The trust in ECB during normal and crisis times..

I just missed this Dec-12 paper by ECB econs – Michael Ehrmann, Michel Soudan and Livio Stracca.

They measure the EU citizens trust in ECB both before and during the crisis. Unfortunately, the paper only measures trust till 2010. The bulk of the ECB decisions and interest in ECB was after 2010..

We study the determinants of trust in the ECB as measured by the European Commission’s Eurobarometer survey. The formulation of the corresponding question in this survey is very general, and compatible with very different notions of “trust” by respondents. In particular, the survey does not ask whether respondents trust that the ECB delivers on its mandate. Still, the ECB started with a relatively high level of trust right from the outset, especially in comparison with national institutions (other than central banks). 

However, with the onset of the global financial crisis, trust started to fall. It also continued to fall after 2010, a period not covered by our analysis. We find that the fall in trust until spring 2010 can be rather well explained based on the pre-crisis determinants, and show that it reflected the macroeconomic deterioration, a more generalised fall in the trust in European institutions in the wake of the crisis as well as the severity of the banking sector’s problems, with which the ECB was associated in the public opinion. Finally, we show that a higher degree of knowledge about the ECB generates more trust in normal times and even more so during the financial crisis.

The paper looks at impact on trust in ECB from three angles:

Against this background, in this paper we contemplate and test three, not necessarily mutually exclusive, hypotheses for the fall in public trust in the ECB associated with the global Önancial crisis. First, it could be that the fall in trust in the ECB is explained by economic developments (henceforth the Economy Hypothesis). Since the central bank is an important economic policy actor, the global Önancial crisis and the associated economic contraction are likely to reduce the central bank’s  popularity in the public opinion. Second, it is possible that the global financial crisis has exposed European policy makersílimitations in preventing and solving global problems and the trust in the ECB has su§ered because it is a European institution (the Europe Hypothesis). Third, as the banking sector was at the epicentre of the global financial crisis, its problems may have negatively impacted trust in the ECB through several channels: either the ECB is (perceived to be) a “bank”, or it is (wrongly) assumed to have direct supervisory and regulatory responsibilities for the banking sector, or, finally, its actions are seen as implying some form of bail-out of the financial sector which was seen as undeserved or inappropriate in the public opinion (henceforth the Banks Hypothesis).

The paper finds all the three factors led to erosion of trust…

We try to come up with testable implications of the three hypotheses and we  conclude, from the empirical analysis, that all of them appear to have played a role. Hence, the fall in the public trust in the ECB in crisis times can be explained by a combination of (i) the large and abrupt economic contraction due to the financial crisis, (ii) a generalised loss of confidence in Europe and European institutions, and (iii) the fact that the ECB is somehow associated to the banking sector in the public opinion, either as a supervisor and regulator or because its policies were seen as a bail-out of the banking sector. Importantly, we find that these determinants are able to explain the fall in trust during the crisis entirely, using essentially the same elasticities estimated in the pre-crisis period. In other words, the crisis has brought no fundamental change in the way economic agents form trust in the ECB. We again emphasise that these conclusions do not necessarily extend to the post-2010 period, during the euro debt crisis.

I would love to see an update of this from 2010 onwards.


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