The Euro -- Legal and Commercial Issues

Client Advisory

May 2002

January 1, 2002. Welcome to the euro-zone! The European Union was formed to eliminate intra-European barriers to trade by creating commercially transparent borders within the EU. Over the course of its existence, as quotas, tariffs, state subsidies, and other restrictive national legislation fell to the EU’s continuing pronouncements, the element of currency exchange risk had continued as one of the most enduring barriers to true European commercial union.

The goal of European economic and monetary union took an historic step forward on January 1, 1999, when EMU’s “euro” completed its long gestation period and emerged as the single currency for the participating Member States, beginning a transition period leading to economic and monetary union, with the euro being the only legal tender, legally by July 1, 2002, and effectively by February 28, 2002.

Background. The euro was created in the Treaty of Maastricht, signed on February 7, 1992, when the Member States of the EU committed to establish an economic and monetary union with one currency and a central monetary policy. In December 1995, the European Council of Finance Ministers (“Ecofin”) adopted a three-step timetable for monetary union. During the first phase, on March 25, 1998 the Commission and the European Monetary Institute (the “EMI”) published their reports on the so-called “convergence criteria” of the 15 Member States, and recommended that 11 countries would be allowed to join the new single currency plan. The EMI recommendation was confirmed by the European heads of state at their meeting in Brussels on May 3, 1998.

Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain, were the original euro “in” countries, with Greece joining effective January 1, 2001.[1] Britain, Denmark, and Sweden opted not to join EMU in its initial stage, and Denmark voted against joining in a referendum in September 2000; the Swedish government has formally backed membership, but like Denmark the country is divided.

The convergence criteria, which were applied fairly liberally to encourage maximum participation, are tests of monetary maturity and good fiscal policy: inflation rates -- no more than 1.5% above the average of the 3 lowest rates of the Member States; budget deficits -- less than 3% of gross domestic product; and public debt -- no more than 60% of GDP; long-term interest rates -- less than 2% above the three lowests’ average; and the national currency must have respected “normal” Exchange Rate Mechanism Bands in the prior two years (without devaluing).

Introduction of the Euro. On May 3, 1998 the proposed bilateral exchange rates for the original joining currencies were published, and the physical production of euro banknotes and coins then began; the dual currency script transition will be formally concluded by February 28, 2002.

There are 7 euro notes (500, 200, 100, 50, 20, 10, and 5) in different colors and sizes, and 3 bronze coins (1c, 2c, and 5c), 3 gold coins (10c, 20c, and 50c), a 1-euro coin with a silver center and gold surround, and a 2-euro coin with a gold center and a silver surround. There are an estimated 14 billion of new banknotes and 50 billion of new coins. National images are permitted on coins but not notes, an ECB decision that has prompted controversy.

The second phase of the transition effectively commenced on December 3, 1998 with the coordinated reduction of interest rates in 10 of the 11 original countries to 3% (followed weeks later by Italy), and officially continued on January 1, 1999, when the euro legally became the official unit of account of currency for EMU. Each participating Member State’s currency continued to exist during the transition, but only as a “legacy” currency or “National Currency Unit” (“NCU”), strictly a denomination of the euro and not an independent currency.

The rule until December 31, 2001 was “no prohibition/no compulsion,” and no party could be forced to, or prohibited from, using the euro. The ISO/SWIFT currency code for the euro is EUR; the euro is settled to two decimal places.

Effectively, through the transition period, euros were substituted for participating Member States’ national currencies, with massive European and worldwide effects, complications, and costs, dealt with by every government and commercial enterprise with contacts involving any of the prior currencies. In addition, new and continuing disclosure issues were created for SEC-registered and other entities with significant activities involving any of the European currencies which were converted. Coupled with the contemporaneous Y2K computer problems, the euro presented a series of constant complications which were resolved as the conversion was implemented.

The treaties currently in force require that all of the 15 EU Member States, except for the U.K. and Denmark (and possibly Sweden) must convert their currencies to the euro when they meet the defined “convergence criteria.” Initially, the eleven countries approved by the EU as the first “in” countries on May 3, 1998 converted. Greece converted effective January 1, 2001.

In Brussels at 1:00 p.m. on December 31, 1998, the conversion rates for the first 11 “in” countries were permanently and irrevocably fixed, and effective January 1, 1999 the European Currency Unit (“ECU”) ceased to exist (each ECU becoming 1 euro), and fiscal management of the euro then was assumed by the EMI’s successor, the ECB, headquartered in Frankfurt, with euro monetary policy thereafter established by the European System of Central Banks (the ECB and national central banks acting as the ECB’s agents). The euro exchange rates are as follows:

Euro Exchange Rates
January 1, 1999  (Greece February 1, 2001)




Dollar Rate 


Euro Rate















































































The euro-related Stability and Growth Pact requires the Member States to continue toward fiscal consolidation by reducing national debt, meaning reducing public spending, and enforcing that pursuit by fining countries with excessive deficits. Since inception at $1.17, the euro dropped in trading dramatically against the dollar, to a low of $82.28, before strengthening somewhat to its current level of about $.90. The new currency has spurred stock and bond exchange consolidations, reduced the cost of capital in the member countries, and prompted an increased level of mergers and acquisitions. Before its recent strengthening when the U.S. economy weakened, the ECB and G7 intervened several times to support the currency, with only modest success, and now is under constant pressure to reduce rates to counter the U.S. recession.

European Central Bank. The ECB is a politically independent institution modeled on the U.S. Federal Reserve Bank, and, like the Fed, the ECB is expected to control inflation by exercising all but complete authority to establish the monetary policies of the “in” countries, including the authority to fix interest rates, and also by exercising very substantial influence on the monetary policies of other EU Member States through ERM2, the new exchange rate mechanism, which has been joined by Denmark, but not by Sweden and Britain.

Overall euro economic policy is coordinated by Ecofin, but participating Member States are permitted to have private informal talks regarding their shared specific responsibilities for the single currency in the “Euro-X Club” (“X” being the number of participating Member States, currently 12), which was a French creation.

Under a compromise organized by Britain, the finance ministers of the U.K., Denmark, and Sweden are invited to the “Euro-12" meetings unless there are to be discussed issues related to the single currency zone, such as the euro exchange rate versus other currencies. In September 1998 the group was expanded to “Euro-11+4” (now “Euro-12+3") to assure England’s participation in discussions of the world financial crisis and how to coordinate with the IMF and the World Bank in addressing it.

The debate over the choice to head the ECB, between Wim Duisenberg, President of EMI and the majority candidate, and Jean-Claude Trichet, governor of the French central bank and the French candidate, was resolved in Brussels by the heads of state in an early-morning compromise on May 3, 1998. The Dutch had threatened to veto Trichet if the French blocked Duisenberg, and the compromise involved Duisenberg being named for the eight-year term dictated by the Treaty, but expressing his intention to resign sometime after full conversion is in place in 2002, when Trichet would be named to replace him. Both of them are very conservative fiscal hawks, but the compromise still raised concern over the real independence of the ECB, and may instigate the ECB to err on the side of austerity to maintain its weakened credibility in the financial markets. In press reports since the appointment, Duisenberg first characterized his agreement as simply “no guarantee” that he will stay beyond 2002 (rather than a commitment to leave by then), and subsequently has said firmly that he will serve his full term.

Following the delayed ceremonial launch of the ECB in Frankfurt on June 30, 1998, debates continued regarding minimum reserve requirements (which are modest, from 1.5% to 2.5% of deposits, and interest-bearing), and foreign exchange reserves, and the degree of transparency which will be available regarding the ECB’s monetary policy deliberations, with Duisenberg favoring less transparency (including not publishing minutes for 16 years but publishing summaries) in order to insulate the Member States’ representatives from political pressures.

The ECB’s Executive Board (6 executive board members and each member country’s national central bank governor) was designated (subject to European Parliament and heads of state approval) with less political squabbling, and includes Otmar Issing (Germany), Chief Economist, Duisenberg, Christian Noyer (France), Vice-President, Tomasso Padoa Schioppa (Italy), in charge of Payment Systems, Sirrka Hämäläinen (Finland), running Organization and Control, and Eugenio Domingo Solans (Spain), head of Statistics, Banknotes, and Information Systems. Of the 17 (18 with Greece’s joining) members of the ECB’s council, 14 are thought to be fiscal hawks, and four neutral. The Bundesbank is the largest ECB shareholder, followed by France and the Bank of Italy.

The 12 “in” countries include over 300 million inhabitants, account for over 19% of the world’s gross domestic product, and 18.8% of world trade, compared with 19.6% of world GDP and 16.6% of world trade for the U.S., and 7.7% of world GDP and 8.2% of world trade for Japan.

The ECB started a publicity blitz in anticipation of January 1, 2002, with the slogan “the euro--our money” and an internet site ( with information and even games for children.

Principal Euro Issues. The advent of the euro was preceded by national debates within Europe as vigorous as those that resulted in the initial formation of the EU itself. In addition to the arguments about cession of control over the countries’ monetary policies, with the argued inevitable economic effects, the debates often cited (i) the effects of the euro’s introduction on the very enforceability of contracts in place, (ii) the effect on performance of executory contracts, (iii) the commercial effects of the conversion on affected businesses, and (iv) the massive costs of the conversion on all involved governments and commercial enterprises.

The currency-specific requirements of the euro conversion were relatively straightforward. Effective January 1, 1999, business could be transacted either in euros or in local, “legacy” currency, but the relationship between each legacy currency and the euro was then irrevocably fixed. New public debt could then be issued by participating Member States only in euros. States were permitted, but not compelled, to redenominate existing public debt in euros.

During the second phase, through January 1, 2002, banks and financial institutions were allowed, but not required, to offer services in euros.

Effective January 1, 2002, euro coins and notes began to circulate as a medium of exchange, preceded by massive “front-loading” of supplies to banks and large retailers, and a complete phasing out of the legacy currencies began, to be completed legally by February 28, 2002, after which only euros will be legal tender in the participating Member States.

Effectively the National Currency Units ceased to exist January 1, 2002, and euro-zone company accounts, VAT and other tax returns, bank relationships, all contracts, credit card transactions, product pricing, employee dealings and all other business relations are now solely in euro.

The issue of euros in large denominations up to E500 (about U.S. $460), which are rarely used in legal transactions, present substantial “seignorage” opportunities for the Member States’ central banks to issue euros not only to the substantial legitimate reserve markets but also to the significant underground markets against interest-bearing securities, thus earning “free” interest from drug traffickers, tax evaders, and organized crime. Obviously the hidden costs are equally significant in the form of lost taxes and the social burdens. The States will also benefit from the legacy currency notes and coins which are never presented for conversion.

Effects on Enforceability of Contracts in Force. Obviously there are innumerable contracts entered into prior to January 1, 1999 and involving legacy currencies which became legally euro-equivalent on January 1, 1999. Are they nonetheless enforceable?

Within the EU the answer is clearly yes. The European Council issued the Article 235 Regulation (Council Regulation (EC) No. 1103/97), effective in all Member States as of June 20, 1997, which states that “the introduction of the Euro shall not have the effect of altering any term of a legal instrument or of discharging or excusing performance under any legal instrument, nor give a party the right unilaterally to alter or terminate such an instrument.”

However, Regulation 1103/97 applies only to contracts governed by the law of an EU Member State (including those not participating in the euro). The Regulation has no legal effect outside the EU. Accordingly, all other affected jurisdictions, potentially every separate legal jurisdiction in the world outside the EU, will need to address the issue separately in some fashion, either through legislation or judicially if the issue arises. It should be that jurisdictions will simply accept the international law principle of lex monetae, that a state has control over its own currency and any changes by that state must be respected. This is one conclusion of “The Legal Implications of the European Monetary Union Under U.S. and New York Law,” authored by Niall Lenihan and published by the EMI as Economic Paper Number 126 (January 1998), which is a remarkably thorough study of the legal implications stemming from the institution of the euro.

In the U.S. the euro conversion was somewhat complicated by the existence of case law to the effect that if an intended pricing mechanism is no longer available, then the predicate contract is unenforceable. See Interstate Plywood Sales Co. v. Interstate Container Corp., 331 F.2d 449 (9th Cir. 1964). To address these concerns, a number of states, including Arizona, California, Illinois, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania and Texas enacted ameliorative legislation. These statutes were instigated by ISDA (the International Swaps and Derivatives Association) and the Foreign Exchange Committee. The U.S. statutes are substantially equivalent and similar to Regulation 1103/97. See J. Freis, “Continuity of Contracts After the Introduction of the Euro: The United States Response to European Economic and Monetary Union,” 3 Bus. Law. 701 (1998).

Status of the euro conversion under U.S. tax law was largely settled July 28, 1998 with the publication of IRS Temp. Reg. Section 1.985-8T. Conversion to the euro is not a U.S.-taxable event under Code Section 1001, and no IRS consent is needed for the change in functional currency resulting from the conversion for a qualified business unit under Code Section 985.

ISDA has a model provision intended for use in existing and future ISDA agreements in which the parties wish to document their intention that EMU should not affect the continuity of their contract. This is available at the ISDA Web Site -- ( The Financial Market Lawyers Group, together with the British Bankers’ Association, prepared a Protocol for the International Forex and Options Master Agreements which is modeled after, but materially differs from, ISDA’s EMU Protocol, and covers continuity, replacement price sources, payment and novation netting, and provisions for average rate and barrier options. A list of adhering parties to the Protocol is published on the FMLG’s web site (http://www. The New York Foreign Exchange Committee has also issued their paper: “EMU: Guide to Operational Issues in the Foreign Exchange Market” (June 1998) (the “Forex Guide”), discussing the multiple changes in operational infrastructure relating to foreign exchange and forex option trading necessary to implement the conversion to euros. ISDA’s “Economic and Monetary Union: Operations Issues for Derivatives Businesses” was prepared for forex options participants, and the Bank of England produced very useful documents on the euro’s introduction, especially their “Practical Issues” series, available at www. bankofengland. The U.S. Federal Reserve Board Division of Banking Supervision and Regulation issued a series of releases for supervised institutions to address in preparing for EMU (Available at http://www. bog,frb. boarddocs/ SRLETTERS/1998/SR9816.HTM). Finally, the EU’s own web site has a wealth of euro-related information (, including the new “One Stop Internet Shop” at business.

In addition to a “euro audit,” certainly every potentially affected contract should address the euro issue (specifically and in force majeure clauses) and deal with it if any significant aspect of the agreement involves an EU Member State.

On the tax side, are any tax or other accruals, such as forex hedges, crystallized? As noted above, are there any deemed tax “revaluations” or other realized gains or losses, and where is the proper tax venue? What is the proper currency for tax returns? (Under the German Federal system, the German States have insisted that some tax returns continue to be filed in DM until 2002, while others can be filed in euros). And all companies will have to address their transfer pricing as a result of the euro price transparency and the probable adjustments required in retail pricing with the direct effects on profits and profits allocations. Tax audits of transfer pricing now have become instantly more efficient, and the justification of different transfer prices to reflect exchange risks has obviously been eliminated insofar as the “in” countries are concerned.

Commercial Considerations. It does not go too far to say that introduction of the euro affects almost every aspect of the businesses dealing in any significant way with Member States of the EU, and well may have unexpected effects on companies thought to be insulated. The costs to affected businesses of the conversion have been estimated to be as high as $200 billion, with questions whether the costs can be expensed or must be amortized for accounting and tax purposes. Some businesses may eventually relocate to seek a weaker or stronger currency. The savings in currency conversion expenses will be massive, estimated at over $50 billion annually.

Over “Le Weekend” of January 1-3, 1999, many thousands of financial industry employees around the world converted many billions of assets, internal accounts, and trading programs from legacy currencies to euros. An estimated 25,000 issues were redenominated.

Companies organized within the EU obviously are bearing the heaviest costs and burdens from an internal standpoint, but the commercial issues are being experienced well beyond those geographically within the EU.

Here again the issues run the full range of commercial operations: For financial periods including the euro transition, should financial results (including historical results) be reported in legacy currencies or in euros? Is this permitted by relevant national laws? Share capital issues, fractional payments, asset/liability currency balancing, cash management and transfer pricing systems, currency exchange hedges, electronic systems problems, payroll – all presented issues often resolved, often ignored. Pricing presented the questions of dual invoicing during transition, printing and advertising considerations, and disparate pricing among the various EU countries. Customers now can tell at a glance the price disparities formerly at least mildly disguised by the varying national currencies, and may realize for the first time the extent of prior price disparities, with other implications for manufacturers. In January, 1998, for example, Volkswagen was fined ECU 102 million ($112 million) for prohibiting its Italian dealers from selling into Germany and Austria, where their vehicles enjoyed a 30 per cent price differential. Cars in Britain cost up to 45 per cent more than elsewhere in the EU, and with the euro’s decline, “parallel imports” have been appearing outside the euro-zone. The common currency plus the Internet’s instant availability of price comparisons is certain to bring convergence of prices for high-ticket items, and eliminate the formerly hidden profits in cross-border credit transactions, including credit cards, involving two Member States. The ever-present bureaux de change will have their border offices made largely redundant by EMU.

Employees as well are dramatically affected by the euro’s transparency, with common remuneration, pensions and benefits programs throughout the EU seen as inevitable, and pan-European pay rates and labor negotiations are thought likely in the long run, but that will necessarily await convergence as well in the widely disparate productivity levels among the Member States.

Forex Businesses. Specific businesses which were highly dependent on the existence of variable currencies were affected dramatically. Currency traders and brokers experienced the loss of the “cross currency” trading pairs formerly available among the different currencies of the participating Member States, and obviously possible swap trades between currencies both converting to euros vanished entirely on January 1, 1999. Fewer trading alternatives usually mean fewer trades and lower commissions. The dollar-euro rate almost instantly became the most important price in the world. Forex traders can still target peripheral trades such as sterling-euro, krone-euro, and Swiss franc-euro, but they concentrate on the majors, euro-dollar and euro-yen.

Eurobonds and Eurojunk. From January 1, 1999, euro-denominated Eurobonds were off and running, since the euro’s position in any global bond-market index attracted investors conscious of the benchmark weightings, but the U.S. still leads in size and depth and maturities. Investment banks are competing to establish the benchmark bond index. “Eurojunk” issues of high-yield corporate debt have attracted increasing interest in the face of the substantial decline in the rates for Member States’ debt. Even Stockholm has approved listings in euros in order to remain competitive, despite Sweden’s deep-seated hostility to EMU.

Libor and Euribor. Another benchmark seeing strong competition if not displacement is Libor, the London inter-bank offer rate. Since the euro’s introduction, loyalty has clearly shifted to Euribor in the trading world, but effectively the two rates are equivalent. Euribor (based on 360-day spot rate) is logically expected to be slightly higher than Libor (based on 365-day same-day settlement), as it is calculated from a pool of 57 banks (some with lower credit ratings and therefore higher lending rates, and including banks in some non-EU countries) instead of the 16 international banks contributing to the daily Libor calculation by the British Bankers Association.

Government Bonds and Corporate Debt. Key statistics will reflect the new market realities, with the yield curve on the benchmark euro government bond being now a first-page number, and Euroland-wide economic indicators replacing the country-specific numbers of before. The varying Member States’ Government bond market conventions are also converging, and derivatives will be euro-based rather than tied to the legacy currencies.

Government bond and corporate debt prices of course no longer reflect currency depreciation risk but rather credit risk only, and corporate lenders now concentrate on sectors rather than countries in their portfolio mixes. Mutual funds have to hedge their euro-cash exposure to equities in the derivatives market. The principal rating agencies, Moody’s Investors Services and Standard & Poor’s, have essentially standardized their ratings of EMU government bonds by eliminating the differences between local and foreign currency ratings for the 12 Member States. As the various countries’ yield spreads have converged, Moody’s has unified the foreign currency ceilings of all EMU Members to AAA, and S&P has reached the same result by stating that issuers in the EMU zone are not constrained by the rating of their domiciliary country. Both agencies insist that credit differentials between the EMU Members will remain, depending on the fiscal and debt pressures each faces and the flexibility each enjoys, and their relative resolve in maintaining fiscal discipline for many of the same economic and political reasons as in the past.

Equities and Exchanges. On the equity and equity-linked derivatives side, trading in country-specific baskets, or trading based on country national indices (such as Paris’s CAC 40, Frankfurt’s DAX, and London’s FTSE 100) now turns with the elimination of currency risk to turn toward pan-European baskets and indices (such as the S&P Euro and Euro Plus indices, Dow Jones Stoxx 50, the FTSE Eurotop 100 and 300, the Morgan Stanley Capital International Europe indices, and the Travelers Group’s pan-Europe benchmark), and the Member States-only indices such as the FTSE Ebloc 100. Exchange consolidations have continued apace, with country-currency-only exchanges having become irrelevant and electronic trading continuing to increase. Europe had 32 stock exchanges pre-euro; only a handful will emerge.

SEC Disclosures. As with the Y2K situation, where the SEC issued Staff Bulletin No. 5 (CF/IM)(January 12, 1998) with the Staff’s disclosure views, in the euro area the SEC Staff issued Legal Bulletin No. 6 (CF/MR/IM) (available at to remind public issuers, broker-dealers, investment advisers, and investment companies of their euro-related disclosure obligations, including known trends or uncertainties related to the euro’s introduction, competitive and labor implications of the increased price transparency, information technology issues, timing and costs, currency exchange rate risk and derivatives exposure, continuity of material contracts, and potential tax consequences. Disclosure obligations in other countries present the same issues.

Conclusion. The goal of the EU as a combined economic union competing on a more level playing field with the balance of the commercial world has now progressed to its next plateau with the advent of EMU and the euro. With even greater border transparency, commercial combinations are expected to accelerate as well, as the national emotions accept the elimination of the legacy currencies. But the complications are apparent and the costs substantial, with the benefit for non-Member State companies intended to be realized in the greater market forecast to result from the effort and the vastly more simple alternatives for trade and investment which will result. Now that the euro debate has largely been settled, the questions will continue whether Europe can modify its social contract to reduce labor costs, bring its tax rates to modern competitive levels, and shorten its tremendous information technology gap. If these goals can be realized then Euroland will be a dramatically stronger competitive force, and the euro more attractive as the currency of choice.

Questions regarding this advisory or “euro audits” may be directed to Robert A. McTamaney ( of our New York Office.  

[1] A useful mnemonic for the 12 in countries is “Baffling Pigs,” Belgium, Austria, France, Finland, Luxembourg, Italy, The Netherlands, Germany, Portugal, Ireland, Greece, and Spain.

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2020 Carter Ledyard & Milburn LLP.
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