What are the Long-Term Consequences of the Eurozone Debt Crisis?

Europe’s worsening debt crisis has prompted a host of dire warnings this week from influential think-tanks, credit ratings agencies, and government officials who are saying that the European Union has “10 days to complete and conclude the crisis response.”

For lawyers on the ground in Europe, the range of potential scenarios makes contingency planning difficult, as they consider the possibilities: the euro currency could simply muddle through; one or more countries could exit the EU and with it, the eurozone economy; or, while least likely, the euro currency could collapse altogether.

The consequences for companies in (or with interests in) the EU, then, can vary a great deal.

“It’s very hard, because there are so many moving parts,” says James Modrall, a partner in the Brussels office of Cleary Gottlieb Steen & Hamilton.

An obvious hypothetical, say attorneys, is how contractual payment obligations would play out should a member state leave the EU and adopt another currency. For example, if a country were to exit the EU and change currencies, would that country’s debtors still be obliged to fulfill their payments in euros, or in the new currency?

For in-house counsel, says Joerg Wulfken, a partner in Mayer Brown’s Frankfurt office, one question may be: “Do I need any currency protection clauses in my contracts?” Such clauses could help safeguard a company’s long-term financing or hedging agreements, in which obligations in euros are hedged against other currencies.

Wulfken says he’s not aware yet of a standard euro currency clause, in the event that a member state were to opt out of the EU. “But I think these clauses will develop as time goes on,” says Wulfken, who co-wrote the firm’s legal update on the sovereign debt crisis last month.

Another uncertainty, he says, is: “What happens to the euro at all if certain EU member states—and Greece is one of them—opt out?”

In that scenario, does the euro disappear? Wulfken is not saying that’s likely. But it is a question being discussed in the markets, he says.

Not that exiting the EU could happen overnight. “It’s a lot more difficult, legally speaking, than people seem to assume,” says Modrall.

In a paper he penned earlier this year for the International Financial Law Review, Modrall explained it thus: “A withdrawing member state would have to negotiate an agreement approved by a qualified majority of the heads of state and government of all EU member states, with the consent of the European Parliament, or wait out a two-year notice period.”

And, according to the treaty that governs the EU, “departing from the euro are without leaving the EU entirely would require a treaty amendment,” Modrall says.

Having worked in investment banking for part of his career, DLA Piper London-based partner David Eatough says what can make a financial crisis difficult for lawyers is that “you tend to think very much that it matters what the documents say.” Most of the time, that’s true, he says, “but I think in a systemic crisis it doesn’t matter what the documents say, and that is a very hard thing for lawyers to accept. The only thing that matters is where the cash is.”

Looking back on when the euro was first introduced, which also raised questions and concerns, Eatough recalls, “the lesson that was learned then—and may still be applicable now—is that it does not matter how much planning you try to do as a contractual matter. . . none of that matters, because what happens is that the market decides and imposes, effectively, a solution on everybody.”