Withdrawal From The Eurozone: Implications For Global Markets

Profession:Clyde & Co
 
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The cloud of uncertainty hanging over the European Union ("EU") and the future of the European single currency (the "Euro") was exacerbated on a day which historians may yet consider one of the unluckiest Fridays on record.

Alongside the grounding of the Costa Concordia cruise ship, on 13 January 2012 the EU's economic stability was further challenged by Standard & Poor's decision to downgrade the long-term credit rating of nine of its members. The growing concerns regarding the mounting debt levels within the Eurozone has led to much speculation that a number of vulnerable Eurozone Member States ("EMSs") may soon default. The combination of the European Central Bank ("ECB") being unable to accept a reduction on its own sovereign debts and private creditors being loath to accept deeper losses, has brought the risk of default into stark focus.

The Eurozone is finding itself in uncharted territory and the (once thought to be) "nuclear option" of a EMS defaulting and returning to its previous currency is now being considered as a viable measure to alleviate financial woes for the Eurozone as a whole. Regardless of such considerations, should a EMS fail to agree a suitable repayment package of its debts EU policymakers may be left with no other option but to expel them from the Eurozone. This note examines how a EMS's potential departure from the Eurozone might be engineered, the potential consequences and the steps companies might consider to protect their interests.

Mechanism for leaving the Euro

A significant challenge is the fact that there is no mechanism within EU Law for a member state to do so – voluntarily or otherwise. Despite the viability of a "one size fits all" currency being challenged long before the Maastricht treaty, it now means that there is much uncertainty as to how an exiting EMS would revert to its original currency. The legal position is that whilst withdrawal from the EU is a right of member states under Article 50 of the Lisbon Treaty (the "Treaty"), there is no equivalent right of exit from the single currency. In September 2011, following rumours that Germany and the Netherlands were considering exiting the Euro, the European Commission insisted that no member of the Eurozone was legally entitled to withdraw. In the absence of prescriptive legislation it is uncertain as to whether a EMS would be able to withdraw from the Euro without also having to leave the EU too.

Article 50 of the Treaty provides that upon receipt of a notification to withdraw, the EU is to "negotiate and conclude an agreement with that State, setting out the arrangements for...

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