The EU treaties and individual contracts contain no provisions for a country to exit the Euro, so the implications for private contracts are likely to be determined by a mixture of fundamental legal principles and commercial realities
As the possibility of a country leaving the Euro increases, more attention is being paid to the consequences of, and questions posed by, a Eurozone country withdrawal. Beside the macro-economic consequences of withdrawal and the logistical and psychological challenges of creating a new currency, what would be the effect on private contracts denominated in Euros (or another currency, such as the dollar) that have been entered into by one counterparty in the withdrawing country and a counterparty outside that country?
Most of the analysis of this question has been rather cursory – see, for example, this widely-quoted article by Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley – but a much more considered and informed approach is taken in this 2010 article in Capital Law Markets Journal by Charles Proctor, a partner at Bird & Bird LLP.
The analysis in Mr Proctor’s article (which assumes that Greece might be an exiting country) draws heavily on the principle of lex monetae – that where a contract refers to a particular national currency, there is an implicit choice of the law of that country to determine the identification of that currency:
“But—important though it is—the lex monetae principle cannot solve the present problem, for the lex monetae of the continuing eurozone Member States will identify the euro as the currency of obligation, whilst the lex monetae of Greece will point to the new drachma, substituted by reference to the recurrent link. The problem is—which of the two competing lex monetae is to prevail?
This question must, in turn, depend upon the original, contractual intention of the parties, and this will be determined by reference to the law applicable to the contract as a whole. Did the parties intend to contract by reference to the lex monetae of Greece, in which event the euro obligation will be substituted by a new drachma obligation at the prescribed substitution rate? Or did they contract by reference to the lex monetae of a continuing eurozone Member State, in which event the obligation will remain outstanding in euro? It hardly needs to be stated that parties contracting in euro will not have given any thought to this issue which, to say the least, exists at a certain level of abstraction. The intention of the parties will therefore have to be inferred from the terms of the contract and the surrounding circumstances, and will inevitably depend on the weight of factors connecting the contract with Greece.”
Mr Proctor’s conclusion – after considering this application of the lex monetae principle on a range of instruments, including loan agreements, swaps and derivatives, and possible events of default – is:
“…that a careful and measured analysis of a contract in the context of the lex monetae principle will provide clear and commercially sensible results in the vast majority of cases. As has been shown, contracts which are essentially domestic to the Greek economy would be redenominated into the new drachma, whilst contracts with a significant international dimension would remain outstanding in euro. In the event that Greece withdrew from the eurozone unilaterally and in contravention of the treaties, then external courts would decline to recognize the new monetary law and would accordingly continue to give judgments in euro in relation to any relevant contractual obligations.”
For a counterweight to Mr Proctor’s views, see the comments made by John Kemp (an analyst at Reuters) to this article that appeared on the FT Alphaville blog today. Mr Kemp takes a more pragmatic approach to the question of a unilateral withdrawal:
“Since forcing repayment of ALL contracts in euros or at non-devalued rates would essentially bankrupt not only the Greek state but almost all Greek firms and households, it would be self-defeating (and there is no way to distinguish between contracts that SHOULD be repaid in euros or at equivalent rates and those which SHOULD NOT). No court would willingly wade into this mess…Only contracts that stipulate payments in a currency that is NEITHER the domestic currency of Greece (Euro) NOR the currency of the Euro zone (also coincidentally the Euro) would be liable to repayment in the original currency (eg US dollars, gold, sterling). If you want to be sure of repayment, the only way to be certain is to stipulate the value in dollars, gold, sterling etc.”
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