The possibility of a eurozone state withdrawing from the monetary union is slim, and expulsion near impossible, according to lawyers at Cadwalader, Wickersham & Taft.
Furthermore, at a briefing given by the firm on Thursday, the firm suggested that even if a withdrawal was successfully negotiated, the effect on the withdrawing state would amount to economic chaos.
Article 50 of the Treaty of the European Union allows for member states to withdraw from the Union in accordance with its own constitutional requirements, but Adam Blakemore – tax partner at Cadwalader – suggested it was doubtful that this would cover a eurozone member, and only extends to other member states.
There are theoretically three ways in which a eurozone member could leave the EU: negotiated exit, a unilateral withdrawal and expulsion.
A negotiated exit would take the form of a relatively harmonious exit, but would by no means be easy. “This would need a renegotiation of EU treaties,” explains Blakemore.
“There would be a significant effect on the withdrawing state. The country’s new currency would likely go through devaluation, and in the case of a state like Greece, we would probably see defaults due to the weakness of the new drachma.”
A unilateral withdrawal by a member state is an even more dubious prospect if article 50 does not apply to eurozone members.
“A unilateral withdrawal would be of doubtful validity,” says Blakemore. “Foreign courts could refuse to recognise any redenominations due to the infringement of EU law.”
If unilateral withdrawal is unlikely, then expulsion of a eurozone member is practically impossible.
“There are no provisions for expulsion in any of the treaties, so a treaty amendment would be needed,” says Blakemore. “The problem is that the amendment needs unanimous agreement – including that of the state to be expelled.”
Whatever the method of withdrawal, Cadwalader predicts a great deal of negative fallout for the economy of the withdrawing state.
Richard Nevins, senior partner in restructuring at Cadwalader, says: “Withdrawal from the monetary union will cause all foreign investment in the state to dry up, and may cause the state’s economy to plunge into chaos.
“The reintroduced currency will inflate versus the euro, which will increase the cost of any foreign debt that remains enforceable in the euro. Local courts are likely to honour redenominations; foreign courts – dealing with foreign law contracts – are not.”
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