Return to Contents Colin Powell Introduction Jersey is in an interesting and unique position when it comes to European Economic and Monetary Union (EMU). The Island is not in the European Union for the purposes of EMU and therefore will not be subject to the rule of the European Central Bank or required to comply with Directives or Regulations issued in support of EMU. At the same time the Island is in monetary union with the United Kingdom and therefore has a monetary relationship with a country which sometime in the future can be expected to be a member of EMU. Furthermore, the Island’s finance centre activities are related to those of the City of London in such a way that the Island has been described as the "Offshore" City. What is good or bad for the City in relation to EMU is therefore also likely to be good or bad for the Island. What planning for EMU is undertaken by City based institutions should also be mirrored in the planning undertaken by institutions in Jersey. There is no reason to expect the Island’s present relationship with the European Union to change in any way as a result of the EMU. There is every indication that the European Union finds the present relationship, as defined by protocol 3 attached to the UK Treaty of Accession to the European Community, a satisfactory one. -
The Treaty on European Union (the Maastricht Treaty) marked a new stage in creating ever closer union among the peoples of Europe. In drawing up that Treaty, Member States addressed the need to make amendments to the Rome Treaty establishing the European Economic Community. That review extended to some minor amendment to Article 227 a paragraph of which refers to the relationship with the Island. No suggestion was made that the Article was in need of change as far as the Island’s relationship with the EU was concerned. -
The Treaty of Amsterdam, which further amended the Treaty of Rome, as well as amending the Treaty on European Union, also made no reference to the position of the Island. -
In recent years arrangements have been concluded with other small communities which have recognised the point made at the time of the agreement on the Island’s relationship, in 1971, that "it is no part of a great Community to impose burdens on a small community". -
The relationship is one which is of advantage to the European Union as well as to the Island. Through Jersey substantial funds (estimated at in excess of £150 billion) are attracted from the world at large and invested in or through European financial centres, particularly the City of London. -
There is also no reason to expect the Island to be caught up in any process of fiscal harmonisation within the European Union which may follow upon EMU. The Island is not in the European Union’s fiscal territory and any change in this arrangement would require a change in the Treaty provisions that provide for the Island’s relationship with the European Union. No such change is in prospect or contemplated. Jersey Currency While the Island will not be part of EMU, it will be affected by it. For example, if the United Kingdom should in the future adopt the single currency, and euro notes and coins should replace sterling notes and coins within the United Kingdom, there is every reason to expect Jersey to adopt the same denomination for Jersey notes and coins. Given the Island’s strong trading relationship with the United Kingdom the only practical course of action is for the Island to retain the present arrangement whereby Jersey notes and coins have the same denomination as the notes and coins which circulate in the United Kingdom and which are also accepted for transaction purposes within the Island. When considering the position of the Jersey currency in the context of EMU it is helpful to remember the purpose of issuing Jersey notes and coins. It is not to create a tradeable currency, which would have an exchange relationship with other currencies. It is to satisfy the monetary needs of Island residents for transactions within the Island. Being in monetary union with the United Kingdom it would be possible for only United Kingdom notes and coins to be used for domestic transaction purposes within the Island. There is, however, money to be made from issuing notes and coins. In 1996 the States of Jersey made over £2.5 million from the issue of notes and coins worth some £45 million in face value, and the more Jersey notes and coins that are out in circulation the better it is for the local exchequer. There is no restriction on what form Jersey notes and coins might take but it has long been accepted that considerable difficulties would be experienced, for Island residents and visitors, if the denomination of Jersey notes and coins was to be different from those circulating in the United Kingdom. Many goods are received from the United Kingdom already priced and the idea of having a different currency for the Island with a need for dual pricing or overstamping is not an attractive one either for retailers or for shoppers. When the United Kingdom adopts the euro, Jersey will be able to issue its own euro denominated notes and coins as it is presently able to issue its own pound sterling notes and coins. In the same way that the Island issues notes and coins which are differently designed to those issued by the United Kingdom, to avoid confusion, so the Island will not be constrained by the need to follow the design of the notes and coins to be issued by the European Central Bank. Indeed in obtaining agreement that the Island would be able to issue euro notes and coins it has been indicated that they would be expected to look very different from the notes and coins circulating in Europe. This would avoid confusion and also avoid any impression that the notes and coins were issued by the European Central Bank. Jersey euro notes and coins therefore will have no more legal status within the single currency area than the Jersey pound sterling notes and coins presently have within the United Kingdom. The only difference from the present situation will be that whereas at the present time French currency, and the currency of other Member States, are not generally accepted by local shop keepers, and visitors from the Continent are required to exchange their currency for UK or Jersey notes and coins, when the United Kingdom is in EMU the opportunity would exist for euro notes and coins generally to be accepted for transactions within the Island. Although the Island will be outside EMU and not directly affected by the monetary policy actions of the European Central Bank, euro exchange rates and interest rates will have an impact on the Island. At the present time United Kingdom monetary policy determines the interest rates that prevail in the Island. When the United Kingdom joins in EMU, interest rates would be determined by the monetary policy of the European Central Bank, and the foreign exchange rate would be influenced by the monetary conditions prevailing in Europe rather than in the United Kingdom. There is no knowing whether interest rates in the Island will be higher or lower whether the United Kingdom is in or out of EMU. Similarly there is no sure way of determining whether the exchange rate for international transactions will be less or more favourable for Island businesses. What is certain is that the Island will have no more influence over the interest rates and exchange rates applying to local business and personal transactions in the future with EMU than it does at the present time. Planning for the euro The United Kingdom Government has made three key decisions: to declare in principle for the single currency; to make the United Kingdom’s economic requirements the decisive test for British membership of EMU; and to provide a period of stability and certainty to prepare for a decision early in the next Parliament. Businesses in the United Kingdom - and this applies equally to businesses in Jersey - are being encouraged to: -
prepare to be able to trade in euro and compete in the changing economic environment of the Single Market from the 1st January 1999, depending on the type of their activities; -
think about actively preparing for the possibility of the United Kingdom joining EMU from early in the next Parliament. Within the City of London preparations are gathering pace and all the major financial institutions operating in London which the Bank of England has consulted have confirmed their expectation that they will be ready for the introduction of the euro at the beginning of 1999. There is no reason to expect Jersey banks, as subsidiaries or branches of international banks with offices in the City of London, to be any less well prepared. The Bank of England is publishing regular reports on practical issues arising from the introduction of the euro. The latest report (issue no. 6 - 10th December 1997) makes reference to a number of matters which also have a relevance for the Island. -
After 1st January 1999 the euro will be able to be used as a parallel currency alongside sterling. The extent of its use is likely to depend on how well EMU works and whether the United Kingdom is widely expected to join in the relatively near future. -
The euro will be extensively used for the trading and settlement of wholesale financial transactions in the City of London. The euro is also expected to be used by many UK based companies which trade across the Single European Market, and by companies from the euro area trading with the United Kingdom (and both will apply equally to Jersey). Some companies have indicated that they intend to introduce the euro as the official company currency in their subsidiaries outside the euro area. As a result some Jersey companies with no external trade may need to be able to cope with euro transactions, or at least with the sterling equivalent of transactions denominated in euro, even though they have not needed a foreign currency capability to date. -
It is unlikely that the use of the euro will spread much to the retail sector so long as the United Kingdom remains "out" (although French visitors to Jersey may persuade some retailers to accept the euro earlier). -
The UK Chancellor of the Exchequer has announced that companies in the United Kingdom will be able to file accounts, pay taxes and denominate their shares in euro, in the same way that they can use foreign currency today. -
Even though the U.K. will be "out", many companies will need to adapt their accounting systems to record receipts and payments in euro. The timing of switching accounts is for companies to decide. However, firms with subsidiaries in the euro area should note that a number of EU Member States will not permit publicly filed accounts to be euro-denominated until after 1st January 2002 when euro notes and coins are introduced. A particular question which the UK authorities are considering is whether the use of the euro as a parallel currency while the UK is "out" will reduce the lead time that banks and businesses require between the date of any announcement about UK entry, the date of entry, and the date when euro bank notes and coins are introduced in the United Kingdom as legal tender and sterling bank notes and coins begin to be withdrawn. This is a matter that is also of particular concern to Island businesses and the public sector. It has consequences for information systems, for accounting systems, and for equipment replacement programmes (e.g. tills, vending machines). Legislation Although outside EMU, Jersey will be faced with a need to follow legislation enacted in the European Union to provide for the introduction of the euro in the same way as other non-EU financial centres which have a significant trading relationship with the European Union. Within the European Union there are two Reg which have given legal effect to the euro. The first Regulation [1], under Article 235 of the Treaty, is now in force in all Member States including the United Kingdom. This Regulation ensures that: -
the ECU will convert into the euro one for one on the 1st January 1999; -
there will be continuity of contracts. Financial contracts denominated in the national currencies of participating Member States will remain unchanged as a result of the introduction of the euro, except for the change in denomination and hence amount at the conversion rate; -
the conversion rates will have six significant figures, and may not be rounded. But monetary amounts will be rounded to two decimal places (i.e. to the nearest euro cent) with amounts ending in five being rounded up. The second Regulation [2], under Artic9 L(4), is agreed but only the participating Member States can vote to adopt it. The Article 109 L (4) Regulation therefore will not apply directly in the United Kingdom. However, certain provisions will almost certainly apply indirectly because they are part of the monetary law governing the euro and will therefore be recognised by the English courts. Because of the international scope of the Island’s finance centre activities, and in particular the close working relationship with the City of London, the Regulation also has a relevance for businesses in the Island. The Article 109 L (4) Regulation: -
provides legally enforceable equivalents, at the conversion rates, between national currency units and the euro unit during the transitional period from 1st January 1999 until the 31st December 2001 -
obliges banks (and other account providers) to convert incoming payments from the national currency unit to the euro unit during the transitional period, and vice versa, depending on the denomination of the customer’s account; -
allows issuers to re-denominate into the euro unit their outstanding "in" currency denominated debt securities (once the relevant Member State has re-denominated some or all of its own sovereign debt under its national law) without a bondholder meeting, so long as there is no change in economic value involved; -
establishes that the euro will become legal tender throughout the euro area when euro bank notes and coins are issued on the 1st January 2002. Euro area national bank notes and coins will subsequently be withdrawn and cease to be legal tender by 30th June 2002 at the latest. This final period may be shortened by individual participating Member States, if they so choose. Because it is important to provide legal certainty and to give as sound a base as possible for transactions carried out under English law, the Bank of England has consulted widely about whether there is a need to introduce into English law through domestic legislation any of the provisions of the Article 109 L(4) Regulation which will not otherwise apply. The current view is that it is not essential to introduce such legislation. The application of the euro regulations The European Commission has published, with a note of caution, a set of questions and an the euro regulations a number of which should be of particular interest to financial institutions and other businesses in the Island. The full text is published in "The legal framework for the use of the euro - questions and answers on the euro regulations" [3] . In the introduction to the questions and answers, the European Commission states: "the answers provided in this document are preliminary considerations by members of the staff of the European Commission. They should be read under the twin provisos that the interpretation of legislation is in the final instance for the courts to decide and that the interpretations given do not represent an official opinion of the Commission as such. It should be recalled that the two regulations which form the legal framework for the use of the euro are not the product of the Commission, but the legislator i.e. the Council". One of the questions posed is "is there an obligation for credit institutions to make conversions during the transitional period between the euro unit and the national currency unit?" The Article 109 L (4) Regulation on the introduction of the euro provides that amounts denominated in the euro unit or a national currency unit and payable within a participating Member State by crediting an account can be paid by the debtor either in the euro unit or in the national currency unit. It allows the debtor to make payments in a denomination other than the one in which his obligation is expressed, provided of course that he has the necessary payment facility and that his creditor accepts to be paid by that means of payment. Payments into and within non-EU countries (like Jersey) however are not covered by the Council Regulation. Payments from such countries are on the contrary covered as soon as the payment arrives at an account located in a participating Member State, providing the payment is denominated in the euro unit or in the national currency unit of the Member State where the account of the creditor is located. A contract stipulating that payment is to be made in francs to an account located in France would therefore be covered by the Council Regulation even if the debtor is located in Jersey and initiates the payment from there in euro. The conversion obligation from euro to francs would of course lie only with the French bank. The application of the Regulation is dependent only on the location of the institution where the crediting of the account takes place. It is independent of the nationality or residence status of the creditor or debtor and is also independent of the contractual law which underlies the payment. Another aspect of the introduction of the euro of particular relevance to the Island is continuity of contracts. Various States in the United States of America have considered contractual certainty so important that they have introduced their own domestic legislation to make it absolutely clear that the replacement of one of the European currencies by the euro will not operate to frustrate or terminate financial obligations. Equivalent Jersey legislation providing for continuity of contracts is in the process of being prepared. This legislation will also deal with the other two matters covered by Council Regulation (EC) No 1103/97. It has been argued that the domestic law of most countries would not allow a contract to be terminated simply because one of the currencies referred to in the contract has been replaced by the euro. However, it is considered desirable to reproduce the wording of Article 3 of Council Regulation (EC) No. 1103/97; that is - "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 agreement. This provision is subject to anything which parties may have agreed". Fixing interest rates There are other aspects of the introduction of the euro which have a relevance for Island businesses. One example is the disappearance of certain reference interest rates. There will be a single rate for the euro determined by reference to rates generally across the single currency area. This will be what is currently referred to as EURIBOR. Establishing EURIBOR will be co-ordinated by the Banking Federation of the European Union, although questions remain about the precise method of calculating the rate. The question has been posed whether EURIBOR is a commercially reasonable substitute for other reference interest rates, or whether a contract would be made impossible to perform because a fundamental part of the contract - the method used for determining the price of money - could not be operated. There is currently no certain answer to this question. The legal framework for the euro does not expressly address the issue of the disappearance or replacement of reference rates like interest rates or securities prices. The reason for this is the diversity of existing reference rates. They are often defined by private entities which makes it difficult to provide a single legislative solution for the replacement of these rates. Nevertheless it appears that contracts including reference rates will not be discontinued because of the introduction of the euro and no specific enactment is envisaged in the EU on this subject. Many contracts include a fallback clause which designates a substitute for the original reference rate. Moreover it can be expected that parties will agree on the replacement of a reference rate to keep the contract. Close substitutes will be available for most reference rates. For contracts with reference to the ECU as defined in Community law, the conversion of the ECU to the euro at a rate of one to one will follow directly from the terms of the contracts and the application of Community law (which will be reflected in the Jersey legislation referred to above). If parties have made a link to the official ECU, a judge in a third country may be expected in case of litigation to look at Community legislation (Article 109 L (4) of the Treaty and Council Regulation (EC) no. 1103/97) for interpreting the corresponding provisions in the contract. It can be expected that those ECU contracts under third countries jurisdictions which include no clear reference to the official ECU will equally be converted to the euro at a rate of one to one; in the case of litigation a judge will probably refer to European law which establishes a presumption that all references to the ECU are references to the official ECU. In fact, although not being a lawful currency, financial markets have always treated the ECU as being very similar to a currency, which might therefore benefit from the application of lex monetae. Force majeure clauses in contracts generally excuse non- performance of a contract in the case of circumstances beyond the control of the parties which prevent performance or which lead to a severe disruption of circumstances underlying a contract which could not be anticipated by the parties. The conditions which might trigger these clauses are not considered by the European Commission to be met in the case of the introduction of the euro. The Article 109 L (4) Regulation on the introduction of the euro gives a right to a private issuer of securitised debt to re-denominate its outstanding debt; this right applies to debt which is negotiable in the capital markets and to money market instruments; the right can be exercised when the government of the Member State in whose currency the debt is denominated has taken measures to re-denominate its own debt, issued under its own contractual law. It is not necessary that the respective Member State has re-denominated the whole amount of its debt. What matters is that a Member State has re-denominated at least part of its debt. In this context another event of relevance for Island financial institutions is the "conversion weekend", spanning 31st December 1998 to the 4th January 1999, which will involve re-denomination into euro of some or all of the marketable debt issues of "in" governments and some other issuers together with a conversion into euro of some cash accounts in central securities systems. All those operating in the wholesale securities markets in London need to understand how the conversion weekend is expected to work. Conclusion On these and many other matters the Island will have to have regard for what is happening in Europe because of the international nature of its business activities, and in particular its finance centre activities. In general however the Island should have nothing to fear from EMU whether the United Kingdom is "in" or "out". The onset of EMU can be considered to be one more change in a constantly evolving commercial environment to which the Island is always needing to respond. Past experience would suggest that the Island is quite capable of handling the situation. Past experience would also suggest that such a period of change and of market disturbance will throw up business opportunities of which Jersey will be well placed to take advantage. However, this process will only occur if there is adequate planning, and if there is full and effective recognition by the legislature and by the courts of the need to respond to the changes that the introduction of the euro will bring in its train. Colin Powell OBE, formerly the Island’s economic adviser, is now Chief Adviser to the States of Jersey. |