Restoring Trust in the System

Last year, when, as the new Prime Minister of the Slovak Republic, I sought a parliamentary vote of confidence and approval of the Government Programme Statement, I began and concluded my address with the words: trust and confidence. I spoke about what trust means. That today’s promise must also be the reality of tomorrow. That good ideas lead to rewards and breaches of rules to punishments. That honesty and decency at work, in politics, and also in every-day life are not to be ridiculed, but should be a natural part of everyday life that comes without questions.


All of us know the benefits resulting from trust. This has been documented by generations of economists, sociologists and psychologists. Almost forty years ago Kenneth Arrow wrote: „Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence“. I remember an article from Forbes magazine describing the difference between the income of the people in Somalia and in the US that can be basically explained by way of trust. If you make $40,000 a year, then $200 is down to hard work and $39,800 is down to trust.


Over the last years we all have gone through and seen the high costs linked with the loss of trust in the financial markets. The crisis, unemployment, economic recession, social unrest, the Eurozone debt crisis – all of these come at an astronomical social cost, and still the bill is far from being final and complete. Where trust is missing, you need cash. A lot of cash – to secure economic growth, to bail-out financial institutions or to rescue the member states of one of the most advanced economic blocs in the world. I do not want to sound too pessimistic, but these days we have to do everything possible in the Eurozone in relation to the debt crisis to avoid a situation causing not just lack of trust, but also lack of cash.


Restoring trust in the system is not the same as reforming the system. Profound structural changes, healthier institutions, formal rules and compliance with the rules are, quite naturally, the crucial elements of change for the better. A responsible politician’s task is to carry out reforms, to seek the best solutions, to make every effort to explain to the public these complex issues, trying also to find support for them. Politics, however, is often an unrewarding business, and in many cases you can only hope for the results to materialise, at some point during this infinitely complex journey, through which trust and confidence of the general public will be enhanced. And as far as the genuinely significant and challenging changes are concerned, this rarely occurs before the next elections, so that you may fall in a vicious circle of wrong incentives and decisions fuelled by the election cycle.


One of the most important challenges in Slovakia with which my government is confronted is to restore trust and confidence in the rule of law. In the broadest sense – beginning from enforceability of law, through trust in justice, and ending with the reduction of corruption rates and cronyism. We have launched extensive reform programmes – in the judiciary, in the office of public prosecutors, as well as by making all public contracts automatically available on the internet. In part, these changes focus on strengthening the key institutions and renewing their personnel, partly to increase transparency, and partly also to speed-up the procedures in various offices and in courts, reducing the time required for decision-making.


I dare to say that the majority of our citizens do understand that these changes are necessary, because in their everyday private lives they have encountered cases of poor operations of the rule of law - cases of injustice, unreasonable delay in court proceedings, and cronyism or nepotism. But whether and when they will also acknowledge that these reforms have changed Slovakia for the better is quite a different question. We may well successfully explain the need for reforms and system changes, use statistics, analyses, facts and draw upon knowledge of social sciences. But I am convinced that the feeling of the need for changes will get transformed to the feeling of trust only after the first top politician will go to prison in Slovakia for the crime of corruption. Moreover, trust will be reality, when this consistently becomes the case whenever he or she will be caught in the act, when this process becomes effective, transparent, comprehensible, and unambiguous and we will see the results already in this century.


The same is also true for the most pressing topic on this continent in the past year – the Eurozone debt crisis. Restoring trust in the Eurozone is not the same as reforming the Eurozone. And restoring trust in the financial system is not the same as reforming the financial system. In the past year, we have been through a lot of hard work, tough meetings, difficult compromises and late-night summits. A question arises here whether the European institutions and European politicians responded to the key issues in an adequate and trustworthy manner. Is there any future at all for the project called euro? Will the absence of fiscal and political union be dealt with satisfactorily? Will the control and monitoring mechanisms fail again? Will politicians be able to consolidate public finances for long-term sustainable results? Will regulators be able to supervise the financial system effectively?


Do we have the answers? Technically, we do. In the past year we launched a number of reforms in relation to stronger fiscal rules, coordination of structural policies and financial sector re-structuring. Now we have a better set of tools for the enforcement of fiscal discipline. We prepared the necessary measures for the establishment of the European stabilization mechanism – a regional analogy to the International Monetary Fund, i.e. the institution that should be ready to intervene and prevent unrestrained crisis development in the Eurozone. Several member states are, at the same time, preparing or introducing into practice budget institutions that will strengthen, beyond the framework of the Stability and Growth Pact, the long-term sustainability of public finances. Speaking of the financial system, the new architecture on global level is trying to guarantee that regulators will act efficiently in the future, enabling us to understand the new financial instruments in an effort to avoid any systemic risks.


However, it is not enough to just have a new institutional framework. As for restoring trust of the people, investors and entrepreneurs concerning the ability to defeat the crisis, I am afraid, it will not be enough merely to say: „trust us, this time we’ve got it right“.


There are several enemies of restoring trust in the Eurozone and competence of its institutions to deal with the crisis. The number one enemy is our own unintelligibility and obscurity. Consider the following: E-F-S-F. E-S-M. S-G-P. European semester. Pact Euro plus. Private sector involvement. Stress-tests. To be perfectly honest, they all sound more like secret codes than a set of tools for coping with the debt and financial crisis and dealing with restoring trust. They may be understood by economic analysts, but I am afraid, the majority of the people must be lost in translation. Especially if they see the only practical impact of these words as another necessity to put more money on the table or to live through another wave of measures to cut-back spending under the treat of the fact that otherwise something really, but really bad would occur.


The other enemy is our own past. Although I am not an expert in financial market regulation or corporate governance, I expect a number of reservations to be raised in today’s panel discussion concerning insufficient regulation, failure of the supervising institutions, defunct mechanisms of sanctions, or the poorly structured system of incentives rewarding those seeking fast short-term profits. I have in mind the financial markets, but it looks rather like a precise description of how the Stability and Growth Pact worked in practice. The Eurozone has a bad track-record of compliance with its own written rules. Therefore it is difficult to gain trust in the reform of something that has been ignored by member states over decades or failed in the first, important test.


An important element of trust is a good experience repeated over and over again. It is not enough to adopt a thousand-page Criminal Code compiled by the Government and promise protection against criminal activities. Where the policemen are corrupt and the judges work slowly, people start seeking other solutions. Trying to get protection on their own, buying expensive safety car alarms, locking entrances in private quarters equipped with security cameras and surrounded by high fences.


Where the global or European institutions do not work, one may also look for other solutions ultimately resulting in the renaissance of nationalism and populism. From the point of view of the future for the E.U. and the Eurozone, this may pose similar or even greater dangers than short-term economic consequences of the uncontrolled debt and financial crises. Thus when posing a common question of what is required to restore trust in the system, my answer will be that any solution will not only have to pass a stress-test of accuracy, but also a test of transparency, and a test of intelligibility, consistency and credibility of the commitment.


A lot of money, time, energy and political capital have been invested into the search for technical answers. Now we need to think very intensely about whether we will be able to practically implement such solutions in a trustworthy manner, so that the political system upon which the European Union has been established can survive.


After all, people don't give their credit card number to an Internet store because it claims it has the assembly manual for a top-class television set but because it is able to deliver it. If we want to restore trust, we must be able to deliver results without delay.