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Institutional Trust and Economic Policy
Lessons from the History of the Euro

Dóra Győrffy is associate professor at Péter Pázmány Catholic University, Hungary

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

1. Introduction
1.1. The controversy over trust 1.2. Research questions 1.3. Methodology and research design 1.4. The concept and measurement of trust 1.5. The argument in a nutshell 1.6. Summary of chapters 2. Institutional Trust and Individual Decision-making 2.1. Theories of expectations 2.2. The concept of uncertainty 2.3. The role of institutions in reducing uncertainty 2.4. Compliance and legitimacy 2.5. Institutional trust and individual planning 3. Institutional Trust and Policy-making in the EU 3.1. Unique and recurrent decisions: the rationality of policy-makers 3.2. The de-politicization of money in the EMU 3.3. Policy choices within the euro-zone: the role of trust 3.4. Prospects after the euro – hypotheses 4. Fiscal Developments in the EU-15 1992-2007 4.1. The EMS crisis – the start of the convergence period 4.2. The working of the EMU fiscal rules 4.3. Motives for change: internal commitment vs. external anchor 4.4. Institutional quality in the EU-15 4.5. Approaches to fiscal consolidation 4.6. Virtuous and vicious cycles at work: Sweden vs. Portugal 5. The Maastricht Process in the CEE-10 5.1. An environment of distrust 5.2. The role of external constraints in an environment of distrust 5.3. Institutional quality and exchange rate choice 5.4. The impact of distrust on economic policy in the CEE-10 5.5. Reforms without trust: Hungary vs Slovakia 6. Financial Crisis in the EU-25 6.1. The origins of the subprime crisis 6.2. The crisis in the EU 6.3. Consequences of the crisis in the EU-25 6.4. Surprising cases: Ireland vs Poland 7. The Relevance of Trust for Economic Outcomes 7.1. Summary of findings 7.2. Differences between East and West 7.3. Institutional trust and economic consequences 7.4. Factors modifying the influence of trust 7.5. Implications for policy 7.6. Conclusions Bibliography Index

"The method and the underlying research design followed in the study is a very fortunate mix of qualitative, quantitative and case oriented elaborations, which generally properly back the development of balanced views. Good design allows the author at the same time to leave enough room to come up with policy oriented answers as well. Adhering to standard structures of the scientific searches, first, a firm theoretical framework was presented on the possible mechanisms through which trust affects economic policies; then the drawn hypotheses were tested empirically; finally deviations from the suggested theoretical patterns were analyzed – as can be expected from genuine works – to trigger some modification of the initial theory". - Society and Economy

"The book is nicely and clearly written... the author does a good job in summarising each chapter not only at the beginning but also at the end of each chapter. It allowed the reader to grasp the material and go over the information more than once. Moreover, the conclusion summarises the entire book and the findings very well. These findings are really important and could be examined further as the crisis has been developing since the date the book was written (2013). Therefore, I believe the book is relevant not only for students and scholars of comparative political economy but also to policy makers." - Europe-Asia Studies

"Trust as a research topic in the social sciences has gained considerable importance in the past two to three decades. This book is not only valuable and relevant in the current economic environment, but also complements Gyõrffy’s previous research, which examined the effects of political trust on fiscal consolidations. The main objective of this research was to examine the heritage of distrust, inefficient institutions and unrealistic expectations indirectly, and to focus on the influences on the makings of economic policy. At the time, such scepticism proved to be unfounded as the process of accession to the European Union provided an anchor for policy-making. However, distrust persists following the EU accession, while the anchor is largely gone. Early fears of transition materialised two decades later and the problems associated with a low level of trust need to be addressed." - Acta Oeconomica

204 pages
978-615-5225-22-2 cloth $55.00 / €42.00 / £35.00