The decision by British voters in June 2016 to leave the EU put the future of the Union into doubt (Buiter 2016). The election of Donald Trump in November of the same year put the future of the Western alliance in doubt. While the disappointing results of Marine Le Pen in the French elections managed to alleviate fears about the immediate disintegration of the EU, there are still fears lingering. In this column, I discuss the causes of this political movement and what can be done to prevent its ascent.
The importance of trust
Economic downturns and crises, as well as sudden changes in the pattern of trade or migration, can not only affect macroeconomic variables such as employment and investment but also leave a lasting effect on the social fabric. One of the structures of social capital mentioned by Coleman (1988) is trust. Economists have been aware of the importance of trust for some time.1 Financial crises, in particular, tend to reduce trust in societies and lead to polarisation in politics, often ending with the rule of populist right-wing parties, as shown by Funke (2016). Such crises differ from ‘normal’ recessions in apparently being caused by the reckless behaviour of banks and financial institutions and the failure of the authorities to monitor and supervise their activities. Thus, financial crises are often followed by rage and anger as described by Galbraith (1954) and Aliber and Kindleberger (2014).
In the first report in CEPR’s Monitoring International Integration series, Europe’s Trust Deficit: Causes and Remedies, my co-authors and I find that support for populist parties in Europe is closely correlated with a lack of trust in national parliaments and in the European Parliament, and with a lack of support for further European integration (Dustmann et al. 2017). Moreover, this lack of trust is especially significant for the older, less educated generations and is magnified by economic contractions, especially the latest Great Recession. In Europe, as apparently also in the US, the population seems to be split into two groups. In one group are young, well-educated individuals living in the big cities who embrace globalisation, free trade, and free migration and are supportive of the EU; while in the other group are people living in rural areas who tend to be older and have less education, and fear globalisation and distrust the EU. Their distrust is translated into votes for populist parties according. Moreover, the share of votes going to anti-EU parties has been increasing in recent years.
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The populist movements that the disillusioned voters turn to share certain features. They tend to be anti-establishment so that they go against the mainstream media, universities, the political class, banks, and so on, and also against widely accepted truisms such as global warming and the benefits of free trade. Second, they tend to be nativist or nationalistic in their policies so that they want to promote the interests of the ‘nation’ or the dominant ethnic group at the expense of foreigners and smaller, often immigrant, ethnic groups. Third, populist movements tend to be led by charismatic leaders who articulate the nativist, anti-establishment policy messages, usually offering simplistic and incoherent policy proposals that sound appealing to the disgruntled voters. The loss of trust in democratic institutions following recessions can thus lead to economic policies being followed that are not helpful for innovation and future prosperity.
It is not difficult to understand how the recent financial crisis has reduced trust in the institutions of the EU. The euro has been blamed for high unemployment in the crisis countries, the free flow of capital between countries has created booms and busts in many countries such as Spain, Ireland and Greece, and the allocation of losses between member states has been found to be unfair by many. But interestingly, we find in our report that trust in the domestic parliament has fallen more than trust in the European Parliament in the crisis countries, although the latter has also fallen significantly. In times of danger, people tend to look after their families, their communities, and their countries while ignoring the interests of others. This applies especially to those who feel threatened by international trade or immigration – the losers from trade who are rarely compensated by the winners. Such a state of the world therefore offers fertile grounds for populism that blames the elite – whose message is often not comprehensible to the average person – for the troubles and offers simplistic solutions such as building walls and erecting trade barriers.
From the point of view of philosophy, trust can be regarded as the act of inviting someone to be in control of discretionary powers while relying on their goodwill. According to Annette Baier (1986), “[t]rust then, on the first approximation, is accepted vulnerability to another’s possible but not expected ill (or lack of good will) toward one” (p. 235). Thus, what is needed to increase trust towards the EU is a belief that the EU is working for the benefits of the citizens of the member countries and is at least partially successful in so doing.
In essence, the lack of trust is caused by the belief of voters that the EU is too inward-looking, too bureaucratic, too remote from the interests of the public, and not interested enough in helping increase economic and non-economic security and prosperity. Inequalities within countries, insecurity among segments of the population, and the financial crisis have all increased this perception of the Union. In contrast, the populist parties offer simple solutions to issues that directly concern voters, the only problem being that these solutions may not, and probably will not, help.
What can the EU do to earn the trust of its citizens?
It follows that the EU will need to address directly the concerns of voters in the member states and propose policies and measures that are likely to be helpful. In essence, the EU needs to earn the trust of European citizens. I suggest that the EU should focus on common interests, increase positive externalities, and reduce negative externalities. In this way, the EU can be shown to not threaten the interests of the low-skilled workers that most oppose it but, in contrast, to be a tool to promote their interests in an interlinked world economy.
Focus on common interests
A distinction has to be made between decisions that need to be taken at the centralised EU level and those that are better left in the hands of the member states. This is the principle of subsidiarity, first formulated in the Maastricht Treaty and incorporated into Article 5 of the Lisbon Treaty. By making this distinction clearer to the public, voters will realise the extent to which their own governments should respond and where the EU should step in. Thus, the distinction between national and EU responsibilities should be made clearer to the public. This is a matter of communicating better with voters so that populist politicians cannot blame the EU as a whole for problems in member countries that these countries alone can tackle, such as high unemployment due to labour market rigidities or sovereign debt problems.
The principle behind this distinction should be that any issue that concerns one country without affecting the other member states should be left to that country, while those that have an effect beyond this should be left to the institutions of the EU. The common decisions can then be scrutinised by national parliaments as described in the Lisbon treaty.
Increase positive externalities
The current institutions of the EU can be used to better formulate policies that address common problems of concern to voters. These could include the fight against terrorism, reducing tax fraud, forming a common policy on immigration, and protecting the environment. By stating goals in these areas and achieving progress, the EU can gain increased trust among voters since voters can relate these to their own interests.
- There are obvious positive externalities from fighting terrorism together.
- Combating tax evasion and tax fraud bring externalities when income earned in one country is stashed unreported in another.
- There is also the issue of tax evasion by multi-national corporations, which set up operations in one country through subsidiaries only to report profits in another country where corporate taxes are lower. This activity can only be stemmed at the EU level since the interests of the countries are not aligned. The failure of the EU to accept a recent French proposal on taxing large corporations is not likely to help stem the tide of the populists. Why should a corporation be allowed to operate and profit in one member country and pay taxes in another?
- Environmental protection is another example for potential positive externalities.
- Controlling immigration creates externalities between countries. Hence, there is a need for a joint policy to coordinate the actions of individual member states.
- While trade agreements have been made with individual countries, the apparent lack of interest by the EU and its member countries in economic development in North Africa – the Maghreb – is surprising. Externalities arise when one member country can increase the standard of living in an African country through trade and investment, which then reduces the pressure of migration to another member country.
Reduce negative externalities
The EU should also help reduce negative economic externalities coming from some countries and affecting others to alleviate concerns and fears of both disadvantaged workers and nations. In order to address concerns when it comes to the free flow of capital and migration, the states should be allowed to put temporary brakes on the volume of capital inflows, at least if outside the currency union, and the number of immigrants.
- The flow of capital can be destabilising, as recent experience shows, and creates an externality coming from one country’s economic policies on another.
The inflow of capital into Ireland, Spain, and Greece within the currency union, and to Iceland, which is a member of the Single Market but not the EU, caused an economic boom in these countries in the years preceding the financial crisis and then a crash. Contrary to the expectations of the fathers of the Single Market at Maastricht, capital did not necessarily flow to the place where the marginal productivity of capital was highest, but created bubbles in the housing market, stock markets, and currency markets. These flows constituted a market failure since they were unsustainable – the loans could not be paid back – and expected private profits were based on the expectations of an unsustainable rise in asset prices (house prices in Ireland and Spain, and currency values in the case of Iceland).
- While immigration can be shown not to affect overall wages much, it can have an effect on the wages of the least skilled as well as on property prices and welfare systems.
Here each country should be given the power to put, at least temporarily, an upper limit on the annual number of immigrants from other member states if it is deemed as being justified by economic or social considerations. Being forced to accept an unlimited number of immigrants from the poorer EU member states may convince voters, at least disadvantaged ones, that the EU is not providing the economic security they desire.
The EU can convince voters that it is acting in their interests, taking their concerns into account, and achieving good results. While the policies of the populist parties are often incoherent, the concerns of voters are real and should be addressed. This involves explaining better what is already being done at the EU level, as well as setting achievable goals and policies that can compete with the policies of the populists. Trust will then be established and the attraction of the populist parties diminished. If, however, voters feel threatened by the EU due to immigration, capital flows, or corporate tax avoidance, to name just a few examples, they will be more tempted to vote for nationalist populist parties.
Author’s note: The views expressed in this column are those of the author alone and do not necessarily reflect the views of the other authors of "Europe’s Trust Deficit: Causes and Remedies".
Aliber, R Z and C P Kindleberger (2914), Manias, Panics and Crashes, 7th Edition, Hoboken, NJ: John Wiley & Sons, Inc.
Baier, A (1986), “Trust and antitrust”, Ethics 96(2): 231-260.
Buiter, W, E Rahbari and C Schulz (2016), “The implications of Brexit for the rest of the EU”, VoxEU.org, 2 March.
Coleman, J S (1988), “Social capital in the creation of human capital”, American Journal of Sociology, S95-S120.
Dustmann, C, B Eichengreen, S Otten, A Sapir, G Tabellini and G Zoega (2017), Europe’s Trust Deficit: Causes and Remedies, CEPR Press.
Galbraith, J K (1954), The Great Crash, Boston and New York: Mariner Books.
Knack, S and P Keefer (1997), “Does social capital have an economic payoff? A cross-country investigation”, The Quarterly Journal of Economics 112(4): 1251-1288.
Tabellini, G (2010), “Culture and institutions: economic development in the regions of Europe,” Journal of the European Economic Association 8(4): 677-716.
 Knack and Keefer (1997) stress the importance of trust in incomplete contracts because it reduces the level of uncertainty. Tabellini (2010) discusses the economic importance of trust from the angle of the prisoner’s dilemma when he came to the conclusion that trust increases the efficiency of anonymous markets exchanges.