The following article is adapted from the text of a presentation given at the Nassau County Bar Association on March 1, 1999, under the joint sponsorship of the Association's International Law Committee and Academy of Law. CLE credit was given for those attending this presentation.
On January 1, 1999, eleven member countries of the European Union listed in the table below launched the Euro to serve as their single currency. During an initial three year transition period ending on December 31, 2001, the national currencies of these countries will be just different units of the Euro. The symbol for the Euro is i. The Commission of the European Union has irrevocably fixed the official exchange rates for the constituent currencies at six significant places. They are also set forth in the table below. They will remain in effect until the national currencies disappear as separate currencies on December 31, 2001, and existing notes and coins cease to be legal tender on June 30, 2002.
Because each constituent currency is now merely a different unit of the Euro, theoretically,
any constituent currency could be used to satisfy an obligation in Euro’s or any other constituent currency. In practice, however, this is not how things will work during the transition period. After the transition period, this becomes academic. In fact, many governments, including, New York, have specifically negated this possibility as will be noted further below.
During the transition period, no one can require a counter-party to pay in Euros, nor may anyone refuse to accept Euros in payment of a debt denominated in the national currency of the transaction, unless there is a specific contractual arrangement to the contrary. Similarly, absent contractual arrangements to the contrary, anyone may pay in the national currency or the Euro. Since there will be no Euro notes or coins before January 1, 2002, the Euro will be a "book currency" that will only be usable through checks, credit card transactions, bank transfers, and the like. The only notes and coins in circulation before January 1, 2002, will be those of the national constituent currencies.
As already noted, when the initial transition period ends on December 31, 2001, national currencies will disappear both as units of the Euro and as currencies themselves. After June 30, 2002, even the notes and coins of the constituent national currencies will no longer be valid tender. All that will then remain will be the Euro as the only legal tender. Moreover, the former national currencies will no longer be legal tender. Thus, financial, commercial, consumer, public, and all private transactions will have to be settled in Euro and only Euro.
The rational behind the Euro goes back to the concepts that gave rise to the Treaty of Rome that was signed in 1957. This treaty sought to assure the free movement of goods within what was then the six member Common Market. It soon became apparent this objective could not be fully achieved without also providing the free movement of services, capital, and people. Most all these objectives are now implemented in the much larger European Union. However, the Euro is an enhancement of the notion of the free movement capital and represents a blending of the economic and political futures of the countries participating in the Euro.
Without a single currency in the European Union, the costs, risks, and inconvenience of moving capital between and among its member states would seriously hamper the free movement of capital objective as well as the other objectives. But, even though the Euro substantially eliminates the exchange rate risk for constituent currency foreign exchange ("forex") transactions within the Euro zone, Euro zone banks are still charging what the European Commission considers excessively large fees for handling transactions in constituent currencies. Thus, European Commission is coming down hard on those banks that have not substantially reduced their foreign exchange transaction fees which still are about 3.5% of the value of the transaction. The European Commission is insisting Euro zone banks must pass the savings resulting from the elimination of forex risk to the consumer. The banks do not want to do this. They were managing the forex risk well and were realizing substantial profits in the process. They are not happy to give up these profits.
There is a small cost, but virtually no risk, to handling the notes of the constituent currencies. But, it is nominal compared to the potential for forex risk. An example illustrates the point: Before the Euro, when a bank took French francs in exchange for German marks, there was a possibility the value of these two currencies would change before the bank could clear the transaction. Thus, by the time of clearing, the number of French francs received for the number of German marks paid out, would buy fewer German marks than were paid out. If so, the bank would have to book a loss on the transaction. Of course, the opposite could be true, and the bank would book a gain. Banks, being risk averse, naturally tried to price forex transactions so as always to assure a profit. Hence the additional cost which was perceived as being a serious impediment to the objectives of the European Union. However, in recent practice, with the European Monetary Union and other attempts to link the constituent currencies of the Euro, this risk was often more theoretical than actual.
Of course, there will be forex risks in converting the Euro into other currencies, such as, the Dollar, the yen, the British Pound, etc. However, from the perspective of US business, so long as you have one constituent currency of the Euro, you effectively have, presumably at very little cost or risk, any other constituent currency. Thus, if a French customer pays in francs, you can use those francs to buy lira, theoretically at little cost and no risk, to pay an Italian supplier who wants to be paid in lira. More important, if the French customer will pay in Euro (by agreement or otherwise), you can use those Euro to pay an Italian supplier at no forex cost or risk. Unless there is a specific agreement with the Italian customer to pay only in lira, you can pay in Euro. Thus, there are significant benefits for US companies doing business in the Euro zone.
Germany and Japan, in particular, have been pressing the United States to make an agreement to assure "stability" in the exchange rates among the World’s major currencies, mainly, the Dollar, the Euro, the yen, the British Pound, and the Canadian dollar. Thus far, the US has strongly resisted these attempts. Treasury Secretary Rubin has outright dismissed much of this as unworkable in the current environment. The US is not going to allow its fiscal and monetary policies to be dictated by external needs. Nor is the US going to bind itself to a political agreement that is driven primarily by European needs and interests. Thus, the value of the Euro and its parity with other major currencies must be determined by fundamentals and market conditions in reaction to those fundamentals. Simply put, the US wants Europe and its other major trading partners to have sound economies on their own, as the US says it will as well. This will be the best way to achieve stable exchange rates. So, for the time being, the World is not ready even to begin to talk about the next step, a single World currency or even a single currency among the major trading nations of the World.
Lawyers need to consider the changes the Euro will bring. For example, there are now many long term obligations, such as debentures or mortgage notes that call for payment in a national currency that is now part of the Euro. Many such instruments were drafted so long ago there is no mention of the Euro or any other reference to the specified payment currency disappearing. Are these contractual obligations in any way impaired? The answer is, "No".
First, most major countries have already passed laws dealing with the introduction of the Euro and the preservation of the validity of contracts denominated in one of its constituent currencies. In addition, many States of the United States have done likewise, New York included (see below). This, therefore, gives a statutory assurance of validity. There is also a body of law that tends to protect the validity of contracts where there is a change, such as a change in currency, if the change is a substantial equivalent and is commercially reasonable. See, United Equities Company. v. First National City Bank, 383 N.Y.S.2d 6 (A.D. 1st, 1976) Thus, there is comfort in the case law as well. By definition, the Euro is the full equivalent of its constituent currencies and would be a commercially reasonably substitute. Finally, while the constituent currency will cease to exist as a separate currency, it will still be part of the Euro, and its value can readily be expressed in terms of a fixed number of Euros for a fixed number of units of the old currency. Thus, the payments called for in the old constituent currency can easily be determined in Euro. Accordingly, the substantial equivalency test can also be met.
If you do not want to accept payments in Euros, for a brief period, in some jurisdictions, you can still contract to receive payment in a constituent currency, and only that currency. These provisions will no longer work after the initial transition period. After that, the Euro will be the only medium of exchange, and the national currency will not be legal tender. Clients must be ready to deal with the Euro, and only the Euro, once the transition period is over. This will mean making sure the client’s bank is able to work in Euro and has suitable instructions for dealing with Euro should they be received. It would be better to do this right away and get the benefit of the experience of working with the Euro, rather than wait until the last moment. Lawyers and clients dealing with forex also need to make sure they have computer software and other systems in place that accommodate the Euro. Also, for clients with foreign branches where a constituent currency is the reference currency, it will be necessary to make the Euro the reference currency and to express books and records in Euro by January 1, 2002. Again, it would be better to do this sooner than later.
There are advantages and opportunities for dealing with the Euro as well. In the commercial world, as well as in large segments of the of the tourism industry, prices are now being quoted in both the national currency and the Euro. Sometimes, this leads to startling results. With a Euro price to compare, one can see the true difference in the price of goods in each market. It was very easy to believe certain goods are cheaper in Germany than in France, but, because of the ever changing exchange rate between the German mark and the French franc and the forex costs, it was not always easy to see the difference precisely. Now, with prices in Euros, these differences are exact and concrete. Moreover, it is much easier to realize the benefit of that difference because the German mark and the French franc are now simply different units of the Euro. US business people, in particular, should be alert to this and try to take advantage of it whenever possible. Forex issues are no longer as important in the Euro zone, and the best price in Euros, subject to shipping costs, terms, and other non-forex business factors will usually now be the best price. Moreover, as noted above, if a client specifies all payments in Euros, those Euros can be used to purchase anywhere in the Euro zone without forex issues.
There should not be any serious drafting issues associated with contracts that are to be performed during the transition period or thereafter. Whenever possible, most people would prefer the Euro. Choosing the Euro will keep the language more concise and eliminate the need to discuss transition issues in the contract. There seems little point to incurring legal costs or wasting negotiating resources to deal with transition issues when it is so easy and simple to move directly to the Euro. This sort of issue should not be a serious part of the bargain. Nothing substantial should be given up on either side for the designation of the Euro as the currency of the agreement.
As noted above, New York, like many governments, has anticipated the development of the Euro and adjusted its laws accordingly. General Obligations Law §§ 5-1601-1604 assist in providing predictable implementation, pending further developments at the federal level. General Obligations Law § 5-1601 contains a definition of the Euro that is expansive. General Obligations Law § 5-1602 provides for the continuity of contracts and specifically declares the Euro is a commercially reasonable substitute for the former constituent currency and a substantial equivalent of that currency. Even though the other constituent currencies should likewise be a commercially reasonable substitute and a substantial equivalent, New York does not permit this. General Obligations Law § 5-1602(1)(c). This may be short sighted as one can easily look at the German mark as a twenty Euro note, the French franc as a five Euro note, and the lira as a small coin as long as these currencies still remain legal tender. Moreover, many people attribute the recent substantial gains in the Greek stock market as being a "Euro play". Greece hopes to join the Euro next year. Buying drachma now may be a cheap way to get Euro should the drachma become included in the Euro as most people think it will. Thus, the financial world really does not seem to be making the distinctions the legal world has made regarding the Euro and its constituents currencies.
The more serious issue to consider is the future of the Euro as a reserve currency that might replace the Dollar. When the Euro was first introduced, it was traded at 1.17 Euro to the Dollar. It quickly traded up to more than 1.18, but, just a few weeks later, it is down more than 5% to barely more than 1.10. This is extraordinary movement for a "major World currency" that was touted as soon replacing the Dollar. For example, a front page article in the January 2-3, 1999, International Herald Tribune, trumpets: "Euro Mints New Questions Over Dominance of the Dollar". Well, the Dollar is not dead yet, and it is not likely to be any time soon.
With the initial euphoria surrounding the introduction of the Euro, there were a plethora of prognostications about the long term adverse consequences to the Dollar. While the Dollar is not out of the woods yet, it now seems clear the Euro is not going to be looked upon more favorably than many of its constituent currencies which, include some traditionally weak currencies, such as the Italian lira, the Spanish peseta, and the Portugese escudo. Moreover, the issues surrounding the selection of the head of the European Central Bank have signaled that the Euro might be a highly political currency after all. The French thought they had extracted a promise from Wim Duisenberg, the Dutchman backed by the Germans (who did not think they could push through a German), that he would resign half-way through his term in favor of a French backed candidate. Whether this will happen remains doubtful at this point, but it is too early to tell. In any case, the possibility exists the Euro will look much more like the lira than the German mark. If this happens, it is likely the Dollar would then become even more important as a reserve currency.
What has happened thus far is explainable, if not predictable. The Euro was introduced with a great deal of enthusiasm and fanfare. Many people wanted to get experience with it, and like any market driven by supply and demand, with the demand high for the Euro, the price went up. However, this enthusiasm quickly abated and people had to take a more realistic view of the Euro. There are still serious problems in Europe the introduction of the Euro will not solve. They must be dealt with through traditional means. Also, Europe has yet to experience the consequences of regional payments imbalances that will undoubtedly develop as national governments can no longer coin their own money.
We have these problems in the United States, even today. If jobs are soft in the Northeast, it is far easier for someone there to relocate to some other region where they are more plentiful. While this is theoretically possible in the Euro zone, Europe is far more segmented then the US. An Italian worker who can not find work in Italy, for cultural, language, social, and a whole host of other reasons, can not easily go to Spain or Germany where there may be plentiful jobs. Moreover, it is even more difficult in Europe, if the structures even exist to accomplish this, to tax people in one country for economic development in another. Each participating country has given up significant sovereign rights to be part of the Euro, and, if its economy needs inflating to produce jobs, it has lost many of the weapons once available. Thus, the choice for the European Central Bank may have to be to inflate generally to stimulate locally. This could lead to an extremely volatile, weak Euro. Alternatively, if the European Central Bank follows a more German philosophy, it will be more concerned about inflation leading to pockets of recession. This could adversely affect the Euro.
Despite these problems, it is not wise to dismiss the importance of the Euro. It is the currency of a huge market, which, although not as cohesive as the US market, is still a very powerful one. It would be unwise to assess the Euro as a currency that can, or should, be disregarded. However, it need not be feared either. The Euro is just like any other currency. It will be stronger and weaker from time to time, and prudence will dictate that, before markets desert the Dollar as a reserve currency, Euro will have to prove its worth. More over, as Secretary Rubin has said, it is the fundamentals that will count in the long run. The Euro will not earn respect just by being there. It will earn respect from the perception of how well the European Central Bank manages the fundamentals of the new Euro zone economy, how well the constituent governments accept the role of the European Central Bank, and whether the people of those countries will accept the European Central Bank as a political institution that will have a significant impact on their day to day lives.
There are some useful resources that are readily available on the Internet that can be consulted for learning more about the Euro, what needs to be done to deal with it, and what would be desirable to do ahead of time. The following is a partial list with some brief comments on each site: