Guest post from friend of Alhambra, Brian Cronin:

“The union of these States is perpetual. No state, upon its own mere motion, can get out of the union. The central idea of secession is the essence of anarchy.” So said Abraham Lincoln in March of 1861. On the other hand: “to exercise self determination through secession is to blow apart the union, to pit people against one another and to sow discord, bloodshed and death”. That was Mikhail Gorbachev in March of 1990. Same idea but looked at from different vantage points and very different political goals.

Withdrawing from a union has proven difficult in the past. The U.S. Constitution of 1787 did not envisage a separation and the southern states’ perceived right to secede led eventually to the the American Civil War, over 600,000 deaths and ruin for the four year Confederacy.

There have been attempts to unify Europe in the past, none of which endured: the Pax Romana, the empires of Charlemagne, Napoleon and Hitler. They were all attempted “vi et armis”, by force of arms, and the subjugated nations could not wait to break free and throw off the tyrant’s yoke. It is a curious fact that the countries of the old Soviet Union yearned to get rid of the hated oppressor and exist on their own, while the old democracies of the west could not wait to band together in an economic and political union to avoid future conflicts. How that was to be done was the key but all agreed that the rules put in place were to be comprehensive and durable.

The 1957 Treaty of Rome laid the groundwork and it eventually led to the more detailed Maastricht Treaty of 1992. But in the euphoria to join together voluntarily, no thought was given to what a member would do if it actually ever wanted to leave the union. There was no Plan B, no escape clause, because it was unthinkable that anyone would want to leave and no scenario was envisioned where that would even be possible or probable.

Not every country that is a member of the EU accepts the euro and not every country that accepts the euro is a member of the EU. Those who originally opted out of the euro but remained within the EU include Great Britain, which refused to give up the pound, and Sweden. Norway, alone of the Scandinavian nations, joined neither but is closely associated with the EU through the European Economic Area. Switzerland, because of its professed neutrality, joined neither the EU nor the euro and is doing just fine.

Maastricht set the parameters for the European Union and the eventual unified currency, the euro. Because of the strictures of the Growth and Stability Pact – the 3% budget deficit to GDP ratio and 60% national debt to GDP ratio – many nations have found it impossible to adhere to the rules and punishment has been lax. The opportunity for lesser lights to borrow at undeserved low rates brought the chickens home to roost, to use that well worn phrase. Once in the euro and monetary policy is controlled by a supra-national body like the European Central Bank, you lose the ability to devalue your currency to get yourself out of trouble and the conditions levied upon you to borrow money to help are so onerous that the cure is worse than the disease, what can you do?

Well, the unthinkable has finally happened and central bankers are now talking openly about an exit from the euro as a solution to Greece’s problems. Could it leave the euro and re-introduce the drachma and still exist inside the European Union? Eventually maybe but not initially. From a purely practical point of view, new currency notes would have to be printed and new coins minted and it could take weeks if not months.

The EU’s founding fathers did nothing initially to address the possibility of voluntary exit, let alone a putting in a provision to expel a country which would involve treaty amendments. That could really be very messy. It would also be counter the spirit of unity and the driving force of union in the first place. So that is very unlikely to happen.

But there are movements in various member countries who would like to see their nations exit from the euro but as of this date, none of them has gained sufficient ground to be a threat. Voluntary exit only became a consideration 15 years after the intial 1992 treaty with the Lisbon Treaty of 2007 which came into force in December 2009. Section 50 of that pact states that if a country wanted to leave the euro, it would have to leave the EU and that could be done by simple notification to the European Council “in accordance with its own constitutional requirements”, the terms to be worked out later. Those terms could be quite complicated but the agreement would eventually have to be ratified by the European Parliament. Down the road, an economic association for Greece with the EU might again be possible and even desirable.

All the political parties in Greece, apart from the extreme left and extreme right, have said they want to remain in the EU and maintain the euro, though the austerity conditions mandated for awarding future funds to bail them out are the sticking point. They have to form a government first and that will probably mean new elections since they are at an impasse. Without a functioning government, the “troika” bankers, the EU, the ECB and the IMF, are unlikely to want to continue to channel funds to Greece and money will quickly dry up. So, if Greece did depart, the drachma would fall drastically and it would have a deleterious effect on its own GDP. Unemployment would climb, consumption would plummet, inflation would rise and savings would be wiped out. Other countries, like Argentina 10 years ago, have gone through such hardships and emerged the wiser at the end of it. The question is whether Greeks, looking into the abyss, want to experience that kind of pain after so much already.

If they do decide to break free, then it would set an uncomfortable precedent for the EU with other nations in difficulty. Greece may not exit for a while yet, but if they go, then others could follow suit and at a faster pace. The printing presses of those companies that produce banknotes for the world would have to start working overtime but at least it might help alleviate some unemployment.