Prepare for a European currency
28 November 1995
European monetary union is closer than most lawyers think and if they don't consider its implications soon they may miss the boat, warns Geoffrey Yeowart
EU: single currency intended to boost harmony in union recent reports in the press may have lulled many lawyers into believing they can ignore the issue of a European single currency.
National currencies are not expected to be replaced by a single currency until 2002 and it is not clear whether the UK will participate or opt out.
The debate has concentrated to date on the economic and political issues surrounding the proposal, but the implications of the single currency could start to be felt in the legal field much sooner.
Companies and their advisers should start to consider the legal issue when entering into any commitments extending beyond 1 January 1999. It would be dangerous and complacent to do otherwise.
The UK will still be affected even if it does not become part of the single currency. In addition, if it opts out, the country may still join later.
The plans for introducing the single currency, unveiled on 14 November by the European Monetary Institute, the forerunner of the European Central Bank, are based on a three-phase approach. This is expected to begin in early 1998 and end in mid-2002.
In the first phase, governments will decide on which member states will participate and when the next stage of economic and monetary union (EMU) will commence. The European System of Central Banks and the European Central Bank will be established and the necessary legislative framework created to introduce the single currency.
The second phase is likely to start on 1 January 1999, when the exchange rates of participating national currencies will be replaced by irrevocably fixed conversion rates. Financial markets will be free to operate in the single currency for non-cash transactions as well as in national currencies. These currencies will co-exist for up to three years.
The final phase is expected to begin on 1 January 2002, when single currency notes and coins come into circulation. Existing national notes and coins will be treated as different denominations of the single currency and progressively withdrawn. They will cease to be legal tender in mid-2002, when the changeover will be completed. A decision on these plans is due to be taken at the Madrid Summit in December 1995.
The European Commission has invited comments on its Green Paper concerning the introduction of the single currency, which was released on 31 May, to be submitted by the end of this year. This is an ambitious and complex project on an unprecedented scale. To miss the opportunity to comment would be foolish.
Unless the legal issues are identified and addressed now, it may be too late to influence the development of the legislative framework.
The Banking Law Sub-Committee of the City of London Law Society (CLLS), in conjunction with the Financial Law Panel, have played a leading role in looking at the legal issues and have already submitted papers on the subject to the commission.
Both papers emphasised the importance of ensuring continuity of contracts on the changeover, while allowing contracting parties freedom to agree whatever approach they think best for dealing with the single currency.
For instance, parties may wish to include the right to prepay or redeem outstanding money obligations or switch to a different currency, such as US dollars, or to review pricing and indexation provisions.
Borrowers will need to think very carefully before entering into longer term fixed-rate commitments such as loans or mortgages.
If the EMU convergence process results in interest rates for the single currency being lower than those for existing national currencies, borrowers could find themselves locked into higher rates, unless they have the right to prepay.
Contracting parties will also need to consider the risk that the conversion rate of a participating currency ceases to be irrevocably fixed because of economic instability during the second phase.
They may wish to provide in their contracts (if appropriate) for what should happen if this were to occur.
The events of 'White Wednesday', when the UK was forced out of the exchange rate mechanism, are still a painful reminder of the potential risk.
The CLLS has suggested enacting legislation throughout the European Union after full consultation to ensure legal certainty and consistency on continuity of contracts. It has also suggested the legal position in jurisdictions outside the EU on questions such as recognition of the single currency and continuity of contracts is investigated.
Many financial contracts denominated in existing national currencies are, for example, governed by New York law. Before selecting the law of a non-EU state to govern a contract, the parties will need to check whether there is any question of that contract being treated as frustrated or revocable when the single currency is introduced.
The position of the existing ECU - a basket of twelve currencies - also needs to be clarified. The Green Paper states the ECU will be converted into the single currency on a 1:1 basis.
However, if only those member states with the strongest economies qualify to join the single currency under the convergence criteria, the single currency will have a different economic value. This potential mismatch is not addressed in the Green Paper.
These and other points which arise are listed in the box accompanying this article. But the list is not exhaustive. Each issue should be considered on the alternative basis of the UK either opting out of the single currency system or joining it.
Unless member states take the radical step of undoing the provisions lying at the heart of the Maastricht Treaty, the single currency will be a topical subject for lawyers into the next millennium.
Lawyers disregard the consequences at their peril.
Some points to consider:
Effect on continuity of contracts and financial instruments denominated in existing national currencies;
Recognition of the single currency outside the European Union and Conflicts of Law;
Effect on interest payment obligations, particularly where the interest rate is fixed;
Effect on foreign exchange transactions;
Implications for derivatives;
Need to review rate fixing, indexation, increased cost, prepayment, impossibility, force majeure and other affected contract terms;
Effect on ECU denominated money obligations;
Dual accounting and dual pricing during the second phase;
Effect on company share capital and company accounts;
Effect of monetary policy implemented by European Central Bank;
Effect of rounding rules.
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