Speculation that Greece could opt out of -- or be pushed out of -- the euro zone roiled global stock markets last week.
Greece subsequently denied any intent, but the rumor raised the murkiness of the process needed for a country to abandon the single currency.
No country has left the euro, but in theory, a country can notify the European Council that it wants to withdraw and be out within two years. Any involuntary move would be much more difficult.
“Right now there is no mechanism to be kicked out.” Marc Chandler, Global Head of currency strategy at Brown Brothers Harriman, said.
There is also the question of what knock-on effects a country leaving the euro zone would have.
“Eurozone breakup would cause the mother of all financial crises,” Barry Eichengreen, former senior policy advisor at the International Monetary Fund, said.
“The decision to join the euro area is effectively irreversible. However attractive the rhetoric of defection is for populist politicians, exit is effectively impossible.”
Simple Cost-Benefit Analysis
Investors can use game theory to discover why it is in every member’s best interest for the European Union to survive, Chandler said.
“Assuming all countries are rational actors, look at the cost/benefit analysis," he said. "What would Greece gain from leaving? The cost of staying in is brutal austerity. The cost of leaving? That any gains of weaker currency would be offset by higher inflation.”
The transition could prove to be a logistical and economic nightmare, according to experts.
Some people say Greece should drop out, regain competitiveness, and rejoin. It doesn’t work,” Chandler said. “If Greece were to drop out two things would happen. First, there would be a huge interest rate spike. Second, high inflation."
The European Central Bank has also said that the risks associated with withdrawal are high.
“Restoring a Member State’s old currency or adopting a new one would inevitably involve considerable risks and difficulties and entail substantial legal complications,” the ECB stated in December 2009.
But if the euro zone is unable to become more competitive, the most productive countries like Germany, and France may decide that leaving the club is beneficial.
Any country that leaves voluntarily or otherwise would inevitably cause resentment among those left behind, according to Eichengreen, and it could challenge the EU’s integrity and sustainability.
Europeans’ 'Baptism by Fire'
While trying to break out of the Union may not violate the laws, it might break the spirit of the EU, which was created based on unification and integration.
In December 2009, the ECB published a paper entitled “Withdrawal and Expulsion from the EU and EMU,", that concluded that, while permissible, the exit clause is, “prima facie, not in harmony with the rationale of the European unification project and is otherwise problematic, mainly from a legal perspective… a Member State’s expulsion from the EU or EMU, would be legally next to impossible.”
If a country wanted to withdraw from the EU it probably could. Greenland left the EEC in 1985, but it remains subject to EU treaties.
And Germany is proposing mechanisms to withdraw from the EU, and punish more severely countries that don’t adhere to rules.
But Chandler said he doesn’t believe either will pass.
“Look back to why the euro zone was created. It was an economic solution to a political problem,” he said.
The EU’s current problems are a “baptism by fire,” Chandler said, adding that the drive to maintain the union seems to be more about politics than economics.
"If they weren’t in a monetary union, they would have significantly less power globally," he said.
"The breakup would just hasten EU’s decline on world stage.” “Wall Street understands economics, but underestimates the political will," Chandler said.
"The markets have integrated the economies, they’ve moved towards a union of sorts better than generals like Napoleon ever did."