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Contracts, Italy and the Euro

March 4, 2013

At first glance, it may seem difficult to find a connection between contracts, Italy and the Euro. But I believe there is an important lesson that contract negotiators should be drawing from the crisis that now faces Europe.

On the surface, the parties to any contract have relatively simple motives. One has a need, the other has a product or service which can satisfy that need. They then debate whether supply can be at a price that makes the arrangement of mutual economic benefit and, if it can, they reach agreement.

The key to success – as all experienced negotiators know – is whether the parties have truly understood the need and the capability; and whether they have undertaken ‘due diligence’ to check the honesty and integrity of the counter-party.

But while this may be an adequate process for a transactional contract, it often fails when there is a need for longer-term commitment. That is because either the personality or ‘culture’ of the parties prevents harmony, or that their interests diverge over time and they need to drift apart.

The grand European venture that led to the creation of the Euro was bound by contract (on this occasion under the title of ‘treaty’). It was never entirely obvious what the many stakeholders involved with this project hoped to gain. It is clear that there was some divergence of interests and in some cases, key stakeholders (like the populations in the countries affected) were offered limited insights and even less opportunity to express opinions.

What we see now is the huge difference in perceptions and expectations of the various peoples in Europe, as well as the continued variations in underlying culture. In the relatively high productivity northern states, ‘the common market’ is an opportunity for open trade and increased wealth creation. Corruption levels are very low and the rule of law extremely strong. In the south, the attitudes appear rather different, at least among the politicians, for whom the Euro meant avoiding tough decisions and living off borrowing and wealth transfer. Countries such as Italy and Greece also remain plagued by high levels of corruption and an archaic, slow-moving legal system that undermines trust or confidence in the law.

The moral of the story – it seems to me – is that you should never enter into long-term contracts without full understanding of your counter-parties culture and behavior. If you choose to ignore these realities, the chances of deep misunderstanding and costly failure is high.

One Comment
  1. Dagmar Ueberfeld-Lang permalink

    Great comment which shows high sensitivity for the issues at hand. I just attended a legal workshop were we discussed contractual scenarios for the contract partner’s dropping-out of the Euro (currency) and the business impact this drop-out will have. When the Euro was introduced in 2002, this would have been unimaginable for most people. Nowadays, legal professionals will have to factor such a scenario in when negotiating longer-term contract with European partners.

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