite fir Euros
    in Northern Europe either, except for Finland.

    • Harald spune:

      Well, printing New Drahma is not the only way for Greece. What about the Lebanon dollarization? Still working, after 30 years.

    • Adam spune:

      If Greece wants to keep the Euro, would require to print or
      to receive the money from somewhere. Printing would
      be illegal or the printed currency would be declared as
      fake and consequently worthless.

      There is one more solution, but it is impossible to work
      in Greece. This corresponds to the case that Greece
      would attract Euros from outside, for example by having
      a positive current account, usually by having much higher
      exports than imports. Even in this case, the government
      may not be able to raise enough taxes and to pay the
      salaries and pensions to public employees.

      Using a foreign currency could work for a small country
      whose evonomy does not require big external funding.
      For example this is the case of Kosovo, where help from EU
      comes in Euros paying the salaries of public employees
      there. Of course Kosovo is actually not a proper country,
      but an EU protectorate and the goverment there is very week.
      This cannot be the case for Greece.

      There is the option for Greece to print a currency that is
      tied at a fixed rate to the Euro. This may work on short
      term but not on long, as shown by Argentina, where the
      local peso was tied to USD. Eventually it ended in financial
      disaster for Argentina. Moreover, Greece would need to
      devalue their new currency and do this quickly. This will
      actually lead to the economic recovery for Greece.

      Of course, introducing a new currency will not remove Euro
      from the market in Greece. Euro will remain as a strong
      currency around, used for property transactions, rents,
      worthwhile salaries … somehow how Euro is in Romania.
      However, the government would no longer use Euro as
      official legal tender and state salaries or pensions
      would no longer be paid in Euros in Greece.

      BTW the legal tender in Lebanon is the Labanease Pound (LBP)
      (lira libanează in Romanian) and you can exchange it for about:
      1 USD = 1500 LBP
      and it is a relatively stable currency, at least for the last 5 years.
      I suppose you mean that USD is used in Lebanon for
      certain payments and transactions. However, it is not
      official tender there.

      • Harald spune:

        @ Adam – It must be fascinating to operate with multiple realities :P

        So, the US dollar is not legal tender in Lebanon, but “introducing a new currency will not remove Euro from the market in Greece. Euro will remain as a strong currency around, used for property transactions, rents, worthwhile salaries … somehow how Euro is in Romania”.

        How about holding two contradictory ideas simultaneously and accept both of them as correct? You know the word for this? :)

        • iosiP spune:

          @Harald,

          Basically, legal tender means that established companies must accept payments in that specific currency (no matter the currency they quote their pricesi in), keep ledgers in the “official” currency and that the government pays civil servants in the same currency.
          Whatever happens in the “real economy” is a completely different story! I’ll give you an example: most advertisement on Romanian TV spells out car prices in EUR. However, if I go buy such a car I can always pay in RON and they have no right to refuse me… well, the fact they are calculating the exchange rate at BNR+3% is another story!

          • Harald spune:

            @ iosiP – Dear Sir, this is exactly the Lebanon dollarization what you described. One can not deny the Lebanon dollarization and then mention the Greece ”euroization” as an option, after printing New Drachma. There is no point to explain the legal tender concept, it is all about the cognitive dissonance.

      • Adam spune:

        @ Harald – There is no contradiction in my words!

        As long as you cannot print a currency or have someone give it to you for free to
        you on an unlimited scake, that currency cannot be legal tender. Nevertheless,
        euch currency could be used for certain limited transactions such as real estate sales,
        mafia style transactions, bribes and so on.

        Actually, Euro is used in Kosovo on a large scale, but I explanined this situation
        in my comments from above.

        • Harald spune:

          @ Adam – All right, I will write again, especially for you: one can not deny the Lebanon dollarization and then mention the Greece ”euroization” as an option, after printing New Drachma. It’s plain cognitive dissonance.

  3. Paul_ spune:

    Maybe ECB will continue to provide Euros to Greek banks, as long as the banks will play by the ECB rules. I don’t think the europeans politicians will start a revenge war with the greek people.

  4. George Gafencu spune:

    Mr. Pahnecke,

    No one pushes Greece out of Euro Zone.

    In case they become bankrupt, they will choose to get out of Euro Zone.

    Being bankrupt, there is no way they can use inflation as a mean to get out of bankruptcy with the stable prices set in euro.

    Only by going to their own currency can Greeks emerge out of their own troubles.

    No one will give them any funding in euro anymore and holding on to it is counterproductive.

    • Laur spune:

      Cool theory, seen in a lot of comments.

      Could you please explain how printing New Drachma can help Greece pay the debts which are in Euro?

      • George Gafencu spune:

        It is as simple as that. The Greek government does not have enough money to pay for everything including pensions and budgetary obligations. Without painful reforms they live by just rolling the debt.

        The drahma would allow paying for the internal obligation, but depreciation to euro and inflation would set the proper incomes and expenses based on market rules. The price would be a real lowering of standard of life for everyone.

        In other words, going to drahma would solve the lack of reforms. A Greece still in euro cannot meet even its internal obligations. In both cases a bankrupt Greece will attempt to get out of any dept.

    • Paul_ spune:

      .. or they can reduce the salaries in euro.

      • Harald spune:

        They will have to do it anyway. With or without the New Drachma, they will have to reduce wages in euro basically.

        Based on their Communist experience, most Romanians will find easier for the government to fool the people by using a New Drachma than by reducing their wages in euro straight away. And based on his Communist inclination, Alexis Tsipras might just do that :P

        The Guardian, yesterday: IMF to Alexis Tsipras: ‘Do you feel lucky, punk?’

        http://www.theguardian.com/business/2015/jun/11/imf-holding-gun-alexis-tsipras-head-greece-credit-talks

        • George Gafencu spune:

          Good answer, Mr. Harald,

          I agree with it. The Greeks got to this point because they consumed more than what they produced and sponged off EU.

          Now they either can stay in Euro zone, have painful reforms and financial stability, or go bankrupt and to the New Drahma and keep their current expenses with the cost of sacrificing almost every Greek’s standard of living. The New Drahma will start at parity with Euro, but will depreciate really fast because the government has not enough currency to support the new currency. Who has some savings in euro can survive for awhile, but once those are out the real pain comes. Add to it the increased demand of New Drahma because everyone will want raises to keep the current standard of living and Greece will get a beauty of galloping inflation, too, besides the lowering of the standard of living. Whoever lived in Romania in the early 90′s knows what I talk about.

          That should be a good lesson for Romania, too, where a financial fiesta is being set up by the Ponta government in their attempt to survive next year’s elections.

  5. Liviu Moldovan spune:

    Ok, Mr. Pahnecke: let’s assume that nobody’s gonna impose your country to leave the EZ, due to some legal/treaties issues. And, as you’ve mentioned, “Greece maintains unrestricted access to the markets”.

    My question is: “What next?”

    Do you really think that this would make a real difference?

    Why on earth can’t your country do exactly the same thing you’ve just mentioned right now? If Athen’s administration have guts, then Greece cand forget about Bruxelles and IMF and get into the markets! Who’s stopping Greece to tape the markets??

    Aaah, oups… there might be a “slight” problem: trust. Trust is a financial term translated directly into %. Aka interest rate.

    How many times Greece has defaulted in the last couple of centuries? Why should anyone forget about Greece’s lies regarding essential statistical data at the time of EZ entry? Or about those 11bln USD in derivatives “parked” with the “help” of Goldman Sachs?

    Instead of complaining about IMF and Bruxelles’ policies wouldn’it be better to regain the most valuable asset a country can have, aka trust?

    “Trust means freedom”… this might be a good starting point, Sir!

    Kindest regards,

    Liviu Moldovan

  6. alex spune:

    Greece is bankrupt, the rest is just technicality.

    Unfortunately those who profited will not be the ones to pay for this mess.



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Oliver Pahnecke writes his PhD thesis on "Odious debt from a human rights perspective" under the supervision of Prof. William Schabas at Middlesex University, London. He obtained ... Citeste mai departe


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