As members of the European Monetary Union struggle to find detailed remedies for the sovereign debt crisis in Greece, there has been an underlying presumption that Greece will remain a member of the euro club.
What if that presumption is incorrect?
There is no definitive legal answer — and the potential consequences of a unilateral exit might not be confined to Greece or to Europe. Any unmanaged restructuring of the EMU could have significant repercussions for U.S. financial institutions.
While the very prospect of an "exit" may seem absurd, it's a real possibility. The Maastricht Treaty, which created the EMU, does not explicitly address the issue of an "exit." Scholars have debated whether this silence enables or prohibits unilateral secession. Under international law and the Vienna Convention, a country could argue that there has been a fundamental change in circumstances that necessitate its withdrawal from treaty obligations. A country could take the even more radical step of withdrawing from the European Union entirely under the terms of the Lisbon Treaty implemented when the EU could not ratify a constitution.
Would such an exit sufficiently benefit Greece to resume issuing its own currency? And could Greece then declare that its debts were payable in its new sovereign currency, rather than the euro? There is troubling precedent elsewhere, most notably Argentina's decision in the past decade to resort to "pesofication." Could drachmatization be next?
The legal consequences of such an action are predictable: massive litigation that will take years to resolve.Even more troubling is the dramatic and adverse effect that any such exit could have upon the global financial system. While exposure of individual banks to Greece is already a subject of regulatory review and public disclosure, the uncertainty arising from European monetary secession could be felt beyond numbers relating to any single country. Who might be next? And which categories of obligations would be impacted?
The painful answer is that, while private institutions made decisions to extend credit and enter into transactions to support Greece's financial strategy, the consequences of those decisions are now public problems. The fact that an "exit" is even possible highlights the need for prompt and coordinated resolution of this crisis. Governments need to work with each other as well as with private institutions that have made themselves vulnerable. And that, perhaps, is the moral (hazard) of the story.