The question of how currency unions break down has come to the forefront of the European debt crisis. The particular concern is Greece ceding from the Eurozone.
I have been following the Greek crisis and have posted a significant number of the news articles regarding Greece to my Twitter feed (which is linked on this page).
Philip Wood, head of the Global Law Intelligence Unit at Allen & Overy, has sent me a paper with their analysis of this question, entitled “The euro and currency unions” dated October 2011.
If you are curious about how Greece might leave the Eurozone, or what may happen, this paper is a superb analysis. Here are a few choice quotes:
The withdrawal of a member state from the euro or the collapse of the euro itself, if it ever happened, would be a major event which one would expect to be dealt with at the political rather than the legal level. Nevertheless, we summarise the technical legal position, however theoretical, because strict legal rights, even if never exercised, are an important factor in determining bargaining positions.
Cessation from the Eurozone treaties was left intentionally left vague when the treaties were negotiated, so there is no way for Greece to legally leave (though the paper notes that they may do so after two years or alternatively with a 72% vote of the European Council under article 50 of the Treaty of Lisbon):
The European treaties are vague on the subject of member states leaving the euro. When the treaties were negotiated, it was felt that explicit rights of withdrawal might damage confidence in the new currency. So there is a legal vacuum which has to be filled by implications and inferences, thereby leaving room for differences of opinion.
There are no explicit legal rights to expel a state from the EU or the eurozone.
That being said, a treaty is only as enforceable as the consequences of breach:
A treaty is just a contract and contracts do get broken. The question therefore is what the legal position might be if a eurozone member unilaterally decided to withdraw from the eurozone in violation of the treaty and to create some new currency at a specified rate of conversion.
The reality is that one can forget about legal rights against a member state which unilaterally withdraws in breach of the Eu treaty.
A country such as Greece can breach its obligations under the treaties establishing a euro currency zone and issue its own currency. Although the legal consequences are limited, the political and financial consequences would be dramatic.