Single European currency - the implications for business

The new Single Currency

Jonathan Rigby of the Banking and International Finance Practice Area of what looks at the steps leading to the introduction of a single European currency

The introduction of a single European currency is barely 12 months away. For years, politicians have debated its desirability, its effects and the timetable for its introduction. Now that the dust is settling on this debate, we thought that we should take a look at the implications of the new currency for business. No informed commentator doubts that European Monetary Union ("EMU") is of colossal importance, not just for companies within the European Union ("EU") but for any company which trades with EU-based companies. The impact will be felt throughout the construction industry.

The introduction of EMU

The Treaty on European Union (the "TEU"), which was signed at Maastricht in 1992, specifically makes provision for EMU. The principal components of EMU are the free movement of capital, the co-ordination of economic policies and the introduction of a single currency: the Euro. The process of introducing the euro involves three distinct stages:

The new economic climate

The preparations for the single currency involve Member States keeping a tight rein on public spending. In order to qualify, budget deficits have to fall to within 3% of GDP; public debt must be less than 60% of GDP and inflation must be no higher than 1.5% above the average of the 3 strongest EU States. The criteria are bolstered by a growth and stability pact and the Euro is likely to reflect the strongest economies of the participating Member States.

From 1999, Member States will start issuing new public debt in Euros and the ECB will control monetary policy and foreign exchange operations in Euros. Regardless of whether Member States are 'in' or 'out', the single currency will have enormous consequences. Member States outside the zone might well find that their currencies are subject to speculation against the Euro. To reduce this risk, existing national and corporate debt may be redenominated.

Economic stability and elimination of exchange risk within the EU are likely to be the main advantages to business and they should in turn reduce costs.

Financial services in the transitional period

From the start of the transitional period on 1 January 1999, many financial operations will take place in Euros. Banks will start to provide financial services in Euros - bank accounts, cheques, credit cards and payment obligations may be settled in national currency units or Euros.

Banks will not charge to convert national currency into Euros. They will provide unlimited facilities for conversion. Conversely, national currency bank accounts may receive deposits in Euros or national currency. Any money received in Euros will automatically be converted into national currency.

What the Euro means for business

The key legal issue for is the continuity of contracts denominated in the currencies of participating Member States.

It was feared that the change in currency would allow parties to escape their obligations by claiming force majeure or circumstances beyond their control. The EU are taking no chances and the legal position is now stated in Regulation EC 1103/97 which applies to both 'in' and 'out' Member States. Article 3 states:

"The introduction of the Euro shall not have the effect of altering any term of a legal instrument or of discharging or excusing performance under any legal instrument, nor give a party the right unilaterally to terminate a legal instrument. This provision is subject to anything which the parties may have agreed."

Recital 7 should be read alongside Article 3 and states:

"Whereas the principle of continuity should be compatible with anything which parties may have agreed with reference to the introduction of the Euro"

Basically, the Regulation provides that contracts will continue, on their existing terms, unless the parties have agreed something else with reference to the introduction of the Euro. But there are some problem areas where specific legal advice should be sought. These are contracts denominated in ECUs; contracts governed by the laws of exotic jurisdictions; and finally, certain types of hedging contracts of particular relevance to companies with their own treasury operations.

During the transition phase, the principle of "no prohibition, no compulsion" will apply. This means that Member States will not be permitted either to force or outlaw the use of either the national currency or the Euro. Where parties agree to use the Euro, they will most likely find that the costs of doing business will fall. The headaches of currency risk and conversion charges for transactions within the EU will be a thing of the past.

Information technology

Many businesses have already begun to prepare their IT systems for the single currency with particular emphasis on accounting systems. With the much-publicised "Year 2000" problem to think about as well, many organisations are trying to co-ordinate the reprogramming work necessary, so as to save time and money.

Corporate changes

One of the most topical issues is the redenomination/ renominalisation of share capital into Euros. This is not provided for in the EU Regulations and is a matter for national legislation.

Several methods have been proposed including 'top down' and 'bottom up' redenomination and the introduction of shares without nominal value (which would require changes to UK company law).

It should be emphasised that changes to companies' constitutional documents will probably be required and that there are likely to be taxation and accounting issues following the changeover. These are all issues of which all public companies (including construction companies) should be aware.

Conclusion

The introduction of the Euro is of huge legal importance whether the UK is 'in' or 'out': any contract which might subsist beyond 1998 denominated in ECUs or an 'in' currency will be affected. It is important for all companies to identify such contracts, be aware of the implications and develop a strategy to minimise risks and maintain competitive advantage.