Legal framework for the use of the euro
"As from 1.1.1999 the currency of the participating Member States shall be the euro". This sentence will be one of the core provisions of the monetary law of the Member States which will have adopted the euro at the beginning of the third stage of Economic and Monetary Union. This monetary law of the participating Member States will be laid down in two Council regulations:
- Council regulation [...] on the introduction of the euro and
- Council regulation [...] on certain provisions relating to the introduction of the euro.
The European Commission put forward proposals for these two regulations on 16 October 1996. They were subsequently discussed under the Irish Presidency in a Council working group and politically endorsed by the Ecofin Council in Dublin on 12 December 1996. The European Council in Dublin welcomed this agreement, invited the Irish Presidency to make the two draft regulations public and invited the Council to adopt the regulation based on Article 235 of the Treaty without delay. The European Parliament and the European Monetary Institute gave their opinion on the legal framework on 28 and 29 November 1996 respectively.
The basis for these two regulations had already been laid down in 1995. In May 1995, the Commission had published its Green Paper on the practical arrangements for the introduction of the single currency in which the principal issues relating to the legal framework for the euro have been discussed. On 15/16 December 1995, the European Council decided on the reference scenario for the introduction of the euro. The Heads of State and Government at their meeting in Madrid asked for the preparation of a regulation defining the legal framework for the use of the euro by the end of 1996.
The Commission proposals profited from substantial input from the European Monetary Institute and from intensive consultations the Commission had organised with representatives of all sectors concerned by the introduction of the euro. Consultations with European banking associations took place in July and September 1996 and a hearing, with a broader participation (consumers, employers organisations, retailers, vending associations) was also organised in September. These consultations showed that for at least some provisions of the legal framework there was an urgent need for legal certainty that called not only for a timely preparation but also for an early formal adoption and an immediate entry into force. The banking industry, in particular, argued that the formal adoption of provisions relating to the continuity of contracts, the conversion of the ECU-basket and on rounding rules should take place as soon as possible.
Article 109 l (4) of the Treaty, which allows the adoption of "the other measures necessary for the rapid introduction of the euro", is however only available when participating Member States are known. Therefore the Commission, following an agreement reached at the informal Ecofin meeting in Dublin in September 1996, decided to split up the legal framework and to base those provisions for which legal certainty is most needed on Article 235, while basing the other monetary law provisions on Article 109 l (4).
The regulation to be based on Article 235 of the Treaty will, after its formal adoption, which is supposed to take place on 27 January 1997, enter into force the day after its publication in the Official Journal. It will be binding in its entirety in all Member States. That was also one reason why the Commission finally decided to split the legal framework into two parts. Market participants in particular had repeatedly expressed doubts whether a regulation based on Article 109 l (4) would be applicable in all Member States, especially if it would apply to the UK because of Article 5 of the UK Protocol. The splitting of the legal framework and the adoption under Article 235 of those provisions which are of particular relevance for all Member States should increase legal certainty and meet these concerns.
The regulation based on Article 109 l (4) will, although politically endorsed at the highest level, only be adopted in 1998 once the participating Member States are known. Nevertheless, the political blessing of the European Council and the publication of the text of the draft regulation should provide the legal certainty the markets had asked for, to organise their own preparatory work.
Regulation based on Article 109 l (4) of the Treaty
The main part of the monetary law of participating Member States will be contained in the regulation based on Article 109 l (4), third sentence of the Treaty. This regulation will define the status of the euro as the single currency and it will, for a transitional period, define the legal status of the former national currencies.
According to the draft regulation, the euro will become the currency of the participating Member States as from 1 January 1999 (Article 2). On that date the substitution of the national currencies of the participating Member States by the euro will take place (Article 3). The national currencies will cease to exist in a legal sense as currencies in their own right. Nevertheless, as euro banknotes and coins will not be immediately available, it must be ensured that economic agents can still use the national currency units during a transitional period, running from 1.1.1999 to the end of 2001 (Article 1).
During this transitional period the euro will exist in several denominations. First there will be the euro unit itself, and its decimal sub-division "cent" (Article 2), and second there will be the national currency units, which will be non-decimal sub-divisions of the euro (Article 6 (1)).
That means the national currencies of the participating Member States are first substituted by the euro and thereby cease to exist, and second they are reintroduced as sub-divisions of the euro. During the transitional period one therefore has to distinguish carefully between the euro, as the currency of the participating Member States, and the euro unit, as one of the units of the euro.
The draft regulation furthermore defines a number of practical rules for the use of the different units, in particular rules which give content to the "no compulsion/no-prohibition principle" established in Madrid for the use of the euro unit. Although the national currency units and the euro unit are expressions of the same currency, their function and the possibility to use them may differ, depending on the provisions of this regulation, on national legislation or on the terms of a contract.
The draft regulation makes clear that all units - the euro unit and the national currency units - can be validly used to set up new legal instruments, like for example contracts or laws. The possibility of using the euro unit follows from the introduction of the euro as the single currency and from the definition of the euro unit as its unit (Article 2). The possibility of using the national currency units follows from the definition as sub-divisions of the euro (Article 6 (1)) and from Article 6 (2) which says that references to national currency units are as valid as references to the euro unit.
This implies notably that parties are free to use the unit they want in contractual relationships. On the other hand it is stipulated in the regulation that acts to be performed under legal instruments, e.g. contracts or laws, have to respect the denomination - either the euro unit or the national currency unit - as provided in this legal instrument (Article 8 (1)). That means, if a contract is set up in BEF, all statements of accounts, invoices etc. have to be made in BEF, unless the parties have agreed on something else (Article 8 (2)).
This ensures that in principle only those economic agents have to use the euro unit who have previously agreed to do so by setting up a contract in the euro unit or by modifying an existing one. This is one of the clauses which safeguards the "no-compulsion principle". Contracts and other legal instruments set up before the 1 January 1999 will during the transitional period not change their denomination (Article 7). That means a contract originally set up in BEF will become a euro-contract denominated in the sub-unit BEF.
Another safeguard-clause can be found in Article 8 (5) which says that Member States can only impose the use of the euro unit on the basis of Community legislation. This applies not only to contractual relationships, it also applies to all transactions of citizens or enterprises with the public sector and to transactions governed by public law. If a Member State wants to enable its citizens to use the euro unit, for example for making tax declarations or for publishing accounts in the euro unit, it is free to do so. If on the other hand it wants to oblige them to use the euro unit, it needs Community legislation enabling it to do so.
Three exceptions to the principle that the use of the euro-unit cannot be imposed during the transitional period are already foreseen in Articles 8 (3) and 8 (4) of the regulation:
- 1. Special provisions are foreseen for payments by crediting an account. Amounts denominated in the euro unit or a national currency unit and payable within that Member State can be paid by the debtor either in the euro unit or in that national currency unit, provided of course that the credit institution of the debtor offers the debtor the necessary payment facility. A conversion obligation is established for the receiving credit institution, which has to convert, if necessary, the incoming payment into the denomination of the account of the creditor. The receiving credit institution does not require the authority of the account holder to make that conversion. This provision applies not only to credit transfers but also to cheques and to other debit instruments. It includes cross border payments, if they are denominated in the euro unit or in the national currency unit of the Member States where the account of the creditor is located.
- 2. Member States may take measures to redenominate outstanding public debt that is denominated in their national currency unit and issued under the contractual law of this Member State. The conditions for the redenomination of other categories of debt, in particular private debt, which would in any case take place at the end of the transitional period, needs to be further specified. The Council has announced that it will define these conditions in the first half of 1997. To prepare the Council decision, a consultation with European banking associations will be organized by the Commission in February 1997.
- 3. Member States may take measures to allow organized markets, e.g. stock exchanges, to change their unit of account.
With these provisions, the list of exceptions from the no-compulsion principle is, for the time being, closed. The basis for any further possible exception has, according to Article 8 (5), to be provided for by Community legislation. The national legislator is on the other hand free to maintain provisions during the transitional period which require the use of the national currency unit. This follows from Article 8 (1) which stipulates that acts to be performed under legal instruments, in this case national laws, stipulating the use of a certain unit have to be carried out in that unit. This applies in the first place to transactions with the public sector and those transactions governed by public law. It should not be misunderstood as a possibility to impose the national currency unit in contractual relationships, as this would interfere with the principle of "freedom of contract" contained in Article 8 (2).
Banknotes and coins
Finally the draft regulation contains provisions on the circulation and protection of banknotes and coins. According to Article 10 the issue of euro notes and coins shall take place at a date to be decided in accordance with the Madrid scenario. The Madrid changeover scenario makes a reference to "1 January 2002 at the latest" as the starting date for the circulation of euro notes and coins. The decision to leave this date open for the time being was taken after indications from the retail sector that the end of the year is not the best time to introduce new banknotes and coins. The actual date will be decided at the latest in early 1998 when this regulation will be formally adopted by the Council.
Participating Member States are by virtue of Article 12 obliged to ensure adequate sanctions against counterfeiting and falsification of banknotes and coins. This formulation has been chosen in close co-operation with the EMI. A review of existing laws in Member States has shown that legal protection against counterfeiting and falsification is relatively homogenous amongst Member States. Most Member States have ratified the Geneva Convention on the protection of banknotes. By this they have committed themselves to a satisfactory degree of protection of banknotes, not only their own banknotes but also those denominated in other currencies. It therefore seemed sufficient, and for reasons of subsidiarity preferable, to formulate only a general obligation for participating Member States.
The final changeover
At the end of the transitional period, the national currency units, as sub-divisions of the euro, cease to exist. Afterwards there will only be the euro unit and the cent as its sub-unit. According to Article 14, all remaining references to the national currency units in legal instruments existing at the end of the transitional period have to be read as references to the euro unit, according to the conversion rates. A physical redenomination of these legal instruments is, legally speaking, not necessary. Nevertheless, for reasons of legal certainty and clarity, it might be desirable to physically redenominate certain legal instruments, e.g. long term contracts.
The regulation provides that national notes and coins will lose their legal tender status at the latest six months after the end of the transitional period, i.e. at the latest 30 June 2002. As it is possible that some Member States will be willing and technically able to introduce the euro notes and coins more rapidly than others, freedom is given to the Member States to shorten, by national law, this six-month period of dual legal tender, which in several respects may be burdensome for economic agents. They may choose to reduce it to zero. Member States are also free to define rules for this period for the use of national notes and coins and to take any measures which may be necessary to facilitate their withdrawal. With the definite withdrawal of national notes and coins the changeover to the euro is finalised.
Regulation based on Article 235 of the Treaty
The second regulation, which will be based on Article 235 EC, contains provisions on matters for which financial markets feel most in need of legal certainty. The consultations on this part of the legal framework with market participants were the most intensive. The majority of the comments which the Commission received on the legal framework were on the provisions on continuity and the ECU-euro conversion.
The draft regulation first confirms the 1:1 conversion between the official ECU-basket and the euro (Article 2). To a large extent, it thereby repeats what is laid down in the Treaty and what has already been stated by the European Council in Madrid. This confirmation applies in the first place to the official ECU as referred to in Article 109g of the Treaty and as defined in Council Regulation EC No 3320/94 of December 1994. But it also applies to all contracts under private law that make an explicit reference to the ECU as defined in Community legislation.
The draft regulation moreover establishes a presumption that all references to the ECU are to be read as references to the ECU as defined in Community legislation. That means, for example, that clauses making reference to the ECU as used in the EMS or in the Community budget, are, according to this regulation, presumed to be references to the ECU as defined in Community legislation. The reasoning behind this presumption is that it can be safely assumed that practically all parties intended to make reference to the official ECU, even if this was not always properly reflected in the wording of their contracts.
The establishment of the presumption, which is rebuttable, respects the principle of freedom of contract. If parties clearly intended to make a reference to something other than the official ECU, e.g. a permanently fixed basket, then the will of the parties prevails. This follows the approach taken in the Commission Recommendation of April 1994 where it was said that in case of doubt, references in contracts to the ECU should be interpreted as meaning the ECU as defined in Community legislation.
Continuity of contracts
Secondly the draft regulation confirms the continuity of contracts and other legal instruments (Article 3). This principle was also already underlined by the European Council in Madrid in the changeover scenario. The Commission introduced it expressly in the legal framework at the demand of market participants, particularly banks, but it is made clear in the recitals that this clause mainly has a declaratory purpose.
It should be noted that the article on continuity refers to the "introduction of the euro", a concept that is broader than the substitution of the euro for the national currencies that takes place on 1.1.1999. The introduction of the euro also comprises the replacement of references to the ECU by references to the euro and it is also open to include other direct effects of the introduction of the euro which might also take place before 1.1.1999. The Commission has, beginning with the Green Paper in 1995, frequently underlined the point that the introduction of the euro does not justify invoking the principle of frustration or principles with similar effects, like "Wegfall der Geschäftsgrundlage", "théorie de l’imprévision", etc.
In all jurisdictions several conditions normally have to be met to allow the invoking of such principles:
- There must be a severe disruption of circumstances underlying the contract, which goes beyond the generally acceptable risk to be carried by one of the parties,
- the event must have been unforeseeable.
For virtually all existing contracts these conditions seem not to be met in the case of EMU. The draft regulation nevertheless provides a clear statement of the principle of continuity; it thereby enhances legal certainty and gives a clear signal to economic agents against challenging existing contracts.
The confirmation of the principle of continuity will not only increase legal certainty inside the Union but should also give a positive signal to parties and judges in third countries. Of course, it is not possible for the Community to legislate for third countries; however the application of the principle of lex monetae, which is a universally accepted principle of law, should ensure the continuity of existing contracts denominated in currencies which are substituted by the euro also in third countries’ jurisdictions. One should bear in mind that for competitive reasons the main financial centres, like New York or Tokyo, have themselves an interest in their jurisdictions recognising the euro and the continuity of contracts.
Finally the 235 regulation includes rules on rounding and on the use of the conversion rates. These rules are mainly based on work done by the EMI and by the national central banks. They are of particular importance for the preparation of the changeover of software products to the euro. They are meant to ensure a high degree of accuracy when making conversions and should prevent profit-making through conversion operations.
Though the official conversion rates can only be adopted on 1.1.1999, the draft regulation already defines some aspects now of how the conversion rates will be fixed. This implies a kind of self commitment by the Council. It is stipulated that only the conversion rates of one euro in terms of each of the participating currencies should be fixed (Article 4 (1)), e.g. 1 euro equals 40 BEF, or 1 euro equals 2 yDM. These rates will be adopted by the Council with six significant figures, which should not be rounded or truncated when making conversions. This follows the practice of the definition of central rates in the EMS.
The rates adopted by the Council should be used for conversions either way between the euro and the national currency units (Article 4 (3)) and also for conversions between national currency units (Article 4 (4)). That implies that for converting from a national currency unit to the euro unit one has to divide by the conversion rate. For converting from the euro unit to the national currency unit one has to multiply by the respective conversion rate.
This also implies that no bilateral rates between the national currency units would be defined by the Council, but only a fixed algorithm which explains how to convert from one national currency unit to another. The first step is to convert from the national currency unit into the euro unit where the result has to be calculated by at least three decimal places, and in a second step one converts that euro amount into the other national currency unit. The alternative of defining bilateral rates would have opened the possibility of profit-making through conversion operations from one national currency unit to the other. It is made clear that alternative methods of calculation can be used, provided they produce the same result as the algorithm laid down in the regulation.