Macroeconomic imbalances have been the subject of much debate in recent years, and are still in the spotlight. Before and during the financial crisis, a lot of attention was devoted to global imbalances – in particular to the persistent current-account deficits of some countries (such as the US) and the persistent surpluses of others (such as China). With the advent of the Eurozone sovereign-debt crisis, the attention has shifted to imbalances within the Eurozone. Simply speaking, a distinction has often been made between the supposedly thrifty Northern countries (such as Germany) and the supposedly profligate Southern countries (such as Greece). In this debate, the question has emerged whether macroeconomic imbalances across countries can partly be traced back to persistent ‘cultural’ differences (Greenspan 2011).

Civic capital and imbalances

In a recent paper, we address this question empirically, with the aim to go beyond – and possibly debunk – the usual cultural stereotypes (Bützer et al. 2013). This raises challenging measurement problems. In particular, it is not easy to define precisely what an imbalance is. In our work we follow a pragmatic approach, and measure macroeconomic imbalances by looking at three common indicators: the government budget balance, the inflation rate, and the current-account balance.

We follow the literature on cultural economics and focus on civic capital, which Guiso et al. (2010) define as the set of values and beliefs that help economic cooperation. Our main explanatory variable is interpersonal trust, i.e. the extent to which citizens trust other people with whom they do not have any particular relationship. Not only does trust impact on many socio-economic interactions, but it is also a proxy for other cultural traits, such as honesty and a feeling of self-determination. Like most of the empirical literature on cultural economics, we use data from the World Values Survey.

We address two key questions:

  • What are plausible theoretical channels through which interpersonal trust may influence macroeconomic imbalances?
  • Is there any evidence that macroeconomic imbalances and interpersonal trust are linked?
Intertemporal collective action problems

Trust may impact on imbalances through a society's ability to overcome intertemporal collective action problems. It is well known that societies with low levels of trust have difficulties in optimally solving collective action problems. In situations similar to the traditional prisoners’ dilemma, low-trust societies are more likely to end up in the inefficient Nash equilibrium rather than in the more efficient cooperative equilibrium. ‘Bad’ macroeconomic imbalances, partly brought about by policy choices and indicated by large fiscal and current-account deficits and high inflation rates, can therefore be seen as an inefficient intertemporal allocation of resources. Indeed, all three of the imbalance measures that we consider (public deficit, current-account deficit, and inflation) may – if excessively persistent – reflect the failed attempt to bring excessive spending from the future to the present.
Evidence of a link between civic capital and imbalances

From an empirical standpoint, there is indeed a positive correlation between interpersonal trust and our indicators of macroeconomic imbalances. This is evident from the data shown in Figure 1, which covers the Eurozone countries in the 2000s, but is also confirmed by data from 65 countries over three decades (the 1980s, the 1990s, and the 2000s).

Figure 1. Interpersonal trust and macroeconomic imbalances in Eurozone countries

Notes: Values are averages for 2000 to 2010. The current account and the fiscal balance are in percentages of GDP. The imbalance index is computed as an average of the three imbalance measures after standardising them. Sources of the data: IMF World Economic Outlook, World Values Survey.

This relationship could of course reflect reverse causality or be driven by unobserved third factors. In our paper we therefore estimate the relationship controlling for variables such as the quality of institutions, educational attainment, and real GDP per capita. We then employ instrumental variables (religiosity, share of Protestants, lagged trust) to establish the direction of causality, and find robust evidence that interpersonal trust does drive macroeconomic imbalances. A one standard-deviation increase in interpersonal trust reduces our measure of macroeconomic imbalances by about a quarter of a standard deviation in our most conservative estimation. Moreover, we can attribute a fifth of the variation in intra-Eurozone imbalances to differences in interpersonal trust.

Policy implications

If macroeconomic imbalances depend on cultural factors that cannot (and perhaps should not) be changed, should we resign ourselves to live with unsolvable imbalances, at a global level but also notably in the Eurozone? Not quite, for two reasons.

First, the World Values Survey data suggest that while cultural differences within the Eurozone do exist, they are not particularly large on a global scale.

Second, the proportion of the variability in macroeconomic imbalances over time – and above all, across countries – that can be explained by cultural variables like trust is non-negligible but also not dominant, both at the global and Eurozone levels. This leaves a role for plenty of other factors – notably economic policies.

How about policies at the European level? We also find that the nexus between interpersonal trust and macroeconomic imbalances is no different in the Eurozone than in other countries. This implies that macroeconomic constraints imposed on Eurozone countries have not (yet) weakened the nexus – but they could in the future. Macroeconomic imbalances in the Eurozone, therefore, should not be seen as destiny, but as something to be addressed by appropriate policies and by enhanced economic governance at the national and EU levels. The recent encouraging developments regarding, for instance, current-account adjustments in Eurozone countries indeed seem to support this view.

Ideally, we would like to repeat the estimation in a few years’ time to find evidence that the EU’s macroeconomic coordination tools – notably the Macroeconomic Imbalances Procedure (European Commission 2012) – have succeeded in weakening the cross-country link between interpersonal trust (or culture more generally) and imbalances in Eurozone countries.

Disclaimer: The views expressed here are those of the authors and do not necessarily represent those of the institutions with which they are affiliated.


Bützer, S, C Jordan and L Stracca (2013), “Macroeconomic imbalances: a question of trust?”, European Central Bank Working Paper 1584.

Akerlof, G (2007), “The Missing Motivation in Macroeconomics”, The American Economic Review 97: 5–36.

European Commission (2012), “Scoreboard for the surveillance of macroeconomic imbalances”, Occasional Paper 92.

Greenspan, A (2011), “Europe’s crisis is all about the north-south split”, Financial Times, 6 October 2011.

Guiso, L, P Sapienza, and L Zingales (2010), “Civic Capital as the Missing Link”, NBER Working Paper 15845.

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