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Sunday, March 24, 2013

Could Cyprus leave the Eurozone but stay in the EU?

Now, we're not necessarily saying that Cyprus should leave the eurozone.

But with eurozone finance ministers set for a pretty long and rough night of talks, trying to reach a compromise that will allow Cyprus to live another day inside the eurozone, the question is, if it came to it (i.e. if a deal can't be agreed and ECB turns off the taps), could the country leave the euro but stay in the EU? As we note here and here, due to Cyprus' geopolitical importance, if it did ditch the Single Currency it would be vital that it stayed in the EU.

Leaving aside the question of how Cyprus would be ring-fenced and given a reasonable chance of bouncing back with its own currency (a big one to leave aside admittedly), what would the legal and political mechanics look like?

There is currently no mechanism for a country to leave the eurozone. However, there is a provision (article 50 TEU) that allows for a negotiated exit from the EU. This has lead some analysts to conclude that a country has to leave the EU if it left the euro. We disagree.

As so often in the EU, this will come down to political negotiations. The below analysis is based on our paper from last year on a possible Greek euro exit (which, incidentally, we said was unlikely to happen in the short-term). The line of reasoning very much applies to Cyprus. 

Given the absence of a specific euro exit article, there are two ways in which a country can leave the Single Currency.
  • Changing the EU treaties to allow for a euro exit mechanism, perhaps modelled around article 50 (possibly even simply extending the article to refer to a euro exit) or the idea – floated by German politicians – to automatically trigger an exit if a state is unwilling or unable to comply with the rules governing the single currency. This would require agreement amongst all 27 member states and would essentially be a treaty renegotiation (making it complex and long winded). 
  • Using existing articles in the treaties which provide flexibility to address a number of issues, such as article 352, to legally facilitate withdrawal from the euro but not the EU. This would also require agreement amongst all 27 member states and the European Parliament. Per definition, a decision for Cyprus to leave the euro has to happen essentially overnight (some estimates have put the real time available at 46 hours). This is problematic as a treaty change could take months, even using the fastest track (the simplified revision procedure, which needs to go through at least some national parliaments). 
Historically, political expediency has trumped EU law. Although it would not be clear cut or easy – and involve a legal stretch – we believe that in order to take a swift decision and avoid a Treaty change EU leaders could (and most likely would) use existing provisions in the EU treaties to allow for a Cyprus euro exit. In particular Article 352 TFEU – sometimes referred to as “the flexibility clause” – allows member states to take measures to achieve EU “objectives” (subject to unanimity and consent of the European Parliament but not ratifications in parliaments), when those are not already provided for in the EU Treaties. Article 352 states,
“If action by the Union should prove necessary, within the framework of the policies defined in the Treaties, to attain one of the objectives set out in the Treaties, and the Treaties have not provided the necessary powers, the Council, acting unanimously on a proposal from the Commission and after obtaining the consent of the European Parliament, shall adopt the appropriate measures."
This article could be used to provide a legal temporary avenue for Cyprus to leave the euro within the framework of the EU treaties. This would be far from an easy process; there would likely be numerous legal challenges against the move, while the negotiations would be hazardous and subject to domestic political constraints.

Precisely for this reason, a full treaty change would almost certainly be necessary very soon after the actual Cyprus exit (and use of article 352), which would change Cyprus status under the EU treaties from a euro member to a non-euro one and recognise, at least in retrospect, that there is a way for a country to leave the euro (under an expanded article 50 for example). Such a Treaty change would, at least in theory, go some way to counter some of the political uncertainty and legal ambiguity around the status of Cyprus’s EU membership and therefore reduce the risk of legal challenges. However, a full treaty change would come with its own set of political and legal complications. As with Article 352, a treaty change could only happen if all member states agreed. In addition, the changes would most likely have to be ratified in national parliaments.

So far from straightforward, but still plausible.  


DeeDee99 said...

"Historically, political expediency has trumped EU law"

Yes - and that itself is an outrage. When is a law not a law? When it is inconvenient to the Kommissars.

The UK should not be a part of a supra-national organisation that ignores its own laws whenever it suits. If a governing authority does not abide by the law, it has no right to govern.

Anonymous said...

Leaving the euro but staying in the EU is actually the best long term solution for some of the countries and not just Cyprus(good for Germany in political terms and good for some of the countries in full depression, for economic reasons). It would bring stability to the Eurozone and, more important, it'd be able to stop the anti-EU bleeding that is slowly progressing, before a more severe rejection takes place in the countries under austerity. And a disorganize exit is not anyone wishes but it will happen under the current macro-policy.

Joe L

Jesper said...

The possible but unlikely scenario:

Cyrpiotic banks are shut down. ->Losses galore for depositors.
->Cypriotic gov to bail out insured depositors or face court actions.
->Imports has to be paid for in hard cash (who'll accept some recently printed new currency?), most likely euro or USD.
->Cypriotic gov to immediately balance budget or find someone willing to lend so that they can continue to import.

Who'll lend to them hard cash?

So, as far as I can tell Cyprus will stay in the euro-zone for the (difficult to predict so therefore not very long) foreseeable future.

Anonymous said...

The EU is pretty clear on its position - in November 2011, the Commission was adamant that Greece could not leave the Euro without also leaving the EU.

The EU is not some savings club or credit union - it is explicitly about political and economic integration, and the European Court is adamant that the goals of the Treaty are sacrosanct - this includes ever closer union.

Cyprus (strategic geopolitically) will be kept in at all costs, and further sacrificed as needed to appease Turkey. France and Germany recently opened membership discussions with Turkey, so there may be more bubbling under than the politics of the German general election.

jon livesey said...

Laws are always ignored in a crisis. In the UK we call it a State of Emergency and the Government rules by Royal Decree.

Typical occasions are in wartime or terrorist attacks.

The system works because it doesn't get abused.

The real outrage here is not the euro-zone ignoring its own rules, but wasting public money to fix up this and that fiscal problem while the entire EU economy deteriorates.

Rik said...

You are stepping over a lot of issues too easily.

-352 refers to actions of the union. Strictly speaking: is membership one? Most likley not it is furthermore clearly not written for this.
Anyway back to my Catalunya parallel. What it basically does is allowing a country to leave and become a new member again.
If 352 would open this opportunity for Cyprus why not for Catalunya (or Scotland)? Or Turkey to open up a new can of worms.

It is btw in the system of EU law that unless otherwise agreed things cannot be reversed. Stupid of course, but a clear choice.

But what is more important as all countries have to agree on this anyway. It is difficult to see how all countries could agree and overnight.
Just some examples, but all can be summarised as: quid pro quo.

Approval difficult to see how membership issues can be decided upon without parliamentary approval in at least several countries.

-why would eg the UK government agree with this without the reneg as exchange? Can Cameron agree on it without parliamentary approval? I would say not, may be formal but some of his backbenchers will kill him. If he gives this chance away half his party will kill him and his credibility towards voters would be gone. Which in itself would require his party to depart from him. He most likley will come back with alist of demands re reneg.

-a lot of countries (voter level) are totally fed up with the Greeces and Cypruses and all Berlusconi like figures with their mum's having huge Swiss bankaccounts.
And basically Catalunya when copying Spanish law and Scotland when copying UK law will better meet the conditions of membership. Turkey is and was still a problem that makes you wonder how the country got accepted in the first place. And would be a huge problem now when reapplying.

-why would Spain agree. As it basically gives a loophole for Catalunya as well.

-Ireland might require a referendum.

In a nutshell. Totally unlikely that it will go overnight, it will require parliamentary approval in several countries.
Unlikely that will not open another can of worms (or more than one).
Difficult to see eg how the UK could agree with anything but a treatychange as they need one themselves. Which would start a whole new ballgame.

And the issue isnot that remote. Cyprus will need another bail out in say 6-12 months. Difficult to se it otherwise. Keeping capital controls in place for several years seems completely weird and they not seem to be working anayway, around the German elections no money should be left in ant Cypriotic bank if thisng go in the de facto capital control pace we see now.
They mess everything up there even worse than Greece.
People in the north get totally fed up with this.
So it is not totally unrealistic that it will happen.

Rik said...

Computer messed up
362 is not writen for membership issues.
Hard to see how all 27 parliaments donot want a say. Like Cameron/UK re reneg.
Other conflicts of interest like Spain/Catalunya.

Looks only realistic way open is treatychange. Never get approval of all 27 on 362.

EU doesnot determine national approval rules. A mistake the EU Commision keeps repeating as well.

Anonymous said...

You are being too optimistic about article 352.

EU institutions are bound by EU law and Case 440/05 showed that they have to abide by the letter of the law. In that Case, the European Council was brought to heel as it used advanced cooperation without trying the prescribed method of acting.

The EU is very jealous of areas where it has exclusive competence, and I don't see any exemptions being made over the single currency, as the politics are paramount. Today's 'rescue' has not been of Cyprus, which will languish in a deepening crisis, but of the eurozone project.


Rik said...

The problem they have here is that it is not simply citizen-state.
They need 27 yes and 0-no. And it has to be voted upon explicitly.

Which means every country can block it. Which of course requires some remarks. Smaller ones will keep their mouth shut. EZ trouble cie will go along. Smaller EZ can be bullied. Non EZ small can be bribed with some extra subsidies.

However just focus on Cameron and the UK.
He will require parliamentary approval. Whether EU law demands that or not. It is an UK issue. If he would go, even if he could, without that half his MPs would drop him and he would have a revolution at hand.
Media will bring it to the popular court and let this pass without using the opportunity would completely rubbish his credibility on this issue. And likely of him personally. It would be the way the put IP stronger on the map and make the referendum promise look like a lie. Which in itself would mean his party would have to replace him if they want to win elections and have permanent competition in the form of IP on the map at least.
So basically Cameron will require approval or he commits political suicide. Anyway he will see the chance and try to use it of course.

Just leave the niceties aside. Plainly speaking he has 2 options. Allow 352 and make a sort of gentlemen agreement on a later change or go directly for the win.

Starting from there seen the history and the complicated structure relying on a later chance has a lot of risk in it. The other side look rather dodgy for instance. Plus if it goes wrong he, Cameron will be shot, politically that is. Doubtful if only for that reason he will go for that unless there are really hard, agreement like, commitments (which in itself makes it treaty like).

A direct treatychange would give him however a possibility to profile himself short before an election. Great result plus referendumpromise even before the election.
Simply looks much better.
Anyway unlikely imho that his backbenchers will not simply demand it that way.

Off course everything packed in the nicest possible words. Blaming backbenchers and so on (very convenient).

Cyprus banks will tank. Money will run of the Island. Present de facto capital controls are not working (>2Bn within a week) and with a largely cash economy plus similar currency as the rest of the continent it is not going to work. In the speed of last week around the German elections there will be around 1 Euro in all the Cypriotic banks. Which means liquidation of assets has to be speeded up to unrealistic speeds.
So will bring other banks in difficulty and there will be a huge lack of funding anyway. So Cyprus 2.0 (or 3.0 if you consider the present still to be approved deal 2.0) is just around the corner most likely.

With a Catch22 Adjusting the treaty now will be very bad PR and do it later it could develop in a huge mess (with non-EZ in particular countries not agreeing).

Anyway getting appoval up North will increasingly get more difficult. While especially for Italy and likley Spain there is simply not enough capacity. So it could also play with other countries than Cyprus. The dynamic looks to be North getting nasty with conditions and at some time a Southern country will fall off.

Anyway this is just the UK a rather complicated one but others will have their issues as well. No way you get this done overnight and easily. Planning on that would be completely wishful thinking.

Rollo said...

If Cyprus did choose to leave the Euro (which is what it must do), then the EU would still to its best to keep Cyprus trapped in its coils. BUt Cyprus would do better as a free nation; as the UK would.

Anonymous said...

Cyprus staying in the EUSSR is only vital to Eurofascists, such as those behind OpenEurope.

To the rest of the world, the EUSSR could vanish in a puff od smoke and there'd be no grieving at all.

Perhaps some cheeriing, though.

Andrew Smith said...

Why on earth would they want to remain in the EU after being scorched by foolish membership of the Eurozone?

Denis Cooper said...

"Could Cyprus leave the Eurozone but stay in the EU?"

Not under the present EU treaties, but then who cares about treaties when they get in the way?

I repeat what I said the other day:

The EU runs according to the maxim stated by the Italian politician Giolitti:

"Per i nemici le leggi si applicano, per gli amici si interpretano."

“Laws are applied to enemies, but only interpreted as regards friends.”

As Germany doesn't want Cyprus or any other country to escape from the eurozone the threat is that law would be applied.