There are plenty of officials who would argue there is no possibility of Greece being excluded from the euro zone in the event of a bankruptcy.
This view was most clearly expressed by European Central Bank President Jean-Claude Trichet in March of last year when he told ZDF public television that the idea that states could be kicked out of the euro zone "to me seems not to be in accordance with the ideas of the founding fathers (of monetary union).”
Rather more recently German Chancellor Angela Merkel insisted that "from a technical and legal point of view there is no possibility at all (of a nation being excluded from the single currency).”
Despite these assurances, the question of whether a nation could leave (or be forced to leave) continues to nag away at investors. To a degree this is the fault of euro zone politicians themselves. A Reuters report of a closed door meeting in early May between Finance Minister Schaeuble and members of parliament from the Christian Democrats and the Christian Social Union noted that he had “vehemently” rejected demands from some lawmakers that Greece should leave the euro zone, noting: "Everything would be better than an exit."
More recently Dow Jones Newswires published a draft paper produced by the Christian Social Union (the sister organization to the CDU and part of the governing coalition with the Free Democratic Party) ahead of their party conference in early October. In it the authors argued that "there must be a possibility to leave the euro zone if a member state isn't willing to permanently meet the convergence criteria."
In other words, there is evidence that conservative lawmakers within Germany would be more than happy to exclude Greece from the single currency if it were at all possible. News reports have, of course, also played their part in fostering this uncertainty. A report in Der Spiegel in early May and in the Greek newspaper Daily Elefterotypia last week, indicated that the issue of a Greek exit had at least been discussed by the government in Athens. Although the government vigorously denied on both occasions that this was the case, a seed of doubt had been planted.
Given that one of the principal reasons why nations such as Greece joined the euro was the unstated promise that their borrowing costs would converge towards those of Germany and that the removal of currency flexibility would work to their advantage, it would be understandable if they now felt a level of regret about their decision.
It is also worth recalling that it became something of a commonplace in the early 1990s that nations would devalue their currencies/leave the old Exchange Rate Mechanism when the pressures simply became too great.
Indeed, for the UK, it is arguable that its exit from the ERM in 1992 was the catalyst for a decade of growth after that. In light of this, it is easy to imagine that if the euro had not been created and, instead, the ERM still existed then nations such as Greece would have been more than happy to have already devalued their currencies as a means of regaining some competitiveness for their economies and implementing monetary policies suited to their own particular needs. In other words, if they could have exited “easily” then it is arguable that they probably would have done so by now.
Whether it is actually legally or technically possible to leave the euro zone remains shrouded in doubt. In December of 2009 the ECB published a paper (in its Legal Working Paper series) titled: “Withdrawal and expulsion from the EU and EMU: some reflections.”
In it the author (Phoebus Athanassiou), while arguing that a unilateral exit of a member state from the euro zone would be fraught with difficulties, did not treat this outcome as an impossibility. The question of whether it is technically possible to “unscramble the omelette” of the euro remains even harder to answer and is one that will tax the currency markets for some time to come.
The author is chief currency strategist at BNY Mellon.