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Crisis and Trust in National and European Union
institutions – Panel Evidence for the EU, 1999 to 2012
Felix Roth
OECD Wor...
Structure of Presentation
I.

Introduction

II.

Theoretical links

III.

Model specification, research design and data

I...
I.

Introduction

•

Bankruptcy of Lehman Brothers in September 2008 acted as the starting point of the
most severe financ...
II. Theoretical links

4
2.1

The consequences of citizens declining trust in the national
Government and Parliament – General Arguments

•

Suffic...
Excourse 1: Application to the current ongoing Euro Area Crisis
•

•

•

•

•

Without sufficient levels of citizens trust...
2.2

Driving factors of declining trust in national and
European governmental institutions?

• Stevenson and Wolfers (2011...
III. Model specification, research design and data

8
1. Model specification
The Baseline equation takes the following form:

Trust it = αi + β Unemployment it +  Inflation it...
2. Research Design and Data
i)

Dependent Variable: Semester data on net trust in the NG, NP, EC and EP between 19992012. ...
IV. Descriptive Statistics

11
Figure 1.
Trust in the national government and European Commission in the EU15/27 (1999–2012)

Notes: NG = national govern...
Figure 2.
Trust in national parliaments and the European Parliament in the EU15/27 (1999–2012)

Notes: NP = national parli...
Table 1.
Net trust levels and changes in net trust in the EA12, EU15, NMS12 and EU27 (2008–12)
Trust

Level: 3-5/ 2008

Le...
Excourse 2: Low Levels of Systemic Trust and the Europe 2020 Strategy
i) In the EU citizens levels of systemic trust are t...
Table 2.
Net trust levels and changes in net trust in the EA8 and EA4 and across selected EA12
countries (2008–12)
Sample/...
Figure 3.
Trust in national and EU institutions in the EA4 (1999–2012)

Notes: The EA4 comprises Spain, Greece, Portugal a...
Excourse 3: Comparing Net Trust vs. Net Support for the Euro in the EA-4

Notes: The data and time series depicted in abov...
Figure 4.
Trust in national and EU institutions in the EA-8 (1999–2012)

Notes: The EA8 comprises Germany, France, Italy, ...
Figure 5.
Scatter plot between delta unemployment and delta trust

Trust NP

50

Trust NG
de

fr

it

fr
pt

-100 -50

ie
...
V. Econometric Analysis

21
Table 3.
Unemployment and trust in the NG and NP, fixed-effects DFGLS estimations, EA12
1

2

3

4

5

6

NG
FS

NG
BC

NG...
Table 5.
Sensitivity analysis for the baseline fixed effects DFGLS model, EA12
Row

Specification change

NG

NP

EC

EP

...
Coherence with previous empirical results
Our econometric results are in line with the empirical findings of Stevenson and...
VI. Conclusions
Concerning trust in the NG and NP, the crisis has not led to a universal
decline of trust. The core countr...
i)
When analysing an EU15/27 country sample, one detects moderate declines in
trust in the national government and parliam...
v)
The highly significant and negative relationship between unemployment and
trust is strongly driven by the crisis period...
VII. Policy Conclusions
i)

Unemployment rates of 25% in Spain and Greece in the aftermath of the financial crisis are
pol...
Appendix

29
Figure A1.
Net trust in the national government, by EU27 country (1999–2012)
Belgium

Bulgaria

Cyprus

Czech Rep

Denmark...
Figure A2.
Net trust in the national parliament, by EU27 country (1999–2012)
Belgium

Bulgaria

Cyprus

Czech Rep

Denmark...
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Crisis and Trust in National and European Union institutions – Panel evidence for the EU, 1999 to 2012

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Presentation by Felix Roth at the OECD Workshop on “Joint Learning for an OECD Trust Strategy” on 14 October 2013. Dr. Roth discusses the consequences of citizens declining trust and the driving factors of declining trust in Europe. He also provides an econometric analysis of trust and unemployment.

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  1. 1. Crisis and Trust in National and European Union institutions – Panel Evidence for the EU, 1999 to 2012 Felix Roth OECD Workshop “Joint Learning for an OECD Trust Strategy” 14 October 2013 OECD Conference Center Paris © Dr. Felix Roth, 2013 1
  2. 2. Structure of Presentation I. Introduction II. Theoretical links III. Model specification, research design and data IV. Descriptive statistics V. Econometric analysis VI. Conclusions VII. Policy Conclusions 2
  3. 3. I. Introduction • Bankruptcy of Lehman Brothers in September 2008 acted as the starting point of the most severe financial- and economic crisis, since the Great depression in the 1930’s, for most advanced economies worldwide (EEAG 2010). • Within the EA the financial crisis has culminated into a sovereign debt crisis from 2010 onwards (De Grauwe 2010). • To overcome this sovereign debt crisis, fiscal austerity measures in many EA countries have been implemented throughout the crisis (Corsetti 2012). • The severity of implementation of austerity measures has been particularly pronounced in the periphery countries of the EA, particularly in Greece, Ireland and Portugal (Theodoropoulou and Watt 2011) as well as Spain (Navarro 2012). • Amongst others, these measures have led to a significant increase of unemployment levels in those four countries. • Given the exceptional magnitude of the crisis, this paper analyses the impact of the crisis on citizens’ trust in their i) national government (NG), ii) national parliament (NP), iii) European Commission (EC) and iv) European Parliament (EP). 3
  4. 4. II. Theoretical links 4
  5. 5. 2.1 The consequences of citizens declining trust in the national Government and Parliament – General Arguments • Sufficient trust is crucial for the legitimacy of a (policy-making) institution. In the absence of trust this legitimacy is endangered (Kosfeld et al. 2005: 673; Kaltenthaler et al. 2010: 1262). Without sufficient trust citizens might commence to undermine the authority of the (policy-making) institution (Kaltenthaler et al. 2010: 1261). This might ultimately lead to an abolition of the (policy-making) institution (Giddens 1996: 166). It would be worrisome for a (policy-making) institution once large numbers of citizens start to distrust it (Kaltenthaler et al. 2010: 1262). Concerning citizens trust in the national parliament an abrupt or steady decline of trust from the long-term trends should be regarded as worrying (Newton 2001: 205). Without sufficient trust i) citizens will try to hold back tax money, ii) young talented graduates will not be willing to work for governmental institutions and iii) the overall compliance with law will decrease (Nye 1997). Trust in the national government is important for long-term fiscal consolidation of an economy (Gyorffy 2007, Jonung 2013). • • • • • 5
  6. 6. Excourse 1: Application to the current ongoing Euro Area Crisis • • • • • Without sufficient levels of citizens trust in the NG and NP the envisaged and often necessary structural reforms (a.o. proposed by the Troika) such as labour market, welfare state and higher education reforms, completion of the single market for services, reforms that aim at stimulating investments in public and business intangible capital in Greece, Portugal and Spain will not be successful. However, without reforms no fast fiscal consolidation possible. The structural reforms should have been implemented in mutual consent (such as in Sweden in the 1990’s) and not in opposition with citizens in the EA’s periphery countries. Citizens will just boycott implemented measures (hold back their tax money, stop complying with the law, vote radical parties, participate in social unrest, etc …). Rapid increase in unemployment rates, amongst others triggered by the implemented austerity measures, is associated with a significant decline strong negative effect on citizens trust in national governments and parliaments in EA’s periphery, endangering their political stability and fiscal consolidation. But also Italy: low levels of trust endanger i) political stability and ii) prospects for fiscal consolidation. Vicious Circle: Without political stability private investors will not invest in EA’s periphery, unemployment will further increase, trust will further decline or remain stagnant, further capital flight in safe havens (e.g. large German cities). One key to solving the Euro area crisis and the reestablishment of fiscal consolidation is the reestablishment of citizens trust in the EA‘s periphery Spain, Greece, Portugal, Ireland, Cyprus but also Italy. 6
  7. 7. 2.2 Driving factors of declining trust in national and European governmental institutions? • Stevenson and Wolfers (2011) show that unemployment is a key determinant of systemic trust. • Literature among popularity functions stress the importance of economic growth, unemployment and inflation (Nannestad and Paldam 1994: 215-16, Bellucci and LewisBeck 2011: 192-94). • Roth (2011) shows that a fast increase of Debt per GDP, when banks were aided/bailed out, lead to a deterioration of citizens trust (e.g. case of Ireland in 2010). 7
  8. 8. III. Model specification, research design and data 8
  9. 9. 1. Model specification The Baseline equation takes the following form: Trust it = αi + β Unemployment it +  Inflation it +  Growth it +  Debt it +  Z it + wit where i represents each country and t represents each time period. Trust it is the net trust amount in national and EU institutions for country i during period t. Unemployment it, Inflation it, Growth it, Debt it and Z it are respectively unemployment, inflation, growth of GDP per capita and debt per GDP and important control variables, such as electorate dummy variables for the national institutions and the European Parliament for country i during period t or indicators of financial stress such as sovereign bond yields. The variable αi represents a country-specific constant term and wit is the error term. Since we utilise an FGLS estimation approach, our baseline estimation does not include time dummies as they are incompatible with FGLS. Reference: Roth, Nowak-Lehmann and Otter (2013). Crisis and Trust in National and European Union Institutions–Panel Evidence for the EU, 1999 to 2012, EUDO/RSCAS Working Paper 2013/31 , European University Institute 9
  10. 10. 2. Research Design and Data i) Dependent Variable: Semester data on net trust in the NG, NP, EC and EP between 19992012. Concept of net trust introduced by Gärtner (1997: 488-89). ii) Country Sample: 27 European countries (12 EA-countries) from 1999-2012. iii) Analysis with estimation via Fixed-Effects DFGLS estimation. iv) Structural break in fall 2008 (full sample: 1999-2012; pre-crisis: spring 1999-spring 2008; crisis: autumn 2008-spring 2012) v) Data on unemployment, inflation (HICP) and sovereign debt yields from Eurostat monthly statistics. Data for GDP, population, and debt over GDP from Eurostat quarterly statistics (interpolated). Data on trust in NG, NP, EC and EP from the bi-annual Eurobarometer (issued on behalf of EC). Data for election dummy from CEPPS 2011. vi) Matching strategy as proposed by Wälti (2012: 597). Correlates as high as 0.99 for inflation and uneemployment and 0.95 for growth of GDP per capita with semesterly data. 10
  11. 11. IV. Descriptive Statistics 11
  12. 12. Figure 1. Trust in the national government and European Commission in the EU15/27 (1999–2012) Notes: NG = national government, EC = European Commission. Values are population weighted for the respective country samples. In 1-2/2009, the special Standard EB 71.1 was used. As the survey item concerning trust in the NG was not included in Standard EBs 52, 53, 54 or 58, the data for these four observation points respectively are missing. The dashed line represents the start of the crisis in September 2008 and differentiates the pre-crisis from the crisis period. From 10-11/2004 to 9-10/2006, the EU-27 country sample consists of EU-25 countries excluding Romania and Bulgaria. From 4-5/2007 onwards, Romania and Bulgaria are included. As the figure depicts net trust, all values above 0 indicate trust by a majority of the respondents and all values below 0 show a lack of trust by the majority. Sources: Standard EBs 51-78 and Special EB 71.1. Reference: Roth, Nowak-Lehmann and Otter (2013). Crisis and Trust in National and European Union Institutions–Panel Evidence for the EU, 1999 to 2012, EUDO/RSCAS Working Paper 2013/31 , European University Institute. 12
  13. 13. Figure 2. Trust in national parliaments and the European Parliament in the EU15/27 (1999–2012) Notes: NP = national parliament, EP = European Parliament. Values are population weighted for the respective country samples. In 1-2/2009 the special Standard EB 71.1 was used. As the survey item concerning trust in the NP was not included in Standard EBs 52, 53 or 58, the data for these three observation points respectively are missing. The dashed line represents the start of the crisis in September 2008 and differentiates the pre-crisis from the crisis period. From 10-11/2004 to 910/2006, the EU-27 country sample consists of EU-25 countries excluding Romania and Bulgaria. From 4-5/2007 onwards, Romania and Bulgaria are included. As the figure depicts net trust, all values above 0 indicate trust by a majority of the respondents and all values below 0 show a lack of trust by the majority. Sources: Standard EBs 51-78 and Special EB 71.1. Reference: Roth, Nowak-Lehmann and Otter (2013). Crisis and Trust in National and European Union Institutions–Panel Evidence for the EU, 1999 to 2012, EUDO/RSCAS Working Paper 2013/31 , European University Institute. 13
  14. 14. Table 1. Net trust levels and changes in net trust in the EA12, EU15, NMS12 and EU27 (2008–12) Trust Level: 3-5/ 2008 Level: 11/ 2012 Changes: 11/ 2012 – 3-5/ 2008 EA12 NG/NP -25/-16 -38/-34 -13/-18 EU15 NG/NP -28/-17 -38/-33 -10/-16 NMS12 NG/NP -44/-55 -51/-58 -7/-3 EU27 NG/NP -31/-25 -40/-38 -9/-13 EA12 EC/EP 21/27 -7/-3 -28/-30 EU15 EC/EP 14/19 -10/-8 -24/-27 NMS12 EC/EP 34/38 22/24 -12/-14 EU27 EC/EP 19/23 -4/-1 -23/-24 Sample Notes: EA = Euro Area, EU = European Union, NMS = New Member States, NG = National Government, NP = National Parliament, EC = European Commission, EP = European Parliament. Values are population-weighted for the respective country samples. As the table presents data on net trust, all values above 0 indicate trust by a majority of the respondents and all values below 0 show a lack of trust by the majority. The periods still reflecting trust by a majority of citizens are shaded in light grey. Values reflecting the strongest decline are shaded in dark grey. Sources: Standard EBs 69 and 78. Reference: Roth, Nowak-Lehmann and Otter (2013). Crisis and Trust in National and European Union Institutions–Panel Evidence for the EU, 1999 to 2012, EUDO/RSCAS Working Paper 2013/31 , European University Institute. 14
  15. 15. Excourse 2: Low Levels of Systemic Trust and the Europe 2020 Strategy i) In the EU citizens levels of systemic trust are too low in most transition countries and in the Mediterannean countries for a modern economy to function efficiently and remain competitive. ii) These low levels of systemic trust, being associated with an overall poor governance structure, represent a major problem for the competiveness and the long-term growth prospectives within those countries. iii) Key priorities of the European 2020 strategy such as higher employabiliy, higher tertiary graduaton rates, higher business investments in R&D and overall intangible capital can only be achieved if governance structures are modernized and ameloriated and sufficient levels of systemic trust are established in transition and Mediterranean countries. iv) One key priority for the European 2020 startegy is to ameliorate the governance structure (higher government efficiency, lower levels of corruption) in the transition and Mediterranen countries (see here also Gros and Roth 2012). 15
  16. 16. Table 2. Net trust levels and changes in net trust in the EA8 and EA4 and across selected EA12 countries (2008–12) Sample/ Country EA4 Levels: 3-5/2008 Levels: 11/2012 Changes: 11/2012 – 3-5/2008 NG/NP 3/10 -72/-72 -75/-82 EA8 NG/NP -33/-23 -28/-24 5/-1 Spain NG/NP 20/20 -75/-76 -95/-96 Greece NG/NP -31/-2 -84/-80 -53/-78 Portugal NG/NP -29/-3 -52/-50 -23/-47 Ireland NG/NP -14/-15 -58/-57 -44/-42 Italy NG/NP -59/-57 -60/-71 -1/-14 France NG/NP -38/-21 -35/-26 3/-5 Germany NG/NP -25/-15 -12/-1 13/14 EA4 EC/EP 38/37 -35/-30 -73/-67 EA8 EC/EP 16/22 1/6 -15/-16 Spain EC/EP 42/46 -41/-41 -83/-87 Greece EC/EP 13/21 -57/-42 -70/-63 Portugal EC/EP 42/46 -1/1 -43/-45 Ireland EC/EP 43/51 3/3 -40/-48 Italy EC/EP 29/29 -2/1 -31/-28 France EC/EP 11/19 4/9 -7/-10 Germany EC/EP 6/18 -4/2 -10/-16 Trust Notes: EA = euro area, NG = national government, NP = national parliament, EC = European Commission, EP = European Parliament. The EA8 and EA4 country samples are population-weighted. The pronounced differences between the EA8 and EA4, as well as the minimum and maximum values are shaded. Darker shading represents maximum values. Lighter shading represents minimum values. As the table presents data on net trust, all values above 0 indicate trust by a majority of the respondents and all values below 0 show a lack of trust by the majority. Sources: Standard EBs 69 and 78. Reference: Roth, Nowak-Lehmann and Otter (2013). Crisis and Trust in National and European Union Institutions–Panel Evidence for the EU, 1999 to 2012, EUDO/RSCAS Working Paper 2013/31 , European University Institute. 16
  17. 17. Figure 3. Trust in national and EU institutions in the EA4 (1999–2012) Notes: The EA4 comprises Spain, Greece, Portugal and Ireland. NG = national government, NP = national parliament, EC = European Commission, EP = European Parliament. Values are population-weighted. In 1-2/2009 the special Standard EB 71.1 was utilised. As the survey item concerning trust in the NP was not included in Standard EBs 52, 53 or 58, the data for these three observation points respectively are missing. As the survey item concerning trust in the NG was not included in Standard EBs 52, 53, 54 or 58, the data for these four observation points respectively are missing. The dashed line represents the start of the crisis in September 2008 and differentiates the pre-crisis and crisis periods. As the figure depicts net trust, all values above 0 indicate trust by a majority of the respondents and all values below 0 show a lack of trust by the majority. Sources: Standard EBs 51-78 and Special EB 71.1. Reference: Roth, Nowak-Lehmann and Otter (2013). Crisis and Trust in National and European Union Institutions–Panel Evidence for the EU, 1999 to 2012, EUDO/RSCAS Working Paper 2013/31 , European University Institute. 17
  18. 18. Excourse 3: Comparing Net Trust vs. Net Support for the Euro in the EA-4 Notes: The data and time series depicted in above figure are based upon the data and time series utilized in the following three working papers: Roth, F., Gros, D., Nowak-Lehmann D., F., 2012. Has the Financial Crisis eroded Citizens’ Trust in the European Central Bank? – Panel Data Evidence for the Euro Area, 1999-2011, CEGE Discussion Papers 124, University of Göttingen and Roth, F., Jonung,,L. and F. Nowak-Lehmann D. (2012). Public Support for the Single European Currency, the Euro, 1990 to 2011. Does the financial crisis matter?, Working Paper 2012: 20, Department of Economics, University of Lund and Roth, F., Nowak-Lehmann D., F., Otter, T., 2013. Crisis and Trust in National and European Governmental Institutions – Panel Evidence for the EU from 1999 to 2012, RSCAS/EUDO Working Paper, European University Institute, forthcoming. The EA-4 comprises Spain, Greece, Portugal and Ireland. NP = national parliament, EP = European Parliament, NG = National Government, EC = European Commission, ECB = European Central Bank, Support Euro = Support for the European Monetary Union and the euro. Values are population weighted. As the survey item concerning trust in the NP was no t included in Standard EBs 52, 53 or 58, the data for these three observation points respectively are missing. As the survey item concerning trust i n the NG was not included in Standard EBs 52, 53, 54 or 58, the data for these four observation points respe ctively are missing. The dashed line represents the start of the crisis in September 2008 and differentiates the pre-crisis and crisis periods. As the figure depicts net trust and net support, all values above 0 indicate trust and support by a majority of the respondents and all values below 0 a lack of trust and support by the majority. Sources: Standard EBs 51-78.
  19. 19. Figure 4. Trust in national and EU institutions in the EA-8 (1999–2012) Notes: The EA8 comprises Germany, France, Italy, Austria, Finland, Belgium, the Netherlands and Luxembourg. NG = national government, NP = national parliament, EC = European Commission, EP = European Parliament. Values are population weighted. In 1-2/2009 the special Standard EB 71.1 was used. As the survey item concerning trust in the NP was not included in Standard EBs 52, 53 or 58, the data for these three observation points respectively are missing. As the survey item concerning trust in the NG was not included in Standard EBs 52, 53, 54 or 58, the data for these four observation points respectively are missing. The dashed line represents the start of the crisis in September 2008 and differentiates the pre-crisis and crisis periods. As the figure depicts net trust, all values above 0 indicate trust by a majority of the respondents and all values below 0 show a lack of trust by the majority. Sources: Standard EBs 51-78 and Special EB 71.1. Reference: Roth, Nowak-Lehmann and Otter (2013). Crisis and Trust in National and European Union Institutions–Panel Evidence for the EU, 1999 to 2012, EUDO/RSCAS Working Paper 2013/31 , European University Institute. 19
  20. 20. Figure 5. Scatter plot between delta unemployment and delta trust Trust NP 50 Trust NG de fr it fr pt -100 -50 ie it pt gr ie gr es es cy cy Trust EP 0 50 Trust EC de fr 0 it ie pt cy -10 fr de it -100 -50 Delta Trust (2012-2008) 0 de 10 pt gr es 20 -10 0 cy ie gr es 10 20 Delta Unemployment (2012-2008) + Non-EA-12 EA-12 Fitted Values EA-12 Graphs by Trust Notes: Fitted regression line only for EA12 country sample. Sources: Standard EB 69 & 78 and Eurobarometer data. Reference: Roth, Nowak-Lehmann and Otter (2013). Crisis and Trust in National and European Union Institutions–Panel Evidence for the EU, 1999 to 2012, EUDO/RSCAS Working Paper 2013/31 , European University Institute. 20
  21. 21. V. Econometric Analysis 21
  22. 22. Table 3. Unemployment and trust in the NG and NP, fixed-effects DFGLS estimations, EA12 1 2 3 4 5 6 NG FS NG BC NG C NP FS NP BC NP C -3.9*** -3.5* -8.0*** -3.2*** -2.5* -7.3*** (0.93) (1.78) (1.82) (0.75) (1.40) (1.28) Inflation Yes Yes Yes Yes Yes Yes Growth Yes Yes Yes Yes Yes Yes Government debt Yes Yes Yes Yes Yes Yes Election dummy Yes Yes Yes Yes Yes Yes Durbin-Watson statistic 2.11 1.82 2.03 2.10 1.84 2.08 Adjusted R-squared 0.82 0.81 0.86 0.81 0.77 0.88 Country fixed effects Yes Yes Yes Yes Yes Yes Control for endogeneity Yes Yes Yes Yes Yes Yes Elimination of first order autocorrelation Yes Yes Yes Yes Yes Yes Observations Number of countries 248 12 143 12 105 12 248 12 143 12 105 12 Dependent variable Period Unemployment Notes: FS=Full Sample; BC=Before Crisis; C=Crisis; NG=National Government; NP= National Parliament. ***p<0.01, **p<0.05 and *p<0.1. Data on growth of GDP per capita are missing for Greece from the 2nd semester of 2011 onwards. Thus, instead of 108, only 105 observations can be depicted. Data on the lagged first differences for debt over GDP are missing for the four time periods 1999-2000 and for Greece and Malta for the first semester of 2001. Reference: Roth, Nowak-Lehmann and Otter (2013). Crisis and Trust in National and European Union Institutions–Panel Evidence for the EU, 1999 to 2012, EUDO/RSCAS Working Paper 2013/31 , European University Institute. 22
  23. 23. Table 5. Sensitivity analysis for the baseline fixed effects DFGLS model, EA12 Row Specification change NG NP EC EP Obs. Cou. Baseline regression 1 -8.0*** -7.3*** -3.1** -3.4*** 105 12 Exclusion of outliers 2 Spain 3 Spain+Greece 4 Spain+Greece+Portugal No change -4.4 -2.5 -1.9 -7.3*** -6.3** -6.1** 0.8 1.2 1.7 0.7 1.2 1.3 96 90 81 11 10 9 5 -2.8 -6.4** 0.1 0.1 72 8 EA4 Restruc. of country sample 6 EU15 -7.1*** -6.4*** -2.7*** -3.2*** 132 15 7 EU27 -1.1 -1.1 -2.1*** -2.3*** 240 27 8 EU27 - Spain 0.2 -0.1 -1.6** -1.7** 231 26 9 10 EU27 - EA4 NMS12 -0.6 0.8 -0.1 2.3 -1.5** -1.6* -1.6** -1.7* 207 108 23 12 Restruc. of time sample 11 9-11/2007-11/2012 -6.0*** -5.4*** -2.4*** -2.8*** 129 12 12 13 10-11/2008-5/2012 10-11/2008-11/2011 -6.2*** -6.7** -5.8*** -6.3*** -1.6 -2.4 -1.7 -2.8** 94 83 12 12 14 15 10-11/2008-5/2011 10-11/2008-11-12/2010 -5.5 -9.1** -5.8** -8.5*** -2.3 -1.7 -3.0* -2.0 72 60 12 12 16 Sov. bond yields Alt. estimation strategies -8.9*** -7.4*** -3.0*** -3.6*** 105 12 17 18 OLS+TD OLS+TD+SBY -6.4*** -6.4*** -5.8*** -5.7*** -3.3** -3.1** -3.7*** -3.5** 117 117 12 12 19 OLS+TD+SBY+EB74 72 12 Incl. of additional variables -5.6*** -4.9*** -1.8 -2.3 Various alterations 20 Excl. special EB 71.1 -6.7*** -6.2*** -2.5*** -3.1*** 93 12 21 22 -3.9*** -7.6*** -3.5*** -6.7*** -1.3** -3.4*** -1.6*** -3.4*** 105 105 12 12 Net trust vs. trust Inclusion of TD Notes: EU=European Union, NMS=New Member States; NG=National Government; NP=National Parliament; EC=European Commission; EP=European Parliament; EA=Euro Area; TD=Time Dummies; SBY=Sovereign Bond Yields. EA-4 comprises Spain, Greece, Portugal and Ireland. ***p<0.01, **p<0.05 and *p<0.1. Reference: Roth, Nowak-Lehmann and Otter (2013). Crisis and Trust in National and European Union Institutions–Panel Evidence for 23 the EU, 1999 to 2012, EUDO/RSCAS Working Paper 2013/31 , European University Institute.
  24. 24. Coherence with previous empirical results Our econometric results are in line with the empirical findings of Stevenson and Wolfers (2011) who find that unemployment has a strong and negative effect on trust in public institutions. In almost all regression results unemployment is a powerful predictor of trust. When analysing the impact of an increase of unemployment on trust in the U.S. congress from 1972 to 2010 the authors find a significant and negative effect of unemployment on trust with the size of the coefficient ranging from -0.89 to 1.36. The range of size of the reported coefficient is only slightly smaller than our estimated coefficient for trust in the national parliament of -1.4 This coefficient range is however significantly smaller compared to our coefficient of -3.5 throughout the crisis period. 24
  25. 25. VI. Conclusions Concerning trust in the NG and NP, the crisis has not led to a universal decline of trust. The core countries from the EA12 such as Germany, Austria and Finland have actually higher trust levels in 11/2012 than before the crisis in 3-5/2008. The opposite is true for the periphery countries for the EA12 (Spain, Greece, Portugal and Ireland) in which trust in the NG and NP declined significantly. These countries have left their long-term trust trends. Thus the alleged trust crisis in the NG and NP is not an EU-scale crisis, but primarily manifests in the periphery countries of the EA12. 25
  26. 26. i) When analysing an EU15/27 country sample, one detects moderate declines in trust in the national government and parliament. This overall decline in populationweighted trust in trust trends in the national government and parliament has strongly been driven by the countries of the EA12. ii) Whereas in the core of the EA12 trust in the national government and parliament has actually increased or remained unchanged, in its periphery trust in the national government and parliament has fallen significantly and steadily since the start of the crisis. This sharp and steady fall in the periphery explains the overall moderate decrease of population weighted trust in the national government and parliament in the EA12, EU15 and EU27. iii) Whereas the population-weighted trust trends in the core countries of the EA12 have followed their pre-crisis paths throughout the crisis, the population-weighted trends in the periphery countries have departed from their pre-crisis paths since the start of the crisis. This phenomenon applies in particular to the case of Spain. iv) When analysing the drivers of trust with the help of a FE-DFGLS estimation within an EA12 country sample and timeframe from 1999-2012, an increase of unemployment turns out to be significantly and negatively associated with trust in the national government and parliament. 26
  27. 27. v) The highly significant and negative relationship between unemployment and trust is strongly driven by the crisis period (2008-2012). The coefficients for trust in the NG and NP are twice as high in the crisis period as in the pre-crisis period. vi) Within the EA12, whereas this highly significant and negative relationship between unemployment and trust the NG throughout the crisis is strongly driven by the country case of Spain, in which a significant increase in the unemployment rate is strongly associated with a decrease of trust, the relationship between unemployment and trust in the NP remains highly robust even after the exclusion of Spain from the EA12 country sample. vii) Highly significant and negative relationship between unemployment and trust in the NG and NP remains robust throughout the whole crisis period. viii) The relationship between unemployment and trust in the NP holds strongly for an EA12 country sample. Within the EA12, in times of crisis, a 1 percent increase in unemployment rates is associated with a decrease of net trust of -7.3 percentage points (a decrease of trust of -3.5 percentage points). 27
  28. 28. VII. Policy Conclusions i) Unemployment rates of 25% in Spain and Greece in the aftermath of the financial crisis are politically and socially unsustainable. Reducing these high unemployment rates should be given top priority in order to regain citizens trust in the national government and parliament. Regaining citizens trust in the EA periphery is necessary to secure political stability and successfully implement the structural reform agenda to regain fiscal consolidation. ii) Necessary structural reforms such as the amelioration of the quality of governance, labour markets, welfare state and higher educational reforms, the completion of the single market in services have to be accompanied with growth enhancing investments. These investments would ideally focus on intangible capital: modernization of (higher) education, public-private partnership schemes to enhance business intangibles and modernization of governance structures. The reforms should by no means abolish fundamental and economically important labour rights, should not result in „wage and social security dumping“, thus they should not endanger the fundamental agreements of the European Social Model and should be socially and politically sustainable. iii) As governments of periphery countries cannot stem these investments themselves and as in times of liquidity crisis private investor‘s confidence is shattered two potential investment plans are possible: 1) either a large scale investment (Marshall) plan for the EA periphery countries (EIB 2012; DGB 2012) financed e.g. by FT-Tax, EU-Tax (Fiscal capacity mechanism), Euro Solidarity Tax. Investment would be based on public and public-private partnership investment schemes, or 2) a European Investment Guarantee Scheme (EIGS) which would guarantee private sector investments in the EA periphery potentially backed by the EIB (Zuleeg 2013). iv) Public investments in Germany into public infrastructure, higher education institutions, publicprivate partnerships schemes for business intangibles (Bosch 2013, Fratzscher 2013). Germany and other EA creditor countries should reduce austerity measures and should increase its budget deficit to 3% to take pressure from the periphery countries (De Grauwe 2012). 28
  29. 29. Appendix 29
  30. 30. Figure A1. Net trust in the national government, by EU27 country (1999–2012) Belgium Bulgaria Cyprus Czech Rep Denmark Estonia Finland France Germany Great Britain Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden -100 -50 0 50 -100 -50 0 50 -100 -50 0 50 Austria 2005 2010 -100 -50 0 50 2000 2000 2005 2010 2000 2005 2010 2000 2005 2010 2000 2005 2010 2000 2005 2010 2000 2005 2010 Year Notes: Y-axis displays a range from -100 to +50. For the EU-15 countries, the data commence in spring 1999 (EB 51). For the 12 new member states, the data commence in 10-11/2004 (EB 62), even for Romania and Bulgaria. Data for EBs 52-54 and EB 58 are missing and have been automatically been interpolated by Stata. As the figure depicts net trust, all values below 0 indicate a lack of trust by the majority of respondents. In the case of Great Britain, data from EBs 51-69 are for Great Britain, whereas data from EB 70 onwards are for the UK. Sources: Standard EBs 51-78 and Special EB 71.1. Reference: Roth, Nowak-Lehmann and Otter (2013). Crisis and Trust in National and European Union Institutions–Panel Evidence for the EU, 1999 to 2012, EUDO/RSCAS Working Paper 2013/31 , European University Institute. 30
  31. 31. Figure A2. Net trust in the national parliament, by EU27 country (1999–2012) Belgium Bulgaria Cyprus Czech Rep Denmark Estonia Finland France Germany Great Britain Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden -100 -50 0 50 -100 -50 0 50 -100 -50 0 50 Austria 2005 2010 -100 -50 0 50 2000 2000 2005 2010 2000 2005 2010 2000 2005 2010 2000 2005 2010 2000 2005 2010 2000 2005 2010 Year Notes: Y-axis displays a range from -100 to +50. For the EU-15 countries, the data commence in spring 1999 (EB 51). For the 12 new member states, the data commence in 10-11/2004 (EB 62), even for Romania and Bulgaria. Data for EBs 52-53 and EB 58 are missing and have been automatically been interpolated by Stata. As the figure depicts net trust, all values below 0 indicate a lack of trust by the majority of respondents. In the case of Great Britain, data from EBs 51-69 are for Great Britain, whereas data from EB 70 onwards are for the UK. Sources: Standard EBs 51-78 and Special EB 71.1. Reference: Roth, Nowak-Lehmann and Otter (2013). Crisis and Trust in National and European Union Institutions–Panel Evidence for the EU, 1999 to 2012, EUDO/RSCAS Working Paper 2013/31 , European University Institute. 31
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