Spirits and States

Olivér Kovács, Research Fellow, ICEG European Center

As the Nobel-laureate George Akerlof together with his co-author Robert J. Shiller emphasised in the book Animal Spirits, the societal and economic development relies heavily on the trust infrastructure of the given country.

Trust and confidence exuded by citizens towards state and governmental institutions are negatively affected by recent financial and economic crisis (Chart 1).

Chart 1. Trust in National Governments and Parliaments and in the European Union: Trend

Source: Standard Eurobarometer 78, p. 14

This calls for pro-active states tailored towards two objectives during their battle when the concomitant weakening of economic growth in the era of austerity has also become much clearer: (i) dampening the sovereign risk through fiscal consolidations; (ii) while supporting as well as reinvigorating growth and not triggering soaring unemployment.

As Stevenson and Wolfers (2011) pointed out, every time when unemployment was in rise in economic history, the trust level declined, that is to say, the democratic deficit just deteriorated. This time is not different in this regard.

Chart 2. Trajectories of unemployment rate (%, 2003-2012)

Source: Eurostat

The question how to stabilise and give impetus at the same time remains a central issue of contemporary European studies. For sure, the role of the state is appreciating.

The question of „how to make the state to be a trust builder channel in a more dedicated way” can be linked to the issue of public sector innovation that may help to maintain the quality of service provision, to reduce excessive expenditures while not imposing additional burdens on labour and the economy as a whole.

This post features the author's personal view and does not represent the view of ICEG European Center.