This paper examines the issues of secession and expulsion from the European Union (EU) and Economic and Monetary Union (EMU). It concludes that negotiated withdrawal from the EU would not be legally impossible even prior to the ratification of the Lisbon Treaty . . .
That, if you can believe it, is from a December 2009 ECB legal working paper.
In its own words, the paper deals with something that, until recently, would have been considered “next to absurd” to even talk about; the possibility of countries seceding from the EU or EMU.
But with the peripherals of the EU (Portugal, Ireland, Italy, Greece and Spain) suffering more than their `core’ union co-members (Germany, France, etc.) in the current recession, secessionist questions are now de rigeur.
But could things ever really get so bad that one of these so-called EU peripherals would voluntarily leave the eurozone, or the the European Union?
The analysts at Deutsche Bank, for one, are discussing the possibility in their latest `Focus Europe’ note. And while they think the costs of a secessionist move would ultimately outweigh any benefits, they do think things will get increasingly hairy for the peripherals in the short-term, as the ECB withdraws its unprecedented liquidity ops:
. . . it is likely that any normalization in monetary policy will disproportionately weigh on peripherals, since a rate hike would affect a much larger outstanding amount of debt. More than hampering the recovery, a tighter monetary policy could even trigger a double-dip in some of the most fragile countries . . . We expect the central bank to start normalizing the monetary stance in September 2010, bringing back the refi to 2.0% by December 2010. 12 month Euribor will probably start to rise before that, since the ECB will not renew in 2010 its special auctions for this maturity. Every 100 bps in interest rate hike would cost roughly 0.6% of GDP in Spain and Ireland through the household income channel alone, while the impact in core Euroland countries would be smaller and very slow to materialize.
Dissatisfaction with the single monetary policy could start to grow in the peripherals by the end of next year, making the prospect of exiting monetary more tempting. The “inadequate monetary policy” argument would then compound the usual “exchange rate adjustment” motive and make the Eurosceptics more vocal, even if we think that any relief brought about by a breakaway from EMU would be largely illusory.
You can read more of Deutsche Bank’s EU peripherals thesis here, in the Long Room.
In the meantime we would note that ECB president Jean Claude Trichet will be speaking on Thursday, in the first of the central bank’s 2010 press conferences.
Expect at least one question on EU/EMU secession, and even more on Greece.
Related links:
Frail recovery and low inflation will limit ECB’s options – FT
ECB liquidity cliff risk – FT Alphaville
The theory strikes back – A Fistful of Euros