Flying too close to the sun: how an EMU expulsion provision will prevent the European sovereign debt crisis from becoming a modern day Greek tragedy.

• Author: Gutierrez, Melissa
• Position: European monetary union

1. INTRODUCTION II. THE HISTORY OF THE EUROZONE III. THE DEBT CRISIS A. The Stability and Growth Pact B. The Advantages of Eurozone Membership Cause Imprudent Fiscal Behavior C. The Contagion Effect IV. SOLUTIONS TO THE EU DEBT CRISIS A. Why an Expulsion Provision is Necessary B. The Removal Process V. CONCLUSION I. INTRODUCTION

   There is a Greek myth that tells the tale of Icarus and his father, who flew out of their prison in Crete on wings made of feathers and wax. (1) The story goes that before taking off, Icarus's father warned him not to fly too close to either the sun or the sea, but to keep on a straight path. (2) Icarus, giddy with excitement from the sensation of flying, ignored his father's instructions and flew towards the sun. (3) Eventually, after Icarus's wings began to melt and he was no longer able to fly, he fell into the sea and drowned. (4)

   Icarus's tale is meant to serve as an example of what becomes of those who succumb to hubris, the fault of pride and overconfidence. (5) And though the myth is ancient, its warnings are still relevant today. Modern Europe, giddy with the influx of economic advantages attained after the creation of its monetary union, could not control its fiscal policy, and flew too close to the proverbial sun. (6) Now, as the wings of economic prosperity and stability are melting away, it must find some way to keep from drowning. (7)

   Europe finds itself struggling to maintain its large economy while many of its founding members, namely Greece, Spain, Portugal, and Ireland, are bogged down with massive amounts of debt. (8) The dream of a common currency began when European leaders attempted to reconstruct the pieces of their war-torn continent and ensure, through economic unity, that such a catastrophe could never happen again. (9) Although this plan has successfully prevented any further military conflicts, it has created economic conflict: all countries in the Eurozone share a common currency and therefore are all economically tied to one another. The collapse of one could pose a disaster for all the others. (10) Greece finds itself facing default yet again, and its numerous bailouts have proven unsuccessful. (11) Other EU Member States, notably Germany and France, have been forced to pour billions of euro into failing Greece, causing their own credit ratings to fall. (12) Despite the bailout, Greece still finds itself unable to meet its upcoming debt obligations. (13) Faced with political backlash at home, some European leaders are now starting to ask whether Greece should be removed from the Eurozone. (14) Currently, the EU framework does not provide for a means of expelling a country from the Eurozone without a concurrent exit from the entire Union. (15) Therefore, an amendment to the Treaty on European Union (TEU) is necessary before any country can be expelled from the monetary union. (16)

   This comment argues that an expulsion provision is necessary because of the nature of the national governments, which habitually overspend and accumulate large debt bills. (17) An expulsion provision may be the only way to prevent the debt contagion from spreading across Europe and potentially damaging the viability of the European Monetary Union (EMU) project. (18) Additionally, the provision is still necessary even if the amendment process is too long to solve the Greek crisis. The European Union is continually expanding its borders to include developing economies, and is no longer a conglomeration of similarly built, strong, Western-European nations. (19) The Union now represents the third-largest people group in the world, with an assortment of differing languages, cultures, political views, and religions. (20) This diversity brings additional challenges, especially in the area of fiscal planning. (21) A one-size-fits-all approach to monetary policy is becoming harder to attain, and as a result, there is a higher incidence of violation of the debt thresholds set forth in the treaties. (22) Therefore, it is necessary to include an expulsion provision in the TEU. The failure to do so originally is attributable to the hubris of Europe, which believed that it could create a monetary union that would be all encompassing and infallible. (23) But just as Icarus's hubris eventually caused his death, so will the hubris of the European Union cause the collapse of the EMU if an expulsion provision is not instituted.

   This Comment describes the legal procedures associated with creating and enacting an expulsion provision and the potential difficulties that may arise in doing so. Part II details the history of the Eurozone. Part III discusses the beginnings of the debt crisis. Part IV discusses the motivations for enacting an expulsion provision, legal procedures involved in amending the founding treaties, and other considerations relevant to EMU expulsion. Part V concludes this Comment.

2. THE HISTORY OF THE EUROZONE

   The Euro currency was first established in 1999 and began circulating in 2002. (24) The history of the European economic and monetary union, however, goes back much further. The idea of a common European currency began with a speech before the League of Nations in 1929, given by German politician Gustav Stresemann. (25) In his speech, Stresemann asked, "[w]here are the European currency and the European stamp that we need?" (26) Winston Churchill expressed a similar sentiment in 1946, proclaiming, "[w]e must build a kind of United States of Europe." (27)

   During the 1930s, Europe pursued protectionist trade policies that were effective in the short-run but lead to long-term inflation, unemployment, and slow growth. (28) To ameliorate this problem, Europe spent a majority of the twentieth century attempting to design a free economic system that would create a favorable international monetary environment. (29) In 1957, European nations signed the Treaty of Rome, which established the European Economic Community. (30) This treaty represented an effort to unite Europe and eliminate the barriers between countries, making future wars between them impossible. (31) The objectives of the Treaty were to create a common market and to increase the convergence of European economic policies. (32) To accomplish this, members were required to abolish restrictions on transfers of capital and labor (33) and coordinate their foreign exchange policies. (34) Members also agreed to act as one in matters concerning the interest of the common market. (35) The Treaty of Rome represented an important step forward in European politics and laid the foundation for what would become the European Union. (36)

   Efforts to renew the move to a monetary union started in March 1979 at the insistence of France and Germany. (37) Further progress was made in June 1988 when the Hanover European Council's commission proposed the introduction of an economic and monetary union in three stages. (38) They also advanced the founding of the European Central Bank (ECB), which would be an independent institution responsible for the economic union's monetary policy. (39) The Heads of State and Government at the Maastricht European Council signed the Treaty on the European Union (TEU) on February 7, 1992. (40)

   The first stage of implementing the economic and monetary union began on July 1, 1990. (41) Its goal was to assess the progress of full economic and monetary convergence. (42) Stage two began in 1994 and required members to make significant progress towards economic and policy convergence. (43) Rules on public financing were adopted and monitored by the Commission. (44) Stage two also established the European Monetary Institute, which was in charge of coordinating monetary policy among members and carrying out preparations for the adoption of a single currency. (45) Finally, the national central banks became independent. (46)

   The third stage of introducing the monetary union was to begin only upon the durable convergence of all members. (47) In this stage, budgetary rules became binding, with penalties imposed for non-compliance. (48) The ECB was created and entrusted with introducing a single monetary policy. (49) The euro was introduced in 1999 and went into circulation in 2002. (50)

3. THE DEBT CRISIS

   The cause of the debt crisis can be traced to the failure of Member States to abide by the Stability and Growth Pact (SGP or "the Pact"), a binding fiscal regulation that instituted monetary restrictions on all members of the Eurozone. (51) Additionally, entrance into the Eurozone skewed some Member States' incentives to maintain healthy fiscal policies and gave them access to large amounts of debt at cheaper rates. (52) Greece was the first to experience severe financial trouble, and now the debt contagion is spreading across the increasingly fragile European marketplace. (53)

   1. The Stability and Growth Pact

      The TEU was a remarkable example of intergovernmental cooperation; (54) it did not however, address all issues concerning a common currency to the satisfaction of all its members. (55) Germany, in particular, was extremely concerned that by adopting the euro, it would have to sacrifice its very strong currency, the deutschmark. (56) The Germans were also weary of casting their monetary lot with countries that had traditionally weak economies and that lacked a "stability culture." (57) They feared that after foreign exchange rates were gone, the danger of currency devaluation due to fiscal irresponsibility would also be eliminated, thereby removing the incentive for a member to act in a fiscally wise manner. (58) The TEU did not adequately deal with these issues due to disagreement about the proper method of effectively regulating and maintaining the common currency. (59) In response to these concerns, the founders of the EU adopted the SGP in 1997. (60) This Pact represents one of the "pillars of the EMU" and was meant to act as an instrument for limiting members' debt by regulating budgetary procedures...