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

Chapter 5. The Maastricht Process in the CEE-10

CHAPTER 5 The Maastricht Process in the CEE-10 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 of distrust on economic policy can be mitigated under certain conditions. The major objective of this chapter is to unveil these conditions and look at how a vicious cycle of low trust, populist economic policies, and low growth can be avoided or if present, how a country can break out of it. In order to answer the above question, this chapter looks into the experiences of the 10 new post-communist member states of the EU (CEE10 ). Similarly to the previous chapter, first the role of external factors, primarily the accession to the EMU, will be examined. Noting the divergent influence it has had on domestic economic policies, the contrasting experiences of Hungary and Slovakia will be analyzed more in depth in order to discover the domestic factors that condition the influence of external forces. The major argument of the chapter is that breaking out from a vicious cycle is far from being assured even within the EU, and the combination of several domestic factors are necessary for external forces to have a positive influence. In this process, human agency—most importantly the beliefs of reformers as well as their relationship within the elite—have a critical role. The chapter proceeds as follows. In the next section, the sources of distrust in the region will be examined, including the legacy of the communist regime and the transition. Then I will discuss the external forces that facilitated convergence in the region in spite of these legacies. In the third 96 Institutional Trust and Economic Policy section, I will classify the countries in the region into three groups based on their exchange rate arrangement, then provide a brief overview of their performance with regard to EMU accession. A deeper examination of the influence of distrust on their economic policy will follow. Finally, I will turn to the cases of Hungary and Slovakia and provide an answer to the original question of the chapter. 5.1. An environment of distrust In the Central European region, decades of communism and disillusionment from the transition resulted in an environment characterized by widespread distrust of the state. The two major factors, which contributed to this outcome, are the lack of respect for the rule of law and the paternalistic concept of the state. 5.1.1. Paternalism and rule of law under communism In a general sense paternalism means that the state places restrictions on a person’s choice for her own good (Buckley 2005, 134). While some degree of paternalism can be found in almost every society with the recognition of bounded rationality, in the communist regime this philosophy played a critical role in all areas of life. The system of central planning was an extreme manifestation of state paternalism, since it is based on the assumption that the leadership not only knows the kind and quantity of products needed by the country but also knows the best method to produce them. The main beneficiaries of central planning in the economy were the weak sectors and companies that received subsidies channeled from better performers. This incentive was enhanced by a strong preference for stability, which protected the managers of weak companies from removal (Antal 1985, 96–99). On the other hand, those companies that overperformed could expect increased norms during the next planning cycle, which led to a strong incentive to restrain their performance (Kornai 1980, 53). This arrangement meant strong disincentives to improve productivity, while efforts were concentrated on maximizing benefits from the state. According to Kornai (1980, 567), this incentive structure resulted in a widespread attitude of “passivity, complaints over difficulties , begging for the help of the state instead of coping with trouble on one’s own initiative.” The Maastricht Process in the CEE-10 97 The reliance on the state was naturally not restricted to companies. Citizens were assured that in return for their compliance, the state will take care of them. This implied guarantees about employment and housing as well as universal access to health care and education. For the population , it could seem that...