At the time of its inception, there can be no doubt that the introduction of the euro had to be seen as a highly successful exercise. The single currency came into being on 1 January 1999, precisely in accordance with the terms of the EC Treaty as then in force. Upon their introduction at the beginning of 2002, physical notes and coins were distributed across the eurozone very rapidly and smoothly indeed, and national notes and coins were withdrawn from circulation even more quickly than had originally been contemplated. Given both the enormous implications and the scale and complexity of the single currency project, it must be accepted that its implementation represented a very considerable achievement on the part of all of the institutions involved.
Nevertheless, it is well known that speculation about the possibility of a eurozone withdrawal was mooted on a number of occasions following the Greek financial crisis from the end of 2009, and the speculation gained momentum as the debt crisis spread across other eurozone countries, including Portugal, Italy, Ireland, and Spain. Some have argued that the single currency was in part responsible for the crisis; others may assert that the root cause was the fiscal profligacy of individual Member States.1 Whatever the truth of this issue, there is no doubt that the single currency certainly suffered from the effects of the eurozone sovereign debt crisis. Some of the steps taken to mitigate the eurozone debt crisis have been discussed earlier.2 Although the response of the eurozone Member States was widely criticized as hesitant and too slow, the steps which were taken3 and the funds which were committed demonstrated a significant political will to preserve the euro. As matters stand at the time of writing, a withdrawal from the eurozone still appears to be a remote, although by no means fanciful, prospect.4
Against that background, it is not the function of a legal text to speculate on the likelihood that the single currency ideal will eventually come to grief, or to comment on the possible causes of such an occurrence. If a Member State withdrew from the eurozone, then the causes of that decision would be of a political and/or financial nature which cannot currently be identified—even if the current debt crisis may provide some fairly clear indicators. However, the consequences of such a decision may give rise to questions which would require resolution within a legal framework. It is thus necessary to emphasize that a withdrawal from the eurozone may be very difficult to achieve in political and practical terms, especially bearing in mind the interdependence of the eurozone’s financial systems. But the events of the financial crisis mean that such a discussion is necessary, even if it may hopefully prove to be of purely theoretical interest. In addition, there is growing interest in single currency areas as a form of monetary organization,5 and it cannot necessarily be assumed that all will be equally successful. The present discussion may therefore also prove to be of relevance in the context of other such unions.
What then, is the nature of the legal issues which might flow from a withdrawal from the eurozone? In some respects, these resemble the issues discussed earlier6 in the context of the identification of the money of account and subsequent uncertainty; it will therefore be necessary to cross-refer to the earlier commentary from time to time. But as will be seen, a withdrawal from the present monetary union arrangements within the eurozone would raise issues of a broader and deeper nature, partly because the monetary union was created by treaty between all EU Member States (including the United Kingdom and others not currently participating in the union). As a result, a departure from the eurozone by one or more participating Member States would have consequences at two levels. First of all, it would have a clear impact on the position of the affected Member State under the EU Treaties. Secondly, it would create difficulties in the context of monetary obligations expressed in euros. As will be seen, it is the view of the present writer that these two consequences cannot be viewed entirely separately but are, in some important respects, interrelated.
The legal consequences which would flow from a withdrawal from the eurozone appear to depend in some measure upon the manner in which such withdrawal is achieved, ie whether it results from (a) amendments to the EU Treaties negotiated with other Member States,7 or (b) a unilateral decision by one or more participating Member States.8 It is therefore proposed to deal with the subject matter under those two headings.
At the outset, it may be helpful to explain the nature of the events that may be treated as a ‘negotiated withdrawal’ for the purposes of the present discussion. The most obvious negotiated withdrawal would flow from an agreement to revise the treaties, followed by the ratification of those amendments by national legislatures. This, however, would obviously be a time-consuming process and, as the financial crisis has demonstrated, the bond markets do not generally demonstrate patience with these matters and any effort to renegotiate the treaties in this relatively leisurely fashion would almost certainly lead to a widening of spreads on eurozone government debt, thus adding to fiscal problems. The announcement of such negotiations would also lead to a flight of capital from the affected Member State(s), fatally undermining the domestic banking system. Whilst this approach is therefore technically feasible, it seems to the writer much more likely that a Member State—either on its own initiative or at the instigation of other Member States—would determine that departure was necessary. The withdrawing Member State would announce its decision and close its banks for a period with immediate effect in order to prevent a run on deposits. It would also impose capital and exchange controls to prevent the withdrawal of cash from the country.9 Other Member States would then announce their support for the measures (no doubt described as a ‘temporary’ eurozone withdrawal) and agree that they would thereafter negotiate the appropriate revisions to the treaties. Although this may involve breaches of the treaties, there would necessarily be a degree of mutuality and consent in the arrangements. It is submitted that—from the perspective of monetary obligations—this may appropriately be treated as a ‘negotiated withdrawal’, as opposed to a unilateral departure from the zone.10 References in this chapter to a ‘negotiated withdrawal’ should therefore be read in the light of the commentary in this paragraph.
If a participating Member State succeeded in negotiating its withdrawal from the eurozone then three related events would have to occur. First of all, the euro would cease to be the currency of the Member State concerned. Secondly, the monetary sovereignty of the relevant Member State would have to be restored to it.11 Thirdly, the Member State would have to create a new domestic currency. With this broad framework in mind, how would a negotiated withdrawal have to be effected?
It will be remembered that the substitution of the euro for each national currency is stated to be irrevocable,12 and that the process of monetary union was declared to be irreversible.13 As a necessary consequence, the Treaty does not contemplate or make provision for withdrawal by a participating Member State from the eurozone itself. It follows that the EU Treaties would have to be renegotiated in order to permit or, as the case may be, to ratify—the withdrawal of the participating Member State concerned. The Treaties can, of course, be amended with the consent of all signatories even though the original text declares monetary union to be irreversible.14 It should be appreciated that the approval of non-participating Member States (including the United Kingdom) would also be required in this context. The ‘out’ Member States have the right to participate in monetary union15 at a later date, subject to meeting the necessary criteria for that purpose. The Treaties cannot be amended so as to deprive them of that right, unless they have agreed to that arrangement.16
Whilst the Treaties do not contain a right for Member States to withdraw from the eurozone, it should be noted that they do now allow for withdrawal from the European Union as a whole. Article 50 of the Treaty on European Union now provides that ‘Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements’. The Article then proceeds to set out the mechanics for withdrawal, including the negotiation of a treaty setting out the agreed withdrawal terms.17 It seems clear that withdrawal from the European Union as a whole must necessarily connote withdrawal from the eurozone as well.18 This would appear to be instinctively the case, in that monetary union was a core EU project and is embedded in the Treaties from which the relevant Member State would be seeking to withdraw. There are also suggestions within the Treaties that the euro is intended to be the lawful currency only of the participating Member States themselves.19 In terms of the Treaties, therefore, it seems that a withdrawal from the eurozone could only be achieved through withdrawal from the EU as a whole. This would obviously be a very extreme remedy and, whilst a Member State may wish or feel compelled to withdraw from the single currency, it is perhaps rather less likely that it would wish to withdraw from the Union in its entirety. It may be that the situation could be by a withdrawal from the EU (including the eurozone) followed by an immediate application for re-admission as a non-participating Member State.20 Clearly, this would be a very difficult process—not least because the negotiation of a withdrawal treaty would be required21—and this merely serves to emphasize the practical difficulty of securing a eurozone withdrawal. But the purpose of the present chapter is to consider this theoretical possibility.
At present, the monetary law of the participating Member States is established by EU law, rather than by national law.22 But, as noted earlier, monetary sovereignty could be restored to the withdrawing Member State by means of a subsequent revision to the Treaties. In many respects, this aspect may be regarded as a purely technical matter, as once it has been agreed that a participating Member State is to withdraw from the eurozone, then the restoration of its national monetary sovereignty is a necessary consequence of that agreement—it would follow as a matter of course. Much more difficult problems would flow from the institutional structure put in place for the single currency. It will be recalled that the central bank of each Member State became a member of the European System of Central Banks (ESCB); each national central bank was required to subscribe for a proportion of the share capital of the European Central Bank (ECB) and to transfer to it very substantial foreign reserve assets.23 The central bank of the relevant Member State would presumably cease to be a member of the ESCB upon the withdrawal of that Member State from the eurozone, and would accordingly cease to be represented both on the Governing Council and the General Council.24 The most difficult aspect would be the settlement of the financial consequences of the withdrawal. The outgoing central bank would no doubt seek the repayment of its capital contribution to the ECB,25 and a pro rata return of its share of the foreign reserve assets then held by the ECB. The allocation of outstanding profits and losses of the ECB would also have to be addressed.26 No doubt these figures could be calculated objectively with relative ease,27 but the remaining eurozone Member States are under no obligation to consent to the departure of the Member State concerned; depending upon the circumstances of withdrawal, they might be inclined to extract a price for agreeing to withdrawal. The withdrawing State would also seek the return of foreign reserves to provide support for its newly created national currency,28 and similar considerations would apply.
But returning to the main, monetary law issues, the essential consequences of a withdrawal from the eurozone would be as follows:
(a) national monetary sovereignty would be restored to the withdrawing Member State;29
(b) in reliance upon its newly reacquired sovereignty in this area, the Member State concerned would create and issue a new currency, denominated by reference to such units of account as it may select;
(c) the central bank concerned would once again become subject to purely national jurisdiction30 and would presumably again resume responsibility for the conduct of monetary policy and associated matters;31 and
(d) the withdrawing Member State would, by national legislation, establish the rate at which the new currency is substituted for the euro.32
It is necessary at this point to make some observations about the practical aspects of this admittedly unlikely process. Even if a Member State is permitted to withdraw from the eurozone, it would remain bound by the other provisions of the Treaties, including those involving the free movement of capital.33 It has been noted earlier34 that Member States cannot impose restrictions on the movement of banknotes across borders, or any other forms of exchange control which would restrict transfers of funds through the banking system. Under these circumstances, it may be very difficult to manage the process whereby the new currency is introduced and exchanged for the euro in the withdrawing Member State. As an example of the difficulties, large amounts of physical cash and bank money could be drained out of the withdrawing Member State if it were thought that the new currency was likely to be substituted for the euro on unfavourable terms.35 Conversely—but perhaps rather less likely—euro funds could flow into the withdrawing Member State if its new currency was thought likely to be substituted on attractive terms. This could result in significant financial imbalances, with an excess of banknotes in parts of the eurozone, and shortages in others. In addition, as has already been seen in the case of Greece, a fear that a country may leave the eurozone may prompt the flight of bank deposits away from the local banking system into other Member States that are perceived to be more secure. Such a move could precipitate a collapse of the local banking system and it would probably be necessary for the departing Member State to act quickly and covertly in making the necessary preparations for departure. The imposition of capital and exchange controls would almost certainly be necessary as an emergency measure. It may well be fair to conclude that an attempt to withdraw from the eurozone will create problems of a magnitude even greater than those which such withdrawal seeks to solve.
At the outset, it becomes necessary to consider whether a voluntary withdrawal from the eurozone has any impact on the intrinsic validity or continuing legal effect of a contract expressed in the single currency. The two legal doctrines that could affect an English law contract are (i) common mistake, and (ii) frustration.
In relation to common mistake, it is true that the parties will have entered into a euro-denominated contract on the unspoken assumption that the euro would continue to exist throughout the duration of their agreement. However, a generalized assumption of this kind will constitute a mistake of a type that could operate to vitiate the contract.36 This position is essentially the same as that which applied in the same area when the euro was originally introduced, and that issue has already been discussed at an earlier stage.37 In essence, the euro will have existed as at the date on which the contract was made, and there will have been no mutual mistake on which the doctrine can operate.
The doctrine of frustration has likewise already been discussed with reference to the initial creation of the euro.38 It is not necessary to repeat all of the ingredients of the doctrine at this juncture. In essence, the contract will only be frustrated by the splintering of the euro if, in consequence, the performance of the contract is rendered ‘radically different’ from that originally contemplated by the parties. Where the English court is required to recognize the new monetary law of the withdrawing Member State and to give judgment in the new currency of that country,39