Trust and Crisis Management in the European Union

The chapter provides an introduction into the main themes of the research. First it introduces the central question of the book: what factors determined the economic and political outcomes of financial crisis management in European Union (EU) member states, which needed a financial assistance program? After documenting the differences in recovery from the crisis, the next part of the chapter provides an overview of the main narratives surrounding the assessment of crisis management: explanations focusing on economic fundamentals, accounts emphasizing the possibility for exchange rate devaluation, and finally the debate over austerity, which has largely dominated assessments of success and failure. After pointing to the shortcomings of these narratives, the research is situated within institutionalist explanations. Through viewing crisis management as a series of relationships, the research emphasizes the crucial importance of trust. The third section provides an elaboration of the theory on trust, institutions, and their relevance for the management of the final crisis. The fourth section discusses methodology, and the chapter concludes with an overview about the structure of the book.

The chapter provides an overview of the financial crisis in the euro-zone. First it examines the origins of the crisis, then recounts the EU-level steps taken to fight the crisis including the establishment of emergency funds, the interventions of the ECB as well as institutional changes. The second part of the chapter considers those paths which were not taken during the crisis management—the breakup of the euro-zone, the establishment of Eurobonds, or a transfer union. The main argument of the chapter is that in an attempt to balance considerations of moral hazard and solidarity during the management of the crisis, a strong divide opened between the North and the South of the EU, which presented a rather distrustful environment for crisis management.

The chapter takes a closer look on the relationship between trust and crisis management. First, it provides an introduction into the concept of trust emphasizing the elements of vulnerability, uncertainty about the future and subjectivity. Then it discusses different forms of interpersonal and institutional trust. The second part of the chapter describes how trust plays a role in the various stages of crisis management—negotiations, implementation, and market reception. The chapter ends with a theoretical framework describing austerity spirals as the outcome of distrust during crisis management.

The chapter applies the theoretical framework about trust and crisis management to the contrasting cases of Ireland and Greece. It recounts the role of the state in the two countries showing the difference between an outward-oriented economy with high-quality governance, and an inward-oriented country with poor governance. After both needed a financial bailout, these differences proved to be crucial in the management of the crisis. The two cases illustrate how trust at all levels of crisis management—bailout negotiations, public reaction, and market reception—resulted in a successful recovery from the crisis in Ireland, while persistent distrust in all of these relations led to a vicious spiral of austerity in Greece.

The chapter examines the cases of three Mediterranean countries: Cyprus, Portugal, and Spain. It asks the question how these countries succeeded in avoiding the fate of Greece despite sharing many similarities with its model of capitalism. The key explanation appears to be a shared elite commitment to the implementation of the bailout program even though the three countries faced a very different set of conditions due to their different negotiating power. In all three cases, public trust in the elite collapsed, but mainstream parties succeeded in preventing populist challengers taking over the government. However, following the exit from the program, reform fatigue set in indicating the limits of elite-driven reforms during a period of crisis.

The chapter examines the cases of Hungary, Latvia, and Romania, which were not euro-zone member states, when they needed a bailout program to overcome the financial crisis. The main question is whether the findings from the euro-zone apply to these countries as well. Low level of trust and weak institutions characterize them similarly to the Mediterranean states. The analysis shows that the three countries represent three different models—while Latvia most resembles the Irish case, Romania shares many similarities with the Mediterranean countries. Hungary is a case by itself—the level of distrust with the international community makes it similar to Greece, but as it successfully avoided a second bailout program, it could follow a populist adjustment path financed by the global markets and EU transfers. The chapter argues that their greater integration into the global economy influenced the success of the adjustment in these countries.

The chapter asks the question how crisis management is related to the emergence of populism. First it provides a summary of the main findings from the case studies on the relationship between institutions, trust, and crisis management. Then it elaborates on the idea of limited government, which involves the rule of law, international rule of law, size of government, and political and civil liberties. By reviewing the changes in these dimensions during the period of crisis management in the eight countries, it categorizes the cases into three groups, which show different characteristics along these lines. The main argument of the chapter is the central argument of the book: a commitment to limited government is associated with both economic success and resistance to populism. In contrast, a steady deterioration of institutions without an elite commitment to checks and balances eventually resulted in the takeover of government by populist forces in Greece and Hungary. While the latter did not experience an economic collapse, its performance is inferior to both Latvia and Romania.

Within the context of discussions on the future of Europe, the last chapter asks how the EU can contribute to the strengthening of institutions at the domestic level. It is argued that precautionary measures are more desirable than strengthening punishment mechanisms—the integration of institutional development into EU competitiveness and regional policy and reducing moral hazard on the financial markets are more likely to succeed in building a resilient institutional framework than enhancing Article 7 although that also appears a necessary step. The main conclusion from the chapter is that stronger domestic institutions and higher level of trust are necessary to bridge the gap between concerns of solidarity and moral hazard, which arise from plans about deeper integration.