With the imminent opening of the European Central Bank on 1 January 1999 and the introduction of a single currency throughout the European Union, it is important for all businesses to be aware of the implications of European Monetary Union (EMU). We consider here the radical currency changes which are already affecting the EU.
1. Timetable For Implementation Of EMU
Preparations have been underway for Economic and Monetary Union, including the introduction of a single currency (the Euro, made up of 100 cent) throughout the EU, for some time, and have now begun for the third and final stage of monetary union.
Most members of the European Union have opted to participate in this final stage. The current Participating Member States are France, Germany, The Netherlands, Belgium, Eire, Luxembourg, Austria, Italy, Spain, Portugal and Finland. The current Non-Participating Member States are the UK, Denmark, Sweden and Greece.
The European Central Bank has now been inaugurated and will officially open for business on 1 January 1999.
The third stage of monetary union consists of two phases as follows:-
Phase One: The Transitional Period (1 Jan 1999 – 31 Dec 2001)
- the euro will become the only lawful currency in the Participating Member States;
- the notes and coins of each Participating Member State’s national currency will remain in use during the Transitional Period but expressed as units of the euro. Euro bank notes and coins will not be used during this phase;
- conversion rates for the Participating Member States will be irrevocably fixed on 1 January 1999.
Phase Two: (1 Jan 2002 onwards)
In Participating Member States only:-
- euro notes and coins will be issued by the European Central Bank for public use;
- national currencies will be withdrawn no later than 1 July 2002.
2. Effect On Sterling
As the UK will not be joining in the final stage of monetary union, and is not therefore a participating country, Sterling will remain unaffected. The Chancellor has indicated that the UK will only join after a positive result is gained in a referendum, and that appropriate enabling legislation will be introduced at that time.
UK businesses will however encounter euros from 1 January 1999 onwards whenever they trade with a participating country. However, the UK will treat the euro like any other foreign currency until it, too, enters the single currency in so far as payment obligations are affected.
3. The Legal Framework
Two Council Regulations (the Continuity Regulation and the Changeover Regulation) set out the legislative framework for the introduction of the euro. They establish the following rules.
3.1 Contract Continuity
Some fears had been expressed that contracts already in existence at 1 January 1999 would automatically terminate on the introduction of the euro and the abolition of the national currency, or that parties anxious to withdraw from a contract could use it as an excuse to terminate. This would be on the basis that the contract contained terms denominated in or by reference to a national currency that were literally incapable of performance by reason of that currency’s abolition.
EU member states
The Continuity Regulation states that the introduction of the euro will not alter the terms of any legal instrument, nor will performance of the legal instrument be discharged or excused by introduction of the euro. This is subject to anything to the contrary which the parties may have agreed in the legal instrument. This is the principle of continuity of contract.
Therefore any legal instrument which is governed by the law of an EU member state will be protected by the above Continuity Regulation.
Non-EU member states
Where a contract is governed by the law of a non-EU member state, it will be necessary to check the local governing law to see if it respects the principle of continuity of contract. In countries which follow the English law of money, the law of the country of the payment obligation determines what constitutes the currency and that obligation. Legal systems that follow this principle are likely to recognise the substitution of national currencies by the euro. New York, Illinois and California have already enacted or are proposing to enact legislation recognising the euro, in order to ensure the continuity of any contracts governed by the law of any of those states. If there is any doubt, however, the other party should be asked to agree to the insertion of a continuity clause.
Continuity clauses state typically that, unless the parties otherwise expressly agree, the occurrence or non-occurrence of an event associated with EMU and/or the introduction of the euro will not of itself discharge a contract, or entitle one party unilaterally to vary or terminate it.
3.2 Payment obligations
The following arrangements will apply in the Participating Member States.
During the Transitional Period (1 Jan 1999 – 31 Dec 2001):-
The Changeover Regulation sets out how payment obligations are to be performed during the Transitional Period as a matter of the law of Participating Member States. Broadly, and subject to agreement to the contrary:-
- payments are to be made in the currency unit stipulated in the contract, be it a national currency or the euro;
- exceptionally, transfers may be made in the national currency or the euro at the election of the debtor in certain limited circumstances.
After the Transitional Period (1 Jan 2002 onwards):-
Euro notes and coins will be introduced, and national currencies will be withdrawn. Therefore:-
- cash payments may be made in both national currency units and the euro until the national currency ceases to be legal tender (which will take place by 1 July 2002 at the latest) and thereafter the euro will be the only legal tender;
- non-cash payments must be made in euro units but only from 1 January 2002.
3.3 Conversion Rules
The salient points from the rules governing conversion rates are:-
- the conversion rate of each national currency unit into the euro will have six significant figures (not necessarily decimal places);
- after conversion into euro units, any amount being paid in euros should be rounded to the nearest cent;
- where there is conversion from one national currency unit to another national currency unit, there must be conversion first into the euro and then into the second national currency unit, in order to achieve the correct mathematical result. This is known as ‘triangulation’ and will only apply to conversions as between participating currencies.
3.4 Interest – basis of calculation
The price source which is used as benchmark for fixing interest rates under the contract will need to be checked carefully.
It is most unlikely that a contract would be frustrated by loss of its price source, but it could lead to disputes between the parties as to how much is payable.
Several member states are expected to introduce domestic legislation to establish new price sources to be used under the euro. France and Germany are expected to introduce legislation which gives their governments power to substitute an interest rate which corresponds most closely to that which is being replaced. It is expected that both states will adopt the euro Interbank Offered Rate (EURIBOR) which will be a pan-European rate calculated from a panel of 58 EU banks and six non-EU banks.
The UK will probably avoid government intervention and will instead take the approach whereby practitioners are left free to settle market practice.