Institutional Trust and Economic Policy

Lessons from the History of the Euro
$65.00 / €53.00 / £47.00
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238 pages, 6 tables and 45 figures

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

List of Figues.
List of Tables
Preface and Acknowledgments

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

Institutional Trust and Individual Decision Making
2.1. Theories of expectations
2.1.1. Rational expectations
2.1.2. Austrian and Post-Keynesian approaches to expectations
2.2. The concept of uncertainty
2.3. The role of institutions in reducing uncertainty
2.4. Compliance and legitimacy
2.4.1. Tax compliance
2.5. Institutional trust and individual planning

Institutional Trust and Policymaking in the EU
3.1. Unique and recurrent decisions: the rationality of policymakers
3.2. The de-politicization of money in the EMU
3.2.1. The collapse of Bretton Woods and its turbulent aftermath.
3.2.2. The creation of the Single market

3.2.3. Learning monetary cooperation: lessons from history
3.2.4. A technocratic approach to the de-politicization of money
3.2.5. Self-imposed commitments for sound money
3.2.6. Tensions within the arrangement—the role of fiscal policy
3.3. Policy choices within the euro-zone: the role of trust
3.3.1. Fiscal policy, growth, and trust
3.3.2. The difficulties of reform
3.3.3. Implications for fiscal consolidation
3.3.4. Implications for adjustment within the EMU
3.4. Prospects after the euro—hypotheses

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
4.6.1. Institutional conditions
4.6.2. Fiscal policy and growth following the EMS crisis
4.6.3. The political economy of fiscal reforms

The Maastricht Process in the CEE-10
5.1. An environment of distrust
5.1.1. Paternalism and rule of law under communism
5.1.2. The heritage of transition
5.2. The role of external constraints in an environment of distrust
5.2.1. International financial markets
5.2.2. The EU as an anchor
5.2.3. The Maastricht process as an anchor.
5.3. Institutional quality and exchange rate choice
5.4. The impact of distrust on economic policy in the CEE-10
5.4.1. Fiscal policy in the CEE-10, 2002–2007
5.4.2. Credit developments in the CEE-10, 2002–2008
5.4.3. Assessment
5.5. Reforms without trust: Hungary vs Slovakia
5.5.1. Roots of distrust
5.5.2. Vicious cycles in Hungary
5.5.3. From isolation to star performer: reforms in Slovakia
5.5.4. The political economy of reforms in a low-trust environment

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
6.3.1. Growth
6.3.2. Public debt
6.3.3. Unemployment
6.3.4. Assessment of crisis performance
6.4. Surprising cases: Ireland vs Poland
6.4.1. Ireland
6.4.2. Poland
6.4.3. Implications for the theory

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
7.3.1. High-trust countries in the euro-zone
7.3.2. High-trust countries outside the euro-zone
7.3.3. Low-trust countries in the euro-zone
7.3.4. Low-trust countries outside the euro-zone
7.4. Factors modifying the influence of trust
7.4.1. Initial level of development
7.4.2. International financial market pressures
7.4.3. Overconfidence
7.4.4. Economic ideas
7.4.5. Leadership
7.5. Implications for policy
7.5.1. The future of the euro-zone
7.5.2. Accession of CEE countries to the euro-zone
7.5.3. The political economy of policy reforms
7.6. Conclusions



"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."
"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."
"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"