Altering the eurozone treaty to allow states to leave or be expelled will help guarantee the future stability of the EMU, argues Thomas Schuster.
Thomas Schuster is professor of economics and quantitative methods at Baden-Württemberg Cooperative State University Mannheim.
After five months of agonising negotiations, the eurozone head of state, the Greek and several national parliaments paved the way to an agreement on a third bailout package. It will include tough reforms like cutting pensions and increasing taxes in exchange for a further €86 billion of financing over three years.
Is this third rescue package really the final act in this Greek tragedy? Unfortunately not. On the contrary, agreeing on this compromise of political reforms for cash only means kicking the can down the road. This does not solve the central problem that Greece has to run a sustainable budget meeting the rules set by the European Monetary Union. And with this compromise, Greece has to rely on foreign help from the EU and the IMF beyond the foreseeable future.
So, what would be a sustainable solution to the Greek euro crisis? It is a central construction fault of the European Treaty that neither an exit nor an expulsion from the European Monetary Union is possible. Nearly every private organisation – be it a choir or a political party – has rules how on to leave the organisation or how to be expelled in the case of some wrongdoing. The euro bloc has neither.
Thus I recommend that the European Union revise the Treaty to enable both exit and expulsion from EMU. If not Greece, sooner or later another country will want to leave the eurozone. And in fact, no one can prevent a sovereign state from doing so. A clear set of rules would merely minimise the negative impact of the uncertainty that would arise from a country leaving the eurozone.
Introducing a right to expel is even more important than a right to exit. With that possibility at hand, the Greek crisis could have been solved much earlier. What is the current threat from euro finance ministers if a crisis state does not carry out the reforms agreed upon? They can only stop the financial assistance.
But unfortunately, this is no threat at all since as a consequence, the crisis state would be forced to default on its debt, resulting in huge financial losses for the remaining euro members. And this is exactly the game Alexis Tsipras has been playing. He knows quite well that the German chancellor Angela Merkel would have a hard time explaining to the German people that Greece will not pay back much of the debt it owes Germany. Only the threat of expulsion is an effective one.
For example, from the very beginning of its existence, the International Monetary Fund has introduced the right to expel a country that does not pay back its debt. It is called compulsory withdrawal (article 26 of the IMF’s Articles of Agreement).
The central problem of the eurozone is that it lacks tools to adequately deal with crisis states that are not willing to carry out economic reforms. Even if the Greek crisis is solved this Sunday, the next euro slump is waiting around the corner – be it in five, ten or 20 years.
To weatherise the eurozone ship, it is absolutely essential that the European Treaties be revised to introduce the right of every euro state to exit EMU and to establish the right of the euro members to expel a state that does not follow the rules.