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Institutional trust and Economic Policy

Lessons from the History of the Euro

Dora Gyorffy

Publication Year: 2013

The book seeks to link theoretical debates on the relevance of trust in economic outcomes with the current arguments about the origins and lessons of the subprime crisis. By what mechanisms does trust influence economic outcomes? Under what conditions do these mechanisms prevail? How do debates about trust help our understanding of the subprime crisis in the European Union? By integrating insights from Post-Keynesian, Austrian and new institutional economics, the central proposition of the analysis is that the presence or absence of institutional trust creates virtuous and vicious cycles in law-abiding, which critically influence the possibility for economic agents to have realistic long-term plans. In a low-trust environment the uncertainty surrounding the functioning of institutions leads to short-term decisions. Political business cycles, lax regulations on credit and boom-bust cycles are typical of such an environment. While empirical evidence from the EU largely supports these propositions, important exceptions are also identified and the conditions for the theory noted–including financial market influences, fashions in economic theory as well as political leadership.

Published by: Central European University Press


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p. 1-1

Title Page, Copyright

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pp. iii-iv

Contents List

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pp. v-vii

List of Figures

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pp. ix-x

List of Tables

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p. xi-xi

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Preface and Acknowledgments

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pp. xiii-xv

Distrust is a palpable experience for all who live in Central and Eastern Europe. Untrustworthy governments and endemic corruption characterize the political class, while law avoidance and lack of civic involvement is a feature of the masses. In such an environment maintaining an attitude of distant cynicism is a sort of survival tool for those still interested in politics. Understanding the consequences of this state of affairs for economic ...

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Chapter 1. Introduction

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pp. 1-12

When trust is present, we hardly notice it. It is only the disruption caused by its loss that makes us aware of its significance. In the economic sphere no other time has shown this more clearly than the period following the collapse of Lehman Brothers in September 2008. The normal functioning of the interbank market was suddenly suspended, and the global financial system froze. While the intervention of public authorities around the ...

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Chapter 2. Institutional Trust and Individual Decision Making

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pp. 13-34

The main objective of this chapter is to theorize how the process of individual planning is influenced by the presence or absence of trust in the institutional environment.1 This is a necessary first step to understand the major question of the book: how institutional trust affects the making of economic policy. In order to build a theory on the role of trust in individual decision making, it is useful to start ...

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Chapter 3. Institutional Trust and Policy Making in the EMU

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pp. 35-57

In the previous chapter a theoretical framework was proposed on how trust or distrust in the institutional environment affects the plans of indi-viduals in society. It has been argued that ceteris paribus the presence or absence of trust primarily influences the time horizon of decision making: long-term orientation is realistic only in a high-trust environment, where ...

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Chapter 4. Fiscal Developments in the EU-15, 1992–2007

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pp. 59-94

In the previous chapter, several hypotheses have been formulated regarding the economic policies of different countries following the introduction of the euro. Fiscal policy has received a particular emphasis—although decision making remained in national hands, supranational rules strongly constrain governmental discretion. As fiscal policy lies at the heart of domestic politics, it was hypothesized ...

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Chapter 5. The Maastricht Process in the CEE-10

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pp. 95-146

Post-communist Europe is an excellent place to study the effects of distrust on economic policymaking. In this part of the world decades of communism and a painful transition process bred considerable disillusionment from the political system. Still, following the transition the region achieved considerable results in terms of convergence, which implies that the consequences ...

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Chapter 6. Financial Crisis in the EU-25

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pp. 147-175

Old and new EU members alike came under severe pressure as the sub-prime crisis swept over the world in 2008. Economic conditions were very different in the various groups, which were discussed in the previous two chapters, and the divergence persisted throughout the crisis. The major question of this chapter is whether the pre-crisis evaluation of economic ...

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Chapter 7. The Relevance of Trust for Economic Outcomes

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pp. 177-197

In the previous chapters, I have examined how institutional trust matters in economic policymaking in the EU-15 and the CEE-10 within the con-text of euro-zone accession. The experiences of various members during the subprime crisis represent an important test for the sustainability of policies. As we could observe, while most countries fared according to ...


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pp. 199-216


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pp. 217-222

E-ISBN-13: 9786155225345
Print-ISBN-13: 9786155225222

Page Count: 238
Publication Year: 2013

Edition: 1st