1. What are the possible risk scenarios? 

At the current time there are a number of possible scenarios that commentators are talking about. These are largely political rather than legal questions and we express no views on the likelihood of any of these events. The scenarios envisaged include:

  • an exit by member state with a weak economy from the Eurozone
  • an exit by a member state with a strong economy from the Eurozone
  • a default by a member state with a weak economy (without exiting the Eurozone)
  • a North-South break-up of member states in the Eurozone
  • a complete disintegration of the euro

ECB measures to support the euro are not considered as part of the scenarios in this section.

2. What might happen if there is an exit from the Eurozone by a member state with a weak economy?

One of the scenarios to receive most commentary is the possible exit of a member state with a weak economy. This scenario is therefore the scenario around which the Q&A is based in assessing the possible risks for businesses.

Aside from the legal issues as to how a member state might exit the Eurozone, any such exit would obviously have major political and economic ramifications for the remaining Eurozone member states and the value of both the new denominated currency of the exiting member state and possibly the euro. It would be envisaged that capital and exchange controls would need to be put in place to protect the value of the new currency of the exiting member (see Exchange and Capital Control risk section). Redenomination risk and Counter-party risk would also be an issue.

3. What might happen if there is an exit from the Eurozone by a member state with a strong economy?

Another scenario that has been commentated on is a possible exit from the Eurozone by a member state with a strong economy. As above, aside from the legal issues as to how a member state might exit the Eurozone, any such exit would obviously again have major political and economic ramifications for the remaining Eurozone member states and possibly the value of the euro. It would be envisaged that capital and exchange controls would need to be put in place to protect the value of the euro (see Exchange and Capital Control risk section). Redenomination risk and Counter-party risk should in theory be less of an issue as the redenominated currency and counter-parties should be stronger.

4. What might happen if there is a default by a member state with a weak economy (without an exit from the EU)?

A member state with a weak economy might default rather than leave the Eurozone. This would need to be done with the agreement of other Eurozone member states and financial institutions such as the ECB and the IMF. In such a scenario, it would be envisaged that some formal restructuring package would need to be agreed on a global basis both to assuage creditors and to calm global financial markets.

5. What might happen if there is a North-South break-up of member states in the Eurozone?

There has been some speculation that there might be a North-South break-up of the Eurozone with a Northern and Southern euro in operation. It would be envisaged that in such a scenario, capital and exchange controls would need to be put in place to protect the value of the Southern euro (see Exchange and Capital Control risk section).

6. What might happen if the Eurozone disintegrates entirely?

If the euro were to collapse entirely, there would obviously be very serious consequences not just for Europe but for global financial markets generally. The euro would need to be replaced by local new currencies of member states and legislation would be needed at both a European and a national level to address the political and economic fallout, including redenomination of euro payment obligations. Capital and exchange controls would also need to be put in place (see Exchange and Capital Control risk section).

7. How might a member state exit the Eurozone? 

The first possible scenario is a lawful exit by a member state in accordance with the TFEU, which sets out, amongst other things, the legal framework for economic and monetary union. However, the TFEU1 does not provide a clear mechanism for a member state to exit from the Eurozone. The only clear exit mechanism is article 50 of the Treaty on European Union2 (TEU), which permits a member state to withdraw from the European Union (EU) as a whole and which by logical consequence, would require a withdrawal from the Eurozone at such time. A member state which wishes to exit the Eurozone but remain a part of the EU would appear to have to exit the EU under article 50 and then apply for readmission3 , subject to ratification by other member states, to rejoin the EU.4 Given this would constitute a consensual exit, it is likely there would be legislation (both at EU and national level) to deal with the legal uncertainty created by a member state leaving the Eurozone.

A second possible scenario for a lawful exit is for member states to agree to amend the TFEU to allow for a lawful exit by a member state from the Eurozone without requiring a withdrawal from the EU as a whole. Again, given this would constitute a consensual exit, it is likely there would be legislation to deal with the legal uncertainty (both at EU and national level) created by a member state leaving the Eurozone.

A third possible scenario is a unilateral and therefore non consensual withdrawal by a member state from the Eurozone. This is the scenario which is most likely to create significant legal uncertainty because there is less likely to be time to implement EC legislation dealing with the legal uncertainty that would inevitably be created by such a unilateral exit.

For further commentary and analysis see Financial Times article and related briefings: “Euro exit as legal quagmire”.