The States which are party to a treaty are, of course, free to agree any amendment or variation to its terms at any time. Although concluded specifically within a Community context, the same principle applies to the provisions of the Maastricht Treaty.
This straightforward principle would, however, clearly translate into fairly tense negotiations between the withdrawing State and the continuing, EMU-participant States. At a financial level, the following issues would arise:
- clearly, the withdrawing State would need to create a new, national currency in substitution for the euro within its own national borders;
- the withdrawing State will have contributed its initial portion of the capital of the ECB. Since the national Central Bank of the withdrawing State would cease to be a member of the ESCB, it would presumably seek a refund of these amounts in order to support its new currency;
- since monetary union necessarily involves a pooling of the foreign reserve assets of participating States - and profits and losses will accrue to the pool over a period - the withdrawing State will presumably seek reimbursement of the foreign reserves contributed by it to the ECB, plus its share of any accrued profits but net of its share of losses12;
- in practice, of course, matters will not be so straightforward. The Maastricht Treaty does not allow for the withdrawal of contributed capital or reserves from the ECB, and financial terms would require a new negotiation. Such negotiations would be complicated by a number of factors; in particular, the withdrawal of a Member State would clearly shake market confidence in the euro and would be likely to lead to extreme volatility in its external value. This could only be mitigated by (i) a retention of a portion of the contribution of the withdrawing State and/or (ii) an additional financial contribution to the ECB by participating Member States in order to support the euro. It is quite likely that the available funding within the ECB itself would be insufficient (i) to support the euro adequately and (ii) to support the creation of a new national currency by the withdrawing State. This, in turn, might render it impossible to negotiate “exit” terms without placing the entire EMU process under impossible strain;
- it will be apparent that withdrawal from EMU by a participating Member State will have major implications both for the withdrawing State and the continuing participants. For the departing State, there will be the costs of establishing a new national currency and the uncertainty of its external value. This uncertainty is likely to endure for a lengthy period given the need to renegotiate the monetary aspects of the Maastricht Treaty and the inevitable complexity of the transitional arrangements which would have to be put in place. The scale of the costs and liabilities involved - and the difficulty of quantifying them with any precision - must of themselves be very significant deterrents to any attempt by a participating State to negotiate a withdrawal. For those States which continue to form a part of the euro zone, the very existence of such negotiations would clearly have an adverse impact on the value of the euro and on their financial markets generally;
- if the EMU process ran into difficulties very early during its third stage (i.e. before the end of the transitional period) then it might be thought that the withdrawal of an individual participant would be facilitated, because physical notes and coins issued in the old national currency would continue to exist; bank accounts in that currency would also continue to be available. But in fact, this would be illusory; the national currency will have ceased to exist and its notes/coins will be mere representations of the euro. The outgoing Member State would therefore have to create a new currency and there is no guarantee that the old notes/coins could be used for this purpose. Certainly, there would be no obligation on a Member State to act in this way in establishing its new currency. The withdrawing Member State would also have to deal with outstanding bank accounts expressed in euro, and this may also prove to be problematical (especially in the context of accounts held by non-residents).
For present purposes, it must be assumed that all of the above barriers to withdrawal can be overcome and that a departing Member State has negotiated satisfactory terms for its withdrawal from the euro zone. What would be the implications for financial or payment obligations? We shall use as an example a Dutch guilder denominated bond, with the Netherlands being the Member State withdrawing from EMU. It should be emphasised that this example is used purely in order to illustrate the points about to be made - it is not thought to represent a likely scenario!
What, then, are the consequences for a bond or other obligation expressed in Dutch guilders where (i) the Netherlands pulls out of EMU and (ii) the bond or obligation falls due for payment after the effective date of the Dutch withdrawal?
The essential question would be - is the bond required to be repaid in euro, or would the obligations under it be satisfied by a payment in the new Dutch currency at the rate prescribed by the new Dutch currency law? The difficulties involved in answering this question are compounded by the fact that the euro continues to exist as the lawful currency of the remaining participant States and is thus available as a medium for payment, notwithstanding the “exit” of the Netherlands from the euro zone. In general terms, it is suggested that the following rules should be applied:
- if the bond (i) was expressed in Dutch guilders (i.e. it was originally issued before 1 January 1999), (ii) was stated to be payable solely within the Netherlands (i.e. there are no “external” paying agents) and (iii) was issued by a Dutch entity, then it must follow that the bond was clearly intended to be issued within the Dutch domestic markets and thus denominated in the lawful currency of the Netherlands. It ought to follow that the obligation is to be met in the new Dutch currency. This is because States generally recognise the right of other States to regulate their own domestic currencies, and matters relevant to such a currency are therefore referred to the laws of the issuing State (the “lex monetae” principle)13. In such a case, the English courts would generally adopt the exchange rate (euro - new Dutch currency) prescribed by the new Dutch monetary law14. The international obligation of the United Kingdom to recognise the Dutch monetary law15 is reinforced by the fact that the United Kingdom would be party to any international agreement amending the Maastricht Treaty, and the English courts will generally endeavour to act in a manner consistent with this country's treaty obligations;
- if the bond was issued after 1 January 1999, then it will be expressed in euro and there will be no direct, contractual link to the former Dutch national currency. But if the debt is payable within the Netherlands, then it is suggested that debtor can discharge the obligation either (i) by payment in euro, since the obligation is expressed in that currency or (ii) by payment in the new Dutch currency, because the law of the place of payment may be taken into account in determining the means or method of payment16. In the latter case, the appropriate rate of exchange between the euro and the new Dutch currency would be governed by the law applicable to the instrument or obligation in question - the courts would not necessarily adopt the exchange rate prescribed by the new Dutch monetary law17;
- if the bond was issued after 1 January 1999 but is expressed to be payable in euro outside the Netherlands, then it seems that the alteration in the Dutch currency should be irrelevant. Performance of the obligation in euro in the stipulated place of performance is entirely possible, because the euro remains the currency of the other, EMU-participant States. This rule would continue to apply even if the issuer were a Dutch-incorporated entity;
- the change in Dutch currency should not have the effect of terminating or frustrating the obligation, at least if the contract or instrument in question is governed by English law18;
- where a contract is converted from the euro to a “new” national currency, clauses stipulating for a floating rate of interest will be deemed to refer to an appropriate price source for the new currency19.
Whatever the financial position and political implications may be, it seems clear that an EMU withdrawal by a Member State would create a number of difficult legal issues, but these difficulties should be capable of resolution against the background of a renegotiation of the Maastricht Treaty.