Foreign Currency: Claims, Judgments and Damages

Michael Howard; John Knott and John Kimbell

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CHAPTER 4 The euro zone

The importance of the euro

4.1 The economy of the European Union (‘EU’) is larger than that of any individual country in the world, and trade within the EU amounts to approximately half of the United Kingdom’s overall imports and exports.2 Accordingly, it is desirable in an examination of the way that foreign currencies are treated under English law to pay particular attention to the euro, which has been adopted by all members of the EU apart from the United Kingdom and Denmark. As will be seen, the euro is also, for some countries that are not members of the EU, either their official or de facto currency.3

The euro: its introduction and its performance

4.2 In line with the Treaty on European Union signed at Maastricht on 7 February 1992, and agreement reached between European heads of state in May 1998, the European Currency Unit (‘ECU’)4 was replaced by the euro5 on

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1 January 1999.6 At first, the euro was just an electronic currency, but bank notes and coins were subsequently issued. The euro is now the official currency of those members of the EU who have joined the euro zone, and European law has thus become those states’ lex monetae.7 For the initial participating countries, references after 1 January 2001 to their national currencies have been deemed to be references to the euro at fixed conversion rates.8 For the first group of 11 member states which adopted the euro, new bank notes and coins were issued on 1 January 2002, after which those states’ individual currencies were phased out over the following three months. By January 2015, a further eight countries had joined.9 The European Central Bank (‘ECB’) was given the exclusive right to issue, and to authorise eurosystem national central banks (‘NCBs’) to issue, euro bank notes which would become the sole legal tender bank notes within the eurosystem community.10

Effect of the introduction of the euro on claims

4.3 One consequence of the introduction of the euro is that an investigation of losses in litigation involving pan-European companies will often be more

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straightforward than it would have been previously. This is because there will often be fewer factors to consider than where there are potentially multiple currencies at stake. Where losses have been incurred, and where any consequent currency transactions have been undertaken, before a relevant country adopted the euro, then to the extent that such losses and currency transactions would, but for such adoption, have fallen to be measured in that country’s pre-euro currency, they will be deemed to be references to the euro at whatever was the fixed conversion rate applying to the introduction of the euro within that country.11

Possible contraction of the euro zone

4.4 By the time of writing (2015) some countries tied to the euro had experienced severe financial difficulties - including Greece, Spain, Italy, Portugal, Ireland and Cyprus. Whether membership of the euro zone stays as at present is therefore uncertain. The situation was serious enough to cause several countries - Poland, Bulgaria and Romania - to have second thoughts about joining the euro zone.12 4.5 If a member state does abandon the euro and leave the EU, there are likely to be serious consequences when resolving financial liabilities relating to that state, both within the state and externally. This will be so most often (i) where any euro liabilities are governed by that state’s laws (and particularly if also by that state’s jurisdiction); or (ii) where a liability in euros is defined in terms as being in that state’s currency (when the laws of that state would apply as the lex monetae); or (iii) where payment is to be made within that state. Prudent businesses likely to be affected by a contraction of the euro zone will already have taken advice and introduced measures designed to minimise their exposure.13

Effect of a contraction of the euro zone

4.6 As matters at present stand, in order to leave the euro zone a member state would also have to leave the EU itself.14 If a member state were to leave the EU

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and abandon use of the euro, it would almost certainty introduce its own alternative currency.15 For example, if this were to happen to the mythical euro zone country Ruritania, ordinary existing financial obligations within Ruritania (or other obligations governed by Ruritanian law and jurisdiction), and previously expressed in euros would - in the absence of contractual clauses providing otherwise, and held to be effective - need to be redenominated and expressed in the replacement currency, which would perhaps be named the new thaler. It is to be expected that if Ruritania were to leave the euro zone, particularly if not in a manner provided for in the Maastricht Treaty as amended, this would have an adverse effect upon its relationships with the remaining member states. This in turn, coupled with Ruritania’s deteriorated financial standing, would be likely to encourage many foreign businesses to seek to revise or terminate contracts with Ruritanian companies. 4.7 For ordinary contractual obligations entirely within Ruritania and presently expressed in euros, such as domestic mortgages, there would need to be a fixed rate for the conversion of liabilities from euros into new thalers, which would be independent of the future performance of the new thaler in the international money markets. For euro obligations existing at the time of changeover, governed by Ruritanian law and jurisdiction, and which involve one external party and one party within Ruritania (the Ruritanian party being subject to any exchange control and other regulatory laws passed in conjunction with the introduction of the new currency), a debtor outside Ruritania would benefit from any future fall in the external value of the new thaler compared with his own currency. This would be so regardless of whether such a debtor traded in euros or in some other currency, because in either case he would be able to buy new thalers at a more favourable rate than the official rate at which his debt would be redenominated under Ruritanian law. The converse would also be true: in the perhaps unlikely event of the new thaler appreciating against the euro, an external debtor would be faced with an increasing liability. However, a Ruritanian subject holding euros within Ruritania at the time of a changeover would not benefit from any subsequent devaluation of the replacement currency, because his funds would have been subject to redenomination at a fixed rate; and various currency controls and restrictions would have been imposed in order to enforce this.

Further adverse consequences

4.8 A likely development within a country if it were to abandon the euro would be severe inflation and the creation of a black market for goods and services, leading to a dramatic fall in the value of its replacement currency, stemming from public distrust.16

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Application of English law to post-euro claims

4.9 There are many uncertainties in connection with a member state leaving the EU and abandoning the euro. Although it can be expected that, where disputes fall to be decided by the courts of a leaving state, those courts will give effect to that state’s monetary laws regarding redenomination, a different outcome might be achieved in the English courts.17 There, factors of varying weight to be taken into account would include the intentions of parties to a contract; whether ‘euro’ is defined (if at all) as the currency of the euro zone members in general or as the currency of the departing state in particular; whether the place of payment is within the departing state; whether the contract has been frustrated by reason of the state’s departure from the euro zone;18 and, in general, whether there are any public policy considerations,19 in light of which a dispute should be determined.20 4.10 It is to be expected that an English court would be more reluctant to give effect to a redenomination resulting from a country’s unilateral abandonment of the euro in breach of that country’s treaty obligations. The reason for this is that the United Kingdom itself has rights and obligations in relation to the EU regardless of the fact that it has not adopted the euro as its own currency.21 4.11 Although the complications could be considerable if a single member state leaves or is suspended from the EU, and abandons the euro, and particularly if several states leave, the consequences would increase enormously in the event that such departures lead to the break-up of the entire euro zone, leading to either the creation of a different currency zone or the re-establishment of individual currencies for all the present members. Expressions of intent by various EU member state governments, during the year 2013 and subsequently, suggest that a total breakdown of the euro zone is unlikely in the short to medium term.22

1 The term ‘euro zone’ (sometimes written as eurozone) identifies the group of those countries, each being a member of the EU, that have adopted the euro as their official currency. Official EU documents usually refer to this group as the ‘euro area’, but elsewhere ‘euro zone’ has a more widespread usage. There are also some countries outside the EU which use the euro, but they do not form part of the euro zone: see, infra, n 9.

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