Institutional trust and economic policy Lessons from the history of the Euro : Lessons from the history of the Euro

Chapter 1. Introduction

CHAPTER 1 Introduction 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 world helped to avoid the worst consequences, four years after the collapse , the system has been unable to return to pre-crisis normality. This book does not attempt to give another interpretation to the above events. Instead, it tries to go back in time and consider the role played by trust during the run-up to the crisis. Unlike the majority of the literature, its focus is on the European Union, which ended up struggling with the consequences much longer than the United States, the source of the cataclysm . Examining the roots of the subprime crisis from a perspective of trust can also provide new insights to the decades-long debate on the relevance of trust to economic outcomes. In the following I will provide an overview of the research. The next section gives a brief summary about the main themes of the controversy in the economics and political science literature on trust and its consequences . Then I will turn to the major questions of the research followed by a discussion on methodology and research design. The concept and operationalization of trust is the subject of the fourth section. In the last two sections I will present the argument in a nutshell and provide a brief overview of the chapters. 2 Introduction 1.1. The controversy over trust The concern about the consequences of declining trust can be considered a global phenomenon and is not limited to the post-Socialist region. Starting from the 1990s, a steady decline of trust has been documented extensively in the developed world both at the interpersonal level and toward government .1 Following the subprime crisis these tendencies are likely to accelerate even further (Tonkiss 2009, Uslaner 2010). Such developments naturally raise the question of consequences. Declining trust might lead to suboptimal economic outcomes through a variety of ways. Interpersonal trust can help to resolve coordination failures , facilitate the sharing of information, as well as improve individual incentives for cooperation (Durlauf and Fafchamps 2005, 1652). Trust in government matters through contingent consent, which means that the government can rely on the cooperation of the citizens even if the costs of cooperation exceed the individual benefits (Easton 1965, 273, Gamson 1968, 43, Levi 1998, 88). The beneficial influence of trust on economic outcomes has received substantial support in empirical research. Interpersonal trust has been associated with higher level of economic growth (Fukuyama 1995, Knack and Keefer 1997, Whiteley 2000), while trust in the government is conducive to liberal economic policies (Hetherington 2004) as well as increased redistributive spending (Rudolph and Evans 2005). While the research on trust has a clear normative appeal, its findings have not gone unchallenged in the literature. O’Neill (2002, 9) questions whether there is more to the “crisis of trust” narrative than a culture of suspicion—indicating that distrust toward pollsters is contradicted by the many instances when citizens actively trust suppliers of public goods. Hardin (1999) claims that distrust is actually the proper attitude toward government, since we do not have the relevant information for placing trust in a reasonable manner. Inglehart and Wenzel (2005, 259) also considers the decline of confidence in public institutions as a positive development since it reflects a more critical attitude toward authorities and hierarchies, which is a sign that self-expression values2 are becoming more important in society. Their ideas are supported by the EBRD (2011, 43) Life in Transition survey, which shows that some authoritarian re1 On the U.S. see Hetherington (1998), Patterson (1999), as well as Putnam (2000). For other countries see the references cited in Newton (2008, 244–245). 2 Self-expression values include social toleration, life satisfaction, public expression and an aspiration to liberty. They stand in contrast to traditional values emphasizing survival. Introduction 3 gimes in the post-communist region display exceptionally high trust in their presidents, governments, and political parties. On the question of consequences Durlauf and Fafchamps (2005) note that while trust has been declining since the 1950s in...