Page last updated at 16:39 GMT, Wednesday, 3 February 2010

Could Greece be expelled from the eurozone?

By Andrew Walker
Economics correspondent, BBC World Service

People walking past a closed shop in Athens
Confidence in Greek debt reached a nadir last year

The European Commission has approved Greek government plans for getting on top of its budget deficit. A huge relief in Athens, no doubt.

But the worries won't be dispelled just yet.

The pressing concern is will Greece default on its debts? And if that seems likely will the rest of Europe, or the IMF come to the rescue?

But beyond that there are some even bigger questions about the Euro.

In particular, will Greece quit the euro or even be expelled from the eurozone? It is certainly not an imminent prospect.

But the question is being asked and was recently put to the European Central Bank President Jean-Claude Trichet. His reply? "I don't comment on absurd speculation," he said.

But it seems one of Mr Trichet's in-house lawyers has been engaging in speculation along precisely those lines, whether it's absurd or not.

'Next to absurd'

In a working paper published on the European Central Bank's website, Phoebus Athanassiou writes about the possibility of secession from the European Union and from Economic and Monetary Union - the process which created the euro.

President of the European Central Bank Jean Claude Trichet
Jean-Claude Trichet doesn't comment on 'absurd speculation' over Greece

Such talk, he acknowledges, would until recently have been "next to absurd". But not now.

"Recent developments have, perhaps, increased the risk of secession, however modestly, as well as the urgency of addressing it as a possible scenario," he says.

The paper doesn't mention Greece by name, but those 'recent developments' must be the fiscal crisis that has engulfed Greece and to some extent other EU countries as well.

Why might one country want to quit - or others to expel? A messy default would be disruptive for other euro countries.

Those also considered by the financial markets to be under similar strain might well find it more difficult and expensive to borrow.

Several countries are potential candidates now for such financial contagion - including Spain, Ireland and Portugal.

And if the problems spread far enough, even those at the core, such as Germany and France, could find European export markets adversely affected.

Expulsion

The appeal of a voluntary departure is that a country would then be free to devalue its currency to improve competitiveness and to set its own interest rates.

That's not to say either expulsion or withdrawal is an easy way out.

A Greek man sells tissues outside closed store
Greece has been trying to reassure markets about its economy

Mr Athanassiou concludes that expulsion is legally almost impossible. The nearest thing possible, he argues, is creating some new community minus the state others want to exclude.

A voluntary departure, however, especially if agreed with the other members, is possible. But leaving the euro institutions would only be possible if the country left the European Union altogether.

Another possible scenario he mentions is that a country that has left the EU might still be able to use the euro, as a few non-EU countries already do.

These are the views of a lawyer and, of course, political considerations would intervene. Nor is this an immediate issue for today.

The focus now in the financial markets, and throughout the EU, is on whether Greece can sort its problems out and, if not, whether there will be some sort of international rescue.

In Athens and in Brussels the hope is that this talk about departure will remain speculation.



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