If Greece decided to leave the euro, it would also have to quit the European Union, according to the terms of the EU's treaties, the European Commission said on Thursday.

The treaties indeed confirm what we have been saying here: the treaty doesn't foresee an exit from the euro zone without exiting the EU, so indeed that is the current situation, European Commission spokeswoman Karolina Kottova said.

The comment was in response to a question about the provisions the EU treaties make for a country to leave the euro, but the spokeswoman did not refer to a particular member state.

Greece's government is on the brink of collapse after Prime Minister George Papandreou shocked global policymakers and financial markets on Monday by proposing a national referendum on the country's bailout terms. Euro zone leaders made plain this would effectively be a referendum on the country's membership of the euro bloc.

Papandreou chaired an emergency cabinet meeting in Athens on Thursday, with his finance minister in revolt against the plebiscite idea after the ultimatum from the leaders of France and Germany.

French President Nicolas Sarkozy and German Chancellor Angela Merkel told Papandreou at a meeting in Cannes on Wednesday that Athens would not receive another cent in aid until it votes to meet its commitments to the euro zone. Greece was due a vital 8 billion euros installment this month.

The Commission said the place of Greece was within the euro zone and there were instruments in place to ensure that.

We see Greece within the euro and the necessary instruments are in place and an agreement has been reached, Kottova told the Commission's daily news briefing. So, as far as we are concerned, this is the only option that is on the table.

The EU treaty does not specifically foresee the possibility of a country leaving the single currency area, which now comprises 17 countries, although it does provide for the possibility of a country leaving the 27-nation European Union.

In article 50, the treaty says: Any member state may decide to withdraw from the union in accordance with its own constitutional requirements.

To leave the EU, the country would have to notify EU leaders that it wants to do so and negotiate with them the terms of its exit, the treaty says. EU laws would stop applying to the exiting country, even without negotiated leaving terms, after two years from notifying the leaders.

If it wanted to become a member of the EU again, the country would have to repeat the normal application procedure.

In a paper on Withdrawal and expulsion from the EU and EMU - Some reflections from December 2009, the European Central Bank legal counsel, Phoebus Athanassiou, noted that in case of leaving the EU, a country could not keep the euro, but would have to adopt its own currency.


While Greece could unilaterally decide to keep using the euro without being part of the European System of Central Banks,

like San Marino, Monaco or the Vatican, it would still lack the key advantage of being able to devalue its currency to boost its competitiveness and help growth.

Greece would also have to withdraw from the ECB its contribution to the bank's capital and its foreign reserve assets, the ECB paper noted, as well as share the ECB's losses, which the bank would suffer on the Greek bonds it holds.

Former ECB President Jean-Claude Trichet, asked in January 2010 about the paper, noted it was written by an individual whose views did not necessarily reflect those of the ECB and that he disagreed with some of its analysis.

Economists believe a euro zone exit does not make economic sense, as the costs would far outweigh the benefit of devaluation and own interest rate setting.

Leaving the euro zone would, among other things, entail defaulting on national debt, which would be still denominated in euros and have to be paid back with the sharply depreciated new currency, probably the drachma, which Greece dropped in 2001.

The Greek banking system would probably collapse as people tried to withdraw their euro deposits ahead of time, very likely triggering civil disorder.

Leaving the euro zone and therefore the EU would most likely also trigger tariffs on all exports to the EU and remove most of the trade benefit from the currency devaluation.

Greece would also most likely lose EU structural funds paid by the 27-nation bloc to countries where the average wealth is lower than the EU average.

Greece has received just 4.9 billion euros of 20.2 billion euros of EU development funds earmarked for it from 2007 to 2013 and it would not get any money in the next seven year budget.

(Reporting By Jan Strupczewski; Editing by Ruth Pitchford)