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Journal of Trust Research
ISSN: 2151-5581 (Print) 2151-559X (Online) Journal homepage: http://www.tandfonline.com/loi/rjtr20
The causal nexus between trust, institutions andcooperation in international relations
Christoph Elhardt
To cite this article: Christoph Elhardt (2015) The causal nexus between trust, institutionsand cooperation in international relations, Journal of Trust Research, 5:1, 55-77, DOI:10.1080/21515581.2015.1007459
To link to this article: http://dx.doi.org/10.1080/21515581.2015.1007459
Published online: 16 Feb 2015.
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The causal nexus between trust, institutions and cooperationin international relations
Christoph Elhardt*
Center for Comparative and International Studies, ETH Zurich, Zurich, Switzerland
(Received 7 January 2015; accepted 11 January 2015)
The aim of this paper is to dissect the causal nexus between trust, institutions andcooperation in international relations (IR) and to highlight the theoretical andempirical potential of bringing trust from the periphery to the centre of our debatesabout international cooperation. My central argument is that the concept of trustallows us to explain particularly risky forms of international cooperation where thecosts of being exploited outweigh the potential gains of cooperation, actors have anincentive to defect if others cooperate, and uncertainty about others’ preferences andconstraints cannot be fully reduced by international institutions. As most institutions inIR remain incomplete, scholars of international cooperation should hence pay moreattention to trust-based forms of risk absorption. Moreover, the paper argues that thecreation of trust is best conceptualised as a process of costly signalling. In order to testthe causal link between trust and cooperation, the paper analyses Germany’s consentto give up the Deutschmark and to create a common European currency in 1989.Germany’s initial mistrust regarding France’s trustworthiness in monetary affairs couldbe overcome by the exchange of costly signals. I show that the creation of trust was anecessary part of a causal mechanism bridging the analytical gap between Germany’sgeneral preferences for monetary cooperation and the actual creation of EuropeanMonetary Union under conditions of risk and uncertainty.
Keywords: uncertainty; cooperation; institutions; costly signalling; process tra-cing; EMU
Introduction
Scholars of international relations (IR) have long recognised that uncertainty about thepreferences and constraints of other states can inhibit mutually beneficial cooperation(Koremenos, 2005; Koremenos, Lipson, & Snidal, 2001; Kydd, 2001). Ever since thepublication of Axelrod’s (1984), Keohane’s (1984) and Oye’s (1986) foundational work,many explanations of how states can overcome this uncertainty in order to reap the gainsof cooperation have been advanced. While rationalists have emphasised the constructionof institutions and regimes (see for instance Koremenos et al., 2001), constructivistsunderlined the importance of shared norms as well as learning and socialisation processes(Checkel, 2005; Wendt, 1999). Only recently, however, the concept of trust was explicitlyanalysed as a factor that enabled actors to bridge the gap between preferences formutually beneficial cooperation and the realisation thereof under conditions of
*Email: [email protected]
Journal of Trust Research, 2015Vol. 5, No. 1, 55–77, http://dx.doi.org/10.1080/21515581.2015.1007459
© 2015 Peter Ping Li
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uncertainty and risk (Booth & Wheeler, 2008; Hoffman, 2006; Kydd, 2005; Michel,2012; Rathbun, 2012).
Building on the small literature of trust in IR, the aim of this paper is to dissect thecausal nexus between trust, institutions and cooperation in IR and to highlight thetheoretical and empirical potential of bringing trust from the periphery to the centre of ourdebates about international cooperation. My central argument is that trust is bestunderstood as an individually insufficient [I], but necessary [N] part of a causalconfiguration that is itself unnecessary [U] but exclusively sufficient [S] for cooperation.In other words, trust is an INUS condition (Brady, 2008) that allows us to explainparticularly risky forms of international cooperation where the costs of being exploitedoutweigh the potential gains of cooperation, actors have an incentive to defect if otherscooperate, and uncertainty about others’ preferences and constraints cannot be fullyreduced by institutions. The occurrence of cooperation under these conditions, I claim,cannot fully be explained by existing theories of international cooperation. An analysis oftrust therefore complements existing approaches in that it alludes to the micro-foundations of international cooperation (Rathbun, 2009). Due to the inherent uncertaintyof an anarchic international system and the incompleteness of many existing institutionsin international politics, the concept of trust has considerable empirical and theoreticalleverage and should therefore play a more prominent role in debates about internationalcooperation and institutional choice.
While a handful of scholars pointed to the importance of trust in IR, it often remainsunclear under which strategic conditions trust problems arise, what exact causal impacttrust has on cooperation and how it relates to international institutions and regimes (Booth &Wheeler, 2008; Hoffman, 2006; Michel, 2012; Rathbun, 2012; a notable exception isKydd, 2005). More specifically, I argue that the current focus on the psychological notionof generalised trust in IR has several important downsides. By defining trust as a generalbelief in others’ trustworthiness, its emergence and causal impact is mainly assumedrather than analysed. As a result, psychological studies of trust in IR focus on the trustor’s(trust-giver) disposition to expose itself to the risk of exploitation, without sufficientlyanalysing the contribution of the trustee (trust-taker) to the emergence of trusting relations(Michel, 2012; Rathbun, 2011a, 2011b, 2012; Uslaner, 2002). It is important to note thatI do by no means question the importance of psychological accounts of trust. Yet,I advocate that more attention should be paid to the exact causal links between trust,cooperation and institutions.
To address these points and to develop a more sociological rather than psychologicaltheory of trust, I will adopt a simple game-theoretic framework. For at least three reasons,game theory can enrich our understanding of the link between trust, institutions andcooperation in IR. First, it allows us to conceptualise trust as a relational concept whichemerges and erodes through strategic interactions between trustors and trustees. In doingso, we can endogenise the emergence of trust between actors. Second, by incorporatingwell-established insights from signalling theory into a model of trust, we are able tounderline the crucial role trustees (trust-takers) play in inducing the trustor to engage inrisky cooperation. Trustees’ signals are expected to be trust-inducing if they are too costlyfor most untrustworthy actors while trustworthy actors can still afford emitting them(Bacharach & Gambetta, 2001; Diekmann, 2009, p. 189; Gambetta, 2009; Kydd, 2005).And third, by formalising the relation between trust and cooperation within a simple,extensive game of incomplete information we can show how and under which conditionstrust has a causal impact on cooperation.
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The article has five parts. First, I define the problem of trust and discuss previouswork in IR on how actors can overcome uncertainty in order to achieve mutuallybeneficial cooperation. Second, I present a basic trust game which allows us tocapture actors’ uncertainty about others’ preferences and constraints, to distinguishbetween trustworthy and untrustworthy types in an original way and to demonstratehow cooperation is dependent on a necessary level of trust which, in turn, is shapedby the potential gains and losses of cooperation. While my model draws on Kydd’s(2000, 2005) seminal work on trust in IR, I incorporate recent theoretical andexperimental insights on trust from other disciplines, particularly sociology(Przepiorka & Diekmann, 2012). The model confirms the intuition that if thepotential losses of cooperation strongly outweigh its benefits even mutually trustingactors can fail to cooperate. By contrast, in case the potential benefits of cooperationare considerably larger than its potential losses, even mistrusting can achievecooperation (Cook, Hardin, & Levi, 2005). In short, different causal paths leadto cooperation and trust is best understood as an INUS condition (Brady, 2008,p. 227).
Third, I spell out the relation between trust and institutions. I submit that instead ofconceptualising trust and institutions as mutually exclusive substitutes, they should betterbe seen as complementary mechanisms to absorb the risks of cooperation (Möllering,2005). The more freedom and discretion institutional rules leave, that is the lower thedegree of institutional risk absorption, the higher the degree of trust must be in order toachieve mutually beneficial cooperation in an uncertain environment. It is thus above allan empirical question to what extent uncertainty is absorbed by trust or institutions in anygiven cooperative project. In the fourth section, I then modify the basic trust game toshow how costly signalling can increase actors’ level of trust thereby enablingcooperation in ways that were previously blocked by uncertainty. I claim that thecreation of trust is best captured by semi-separating equilibria in which trustors cannever know for certain whether a signal was indeed sent by a trustworthy actor. Basedon Bayes’ theorem, trustors are thus only able to update their level of trust if theybelieve that a signal is costly, that is more likely to be sent by a trustworthy than anuntrustworthy actor.
In the fifth and last part, I will apply this model to the creation of European MonetaryUnion (EMU). I argue that the creation of trust through costly signals is a necessary partof a causal mechanism connecting governments’ preferences for monetary cooperationwith the actual creation of EMU under conditions of risk and uncertainty. Particularly forGermany, EMU constitutes a hard case for an analysis of trust. By giving up theDeutschmark (DM), the stability of its currency suddenly depended on the behaviour ofcountries with less anti-inflationary histories. This raises the question of how Germanofficials coped with the uncertainty of introducing a common currency within aheterogeneous group of states. Contrary to what recent studies on trust in IR wouldsuggest, Germany was only willing to expose itself to the risks of EMU after Francecredibly signalled its trustworthiness. By stabilising its exchange rate, abandoning capitalcontrols and making its central bank independent, France was able to reassure scepticalGermans that a common European currency would be as stable as the DM therebyinducing them to take the leap into EMU. This understanding of the creation of EMU as aprocess of trust building through costly signals complements existing constructivist andrational institutionalist explanations of EMU.
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Conceptualising trust
Following Kydd (2005), I define trust as the belief, held by state officials, that specificothers are likely to be trustworthy, that is willing and able to reciprocate cooperation inthe future. This definition contains three noteworthy elements. First, I conceive trust as asubjective probability that represents to what degree an actor believes in the trustwor-thiness of others (Kreps, 1990, p. 98). Trust therefore is a cognitive and not a behaviouralphenomenon. A trusts B irrespective of whether or not A acts on its trust (Hardin, 2002).Only by keeping trust and behaviour apart can the former help us to explain theoccurrence of the latter. Second, trust can be described as a three-part relation in which Atrusts/mistrusts B with respect to X. The grammar of trust is hence conditional onattributes of B and/or issue area X (Hardin, 2001). For instance, A might trust B withregard to its security but not in matters of economic policy. Third, the targets of trust, i.e.the trustees, are governments and their policy-makers.
On a functional level, trust alludes to the acceptance of the costs that others couldinflict if we cooperate with them but which we presume that they will not in fact inflict(Baier, 1995, p. 152; Luhmann, 2000). Trusting actors treat the risks of cooperation as ifthey were unproblematic in practice regardless of the fact that they can never be fullyeliminated. I define risk as a costly, unwanted future state of the world whose occurrenceis uncertain as it depends on the uncontrollable preferences and constraints of others(Sztompka, 1999). To trust means to live as if certain rationally possible risks will notmaterialise in the future (Lewis & Weigert, 1985, p. 969). Trust can thus be seen as a risk-absorbing mechanism that enables forms of cooperation that would have beenunattainable in its absence (Coleman, 1990, p. 302).
While it is commonly acknowledged that trust is a facilitating or even necessarycondition for cooperation among states (Booth & Wheeler, 2008; Hoffman, 2006; Michel,2012; Rathbun, 2012), it is less clear how and under what conditions it indeed has acausal effect on cooperation (a notable exception is Kydd, 2005). I claim that a game-theoretic approach allows us to address this gap. In order for a problem of trust to ariseamong strategic actors, two scope conditions must be fulfilled. First, trust problemsinclude reciprocal commitments to cooperate but non-simultaneous performance thereof(Abbott & Snidal, 2000, p. 429). Trust therefore constitutes a one-sided risky advance(Beckert, 2005; Luhmann, 2000). By trusting others, we expose ourselves to the risks ofexploitation in order to reap the benefits of cooperation. If others fail to reciprocatecooperation, we would have done better not to cooperate in the first place.
This intuition can best be captured by a simple binary trust game as shown inFigure 1. Player A, the trustor, first decides whether or not to cooperate. If he decides torefrain from cooperation, the interaction is terminated and both players receive the statusquo pay-off of P. If, however, the trustor decides to cooperate (play C), it is for player B,the trustee, to decide whether or not to reciprocate cooperation (play c). In case she isdoing so, both players receive R gains from mutual cooperation. If the trustee defects(plays d), however, she receives the exploitation pay-off of Twhile the trustor receives thesucker’s pay-off of S. Assuming that S < P < R, cooperation is only beneficial for thetrustor if the trustee refrains from defection. But given that T > R, the trustee has anincentive to defect. Solving by backward induction, a rational trustor would clearly notengage in any one-sided risky advances despite the fact that the status quo is lessbeneficial than mutual cooperation (P < R). As a result, both players are worse off.
While this simple game illustrates the risks and incentives underlying problemsof trust, it fails to account for their second constitutive element: the trustor’s uncertainty.
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By uncertainty I mean the inability of policy-makers to know the preferences andconstraints of their partners with certainty. The main question for the trustor is hencewhether the trustee will be governed by her incentives to defect or by ‘trust-warrantingproperties’ that entice her to cooperate (Bacharach & Gambetta, 2001, p. 153).
The problem of trust in IR
In the vast literature on international cooperation, it is still debated how actors canovercome uncertainty in order to reap the mutual gains of cooperation. While rationalinstitutionalist and constructivist studies allude to structural or situational features such asinstitutions and shared norms, psychological accounts emphasise the importance of pre-existing dispositions endemic to the trustor (Booth & Wheeler, 2008; Rathbun, 2009). Inwhat follows, I will briefly discuss why existing accounts cannot fully explain how trustproblems are resolved and what a more general theory of trust must entail.
Rational institutionalist approaches long argued that uncertainty among states can bereduced through the creation of regimes and institutions (for an overview seeHasenclever, Mayer, & Rittberger, 1997). Regimes and institutions are thought to piercethe veil of uncertainty between trustors and trustees by providing credible informationabout their preferences, by monitoring trustees’ compliance, by raising the reputationalcosts of defection and even by sanctioning defection directly (Abbott & Snidal, 2000;Hoffman, 2006; Keohane, 1984; Koremenos et al., 2001; Moravcsik, 1998). Yet,institutionalist approaches tend to neglect that in the realm of international politicsinstitutions are often incomplete (Abbott & Snidal, 2000; Garret & Weingast, 1993). Theyare rarely precise enough to be self-enforcing and hence never fully address all potentialsources of uncertainty. By itself, to use Offe’s (1999, p. 66) words, institutions ‘can neverprovide for all contingencies and emergencies […] there are plenty of opportunities ofcheating (breaking the rules) and of subversion (replacing the rules with alternativerules)’. It follows that trustors can only rely on institutions to the extent that they trustthose that apply, interpret, verify, enforce or eventually challenge their rules. I thereforeargue that trust constitutes the micro-foundation of efficient institutions. The relationbetween trust and institutions, however, is rarely explicitly theorised in IR (a notableexception is Rathbun, 2012). It is one aim of this paper to do just that.
Constructivist scholars, on the other hand, claim that shared norms and collectiveidentities can alleviate mutual uncertainty (Wendt, 1999). Accordingly, trust is likely to
C
(S, T)d
c
D
(R, R)
(P, P)
A
B
Figure 1. Binary trust game.Source: Dasgupta, 1988; Diekmann, 2009.
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emerge if trustors and trustees share similar norms and values and develop a strong senseof identification (Adler & Barnett, 1998; Booth & Wheeler, 2008, p. 233). It is importantto note, however, that shared norms per se cannot eliminate uncertainty between actors.Rather, it is the degree of their internalisation that does the explanatory work (Copeland,2006). According to Wendt (1999, p. 254) actors adhere to norms because they are forcedto do so, because it is in their self-interest or because they consider them as legitimate.Hence, only when trustors presume that trustees consider the norm of ‘always reciprocatecooperation’ as self-evident and legitimate, they will engage in a one-sided advance. Andyet, as Copeland (2006) argues persuasively, how should trustors ever know if theircounterparts merely temporally comply with this norm out of pure self-interest or becausethey truly believe in its legitimacy. Similar to institutionalist approaches, manyconstructivist solutions to the problem of trust lack proper micro-foundations. As aresult, they cannot fully explain how actors can overcome trust problems.
Only recently, scholars turned to psychological approaches in order to address thelack of micro-foundations inherent in many institutionalist and constructivist studies(Rathbun, 2009, 2012; Michel, 2012). Building on Uslaner’s (2002) work on trust,Rathbun (2011a, p. 248) argues that trust is best seen as a ‘general belief that others arelargely trustworthy or untrustworthy, independent of the particular partner or situation onefaces immediately’. Trust, Rathbun (2011a, p. 249) adds, ‘indicates a dispositional qualityof individuals that reflects a particular ideological view of the world. It is an attribute ofthe [trustor], not the relationship with or even the characteristics of the specific target ofdistrust or trust’. This implies that based on their innate, general belief in others’trustworthiness, some trustors will engage in one-sided advances while others will refrainfrom doing so. While Rathbun clearly locates trust on a micro level, his psychologicalapproach has several downsides. First, it does no longer allow us to show how trustorscome to believe that their specific counterparts are indeed trustworthy. The emergence oftrust throughout several rounds of strategic interactions between trustors and trustees ishence exogenous to Rathbun’s theory. Second, psychological approaches generally focuson trustor’s beliefs and dispositions without analysing the role trustees play in theformation of these beliefs. And third, by defining trust as generalised belief, we cannotaccount for the fact that an actor might trust his counterpart with respect to issue X butnot with regard to issue Y. Psychological approaches assume that trust is decoupled fromboth the characteristics of the trustee and the issue area of cooperation (Michel, 2012;Rathbun, 2012).
The micro-foundations of trust
It follows from the discussion above that a more comprehensive theory of trust has toaccomplish three things. First, it has to spell out the micro-foundations of the trustor’sbelief that others will reciprocate cooperation. Second, it has to specify the relationbetween trust and institutions. And third, it has to postulate a mechanism through whichtwo actors can overcome their mistrust and build stable trusting relations. It is the aim ofthis section to address the first point while the next two sections cover the second andthird point. I claim that a simple extensive game with incomplete information as shown inFigure 2 allows us to flesh out the micro-foundations of trust.
The game in Figure 2 is an extension of the simple binary trust game of Figure 1. Itincorporates player A’s (the trustors) uncertainty about whether player B (the trustee) willreciprocate cooperation (play c). In games of incomplete information, this is commonlydone by introducing a hypothetical player – Nature (N) – who randomly decides to make
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player B trustworthy with probability α or untrustworthy with probability (1 – α). Whiletrustworthy B’s reciprocate cooperation (play c), untrustworthy players exploit others’trust and defect (play d). As indicated by the dotted line in Figure 2, player A is uncertainwhether he is located at the right or left branch of the game tree. Put differently, he cannottell for sure whether he faces a trustworthy or untrustworthy type. Player A merely formsa probabilistic belief α as to how likely it is to encounter a trustworthy type (McCarthy &Meirowitz, 2007, p. 204). The subjective probability α can thus be interpreted as playerA’s level of trust. α is ranging from 0 to 1 with 1 indicating certainty about others’trustworthiness, 0 indicating certainty about others’ untrustworthiness and 0.5 indicatingindifference or neutrality towards others. As uncertainty is a constitutive feature oftrusting relations, one’s level of trust can therefore only vary in between 0 and 1 such thatα ϵ (0, 1). An actor’s level of trust is broadly shaped by his experiences from pastinteractions with specific and generalised others (Kydd, 2000, p. 331).
While this set-up is widely accepted in the formal literature and figures prominentlyin Kydd’s (2000, 2005) seminal work on trust in IR, it is less clear how to model thedifference between trustworthy and untrustworthy types. Following recent experimentalinsights by Przepiorka and Diekmann (2012), I propose a different, slightly more specificsolution than Kydd (2005) who assumes that trustworthy actors’ pay-offs for cooperationare higher than their pay-off for exploitation without fully spelling out why this is thecase. I argue that player A perceives player B as trustworthy if he beliefs that B has a highdiscount factor (McCarthy & Meirowitz, 2007, p. 58; Morrow, 1994, p. 265). Thisapproach allows us to incorporate the well-known intuition of the shadow of the future inrepeated games into our model of trust (Axelrod, 1984). Actors who possess highdiscount factors (δ1) are expected to refrain from defection because they value the futurebenefits accruing from repeated cooperation higher than the benefits of one-time
d c
S
T
P
P
C
dc
C
D
R/(1 – d I) R/(1 – dS)
R/(1 – dS)R/(1 – d I)S
T
P
P
Untrustworthy
1 – aa
Trustor
Trustworthy
N
A
BD
A
B
Figure 2. Primary trust game: A’s pay-offs are displayed in the upper row, B’s pay-offs in the lowerrow.
Source: Diekmann, 2009, p. 194; Przepiorka & Diekmann, 2012.
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defection such that R/(1 – δ1) > T > P. Untrustworthy actors, by contrast, have lowdiscount factors (δs). For them, the benefits of defecting in the short run outweigh theexpected long-term benefits of repeated cooperation as T > R/(1 – δs) > P (Przepiorka &Diekmann, 2012, p. 4). Solving for δ1, trustworthy and untrustworthy types differ withregard to their discount factor, such that
d1 >T � R
T> ds ð1Þ
We can now solve by backward induction and see that on the left branch of the game treein Figure 2 where player B is trustworthy, she will cooperate, while on the right branchwhere player B is untrustworthy, she will defect. As player A’s pay-off from cooperationis higher than his status quo pay-off (R/(1 – δ1) > P), he has an incentive to cooperate ifhe believes that player B will reciprocate cooperation, that is if his level of trust α is highenough. Given player A’s level of trust α and the pay-off structure outlined in Figure 2, heonly risks a one-sided advance (plays C) if the expected pay-off from doing so outweighsthe status quo pay-offs such that:
aR
ð1� d1Þ þ ð1� aÞ S > P ð2Þ
Solving for α in Equation 2, we receive a minimum threshold for cooperation α* of:
a� ¼ P � SR
ð1�d1Þ � Sð3Þ
Only if player A’s level of trust is above the critical threshold of α* (α > α*) he will risk aone-sided advance (play C; Kydd, 2000, p. 332, 2005; Przepiorka & Diekmann, 2012,p. 4). Examining Equation 3 more closely, we can see how the critical threshold α*depends on player B’s gains from mutual cooperation (R), the potential losses fromdefection (S) and his preferences for preserving the status quo (P). The higher the gainsfrom cooperation (R), the lower α* becomes and the lower player A’s level of trust α canbe in order to risk a one-sided advance. By contrast, the higher the potential losses fromdefection (the lower S), the higher α* will be and the higher A’s level of trust α must be inorder to achieve cooperation.
By formalising the relation between the potential gains (R) and losses (S) of cooperationas well as the level of trust α, we can now qualify the common claim that trust facilitatescooperation (Booth &Wheeler, 2008; Hoffman, 2006; Rathbun, 2012). If the costs of beingexploited by the trustee are extremely high (very low S) thus pushing up α*, the trustormight still refrain from cooperation despite a considerable level of trust in her counterpart as0.5 < α < α* (see the upper light grey triangle in Figure 3). Mistrusting actors, on the otherhand, can still achieve cooperation if the minimum threshold α* is below 0.5 such that α* <0.5 < α (see the lower light grey triangle in Figure 3). In sum, different causal paths lead tocooperation and trust is best understood as an individually insufficient, but necessary part ofa causal configuration that is itself unnecessary but exclusively sufficient for cooperation.In other words, trust is an INUS condition (Brady, 2008).
Trust and institutions
In IR, institutions are often defined as ‘explicit arrangements, negotiated amonginternational actors, that prescribe, proscribe, and/or authorize behavior’ (Koremenos
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et al., 2001, p. 762). Moreover, it is commonly assumed that states create institutions inorder to overcome problems of trust. The creation of institutions therefore implies a lackof trust (Koremenos et al., 2001). According to this functionalist view, institutions allowactors to cooperate despite prevailing mistrust about whether others’ will reciprocatecooperation (Cook et al., 2005; Rathbun, 2012). More specifically, institutions allow evenmistrusting trustors to risk one-sided advances as they are thought to pierce the veil ofuncertainty between trustor and trustee.
Instead of conceiving trust and institutions as mutually exclusive substitutes, I arguethat they are better seen as complementary mechanisms to absorb the risks ofcooperation. While institutions reduce uncertainty by controlling or partially determiningactors’ future behaviour, trusting actors suspend uncertainty by treating the risks ofdefection as unproblematic. Figure 4 illustrates the relation between trust and institutions.The dark grey area delineates the space where actors are able to absorb the risks ofcooperation in order to realise mutual benefits. Inside the white area, by contrast, actorsfail to fully absorb these risks due to a lack of trust, weak institutions or both. Thedownward sloping line separating the two areas indicates that we can think of a widerange of configurations between institution- and trust-based forms of risk absorption.Points on the lower half of the line would for instance stand for cooperation in areaswhere institutions are rather weak and actors mainly absorb the risks of cooperation bytrusting their counterparts. It is then above all an empirical question where on that lineexisting cooperative projects are located.
Although we can in principal think of institutions that fully absorb the risks ofcooperation by determining how others behave in the future (100% on the y axis), it isfair to assume that in IR such institutions rarely exist. This is not to say that internationalinstitutions do not increase the credibility of states’ commitments by interpreting,monitoring and even sanctioning state behaviour (Abbott & Snidal, 2000). Yet, mostexisting institutions are either incomplete in that they do not fully control the futurebehaviour of others or – in the case of delegation – create new trust problems between
Figure 3. Trust and cooperation.
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principals and agents. While delegation to non-majoritarian institutions might indeedfully eliminate uncertainty among principals, uncertainty regarding the preferences andbehaviour of agents is still an issue (Pollack, 2006; Thatcher & Sweet, 2002).
In sum, as long as institutions leave some leeway to those applying, interpreting,monitoring and eventually challenging their rules, actors must trust that this leeway willnot be exploited malevolently (Costa & Bijlsma-Frankema, 2007; Das & Teng, 2001;Möllering, 2005). I therefore argue that without the existence of trust, most institutionswould be seen as inefficient mechanisms to absorb the risks of cooperation. The morefreedom and discretion institutional rules leave, that is, the lower the degree of institutionalrisk absorption, the higher the degree of trust-based absorption must be in order to achievemutually beneficial cooperation in an uncertain environment. Conversely, the higher anactors’ level of trust α, the higher its tolerance for incomplete institutions.
The emergence of trust: Updating and costly signalling
In the primary trust game shown in Figure 2 the level of trust α is exogenously given. Inorder to explain the emergence of trust, however, we have to demonstrate how player A’sα increases in light of player B’s actions. Figure 3 allows us to specify this intuition. Wehave to show how α is pushed from point (1) where cooperation fails because actorsmistrust one another (α < 0.5 < α*) to point (2) where α is high enough (α > 0.5 ≥ α*) tojustify cooperation. To that end, I follow Kydd (2005) and combine the concept of trustwith insights from signalling theory (for an overview see Connelly, Certo, Ireland, &Reutzel, 2011).
To demonstrate the effect of signals on one’s level of trust, I turn to the game inFigure 2 again and assume that at time t player A mistrusts player B such that α is 0.3.This implies that A initially beliefs to be at the right branch of the game tree thus facingan untrustworthy player B who is expected to defect in the future. Let us assume furtherthat the necessary threshold for cooperation α* is 0.6, thus well above A’s level of trust.
Figure 4. Trust and institutions, adapted from Ripperger (1998, p. 84).
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Based on these assumptions, player A will refrain from making any one-sided advances(playing C) and cooperation therefore fails. As a result, both players are worse off. This ismy point of departure for the signalling game shown in Figure 5 where A’s initial mistrustis modelled by nature starting the game with an α of 0.3.
Now assume that over some period, at time t + 1, player B becomes trustworthy andhas an interest in long-term cooperation. She will hence try to convince A that she will nolonger exploit his good will. The game in Figure 5 captures this intuition by giving B anoption to send a signal s in order to raise A’s α to a level where cooperation is feasible. Bysending a signal, in other words, player B tries to reassure player A that he is no longer atthe right but rather at the left branch of the game tree thus facing a trustworthy actor thatwill reciprocate cooperation. The dotted lines in Figure 5 indicate, however, that A cannever be certain whether a signal was sent by a trustworthy or an untrustworthy actor.Yet, only when A believes that B’s signal has likely been sent by a trustworthy actor willhe give up his resistance towards cooperation. As sending signals entails costs, the keyquestion for player A is therefore who can afford emitting them, only trustworthy or bothtrustworthy and untrustworthy B’s. The players’ preferences in Figure 5 capture thisthought in that the costs–benefit differential of sending a signal in order to inducecooperation is different for trustworthy and untrustworthy actors. While a trustworthyplayer B pays a cost of a, an untrustworthy player B pays a cost of b. In addition,trustworthy and untrustworthy types also differ with respect to the benefits they canpotentially earn from making others believe that they are indeed trustworthy. Assumingthat it is equally costly to produce a given signal for both types (a = b), trustworthy actorsgain more from the emergence of cooperation as their discount factors are higher. Thebasic pay-off structure of the game is similar to the one in Figure 2.
In determining who can send costly signals, signalling theory distinguishes betweenseparating, semi-separating and pooling equilibria (Gambetta, 2009; Kydd, 2000). In aseparating equilibrium, signals are unequivocal as only trustworthy B’s can afford to sendcostly signals thereby convincing player A that they truly are long-term cooperators
cd
R/(1 – dI)
R/(1 – dI)
R/(1 – ds) – bR/(1 – ds)
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Figure 5. Secondary trust game adapted from Diekmann (2009, pp. 188–189) and Przepiorka andDiekmann (2012).
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(Bacharach & Gambetta, 2001, p. 160). For this equilibrium to occur trustworthy B’smust prefer cooperation over the status quo despite the costliness of sending a signal suchthat the inequality R/(1 – δ1) – a > P holds. For untrustworthy B’s, by contrast, the statusquo must be more beneficial as the gains from defection minus the costs of signallingsuch that T – b < P. If these conditions hold, then player A knows from observing B’ssignals that he is located at the left branch of the game tree. His level of trust α shoots upfrom 0.3 to 1 (Diekmann, 2009, p. 191). While it is often claimed that the emergence oftrust through costly signals requires separating equilibria (see for instance Kydd, 2000),I argue that these equilibria are at odds with the basic intuition of trust. After receiving asignal, player A is no longer uncertain about whether B will reciprocate cooperation. Theinitial problem of trust is thus simply assumed away by making signals unequivocal. In apooling equilibrium, on the other hand, both trustworthy and opportunistic actors canafford to send costly signals. Due to their ambiguity, signals do not allow the trustor toinfer whether or not a trustee will cooperate in the future and therefore do not effect A’sinitial level of α (Gambetta, 2009, p. 173). As a result, pooling equilibria do not allow usto capture the idea that A’s level of trust can indeed be changed though signals.
In between these two poles, lie games with semi-separating equilibria. I claim that theemergence of trust is most adequately modelled by these equilibria as uncertainty is noteliminated but signals do still have an effect on one’s level of trust. In these games,opportunistic actors sometimes send costly signals as the benefits accruing fromexploitation minus the signalling costs equal the status quo pay-off such that T – b = P.As a result, opportunistic actors will sometimes pretend to have a long-term interest incooperation, i.e. to signal their willingness and capacity to reciprocate cooperationwithout actually intending to do so (Bacharach & Gambetta, 2001, pp. 148–149). The keyquestion for player A is therefore whether he is located at the right branch of the gametree where B is a short-term opportunist that merely mimics trustworthiness but will laterdefect (play d) or at the left branch where B is a long-term cooperator that indeedreciprocates cooperation (play c). In other words, player B wants to know how likely it isthat a costly signal is sent by a trustworthy player B.
Based on this subjective probability, A could than update his initial level of trust byusing Bayes’ formula eventually reaching an α that is sufficient for cooperation. Bayes’theorem allows us to formalise how rational actors update their level of trust afterreceiving new information about their counterparts (McCarthy & Meirowitz, 2007, p. 49;Morrow, 1994, p. 164). In Equation 4, I apply Bayes theorem to player A’s situation.Based on our assumptions, we already know the prior probability that B is trustworthy αand the probability that B is untrustworthy (1 – α). By assuming the conditionalprobabilities of a signal being sent by a trustworthy player B p (s | δ1) and anuntrustworthy player B p (s | δs), we could already calculate A’s updated or posterior levelof trust α′:
pðd1jsÞ ¼a0apðsjd1Þ
apðsjd1Þ þ ð1� aÞ pðsjdsÞ ð4Þ
The key implication here is that the difference between the prior and posterior levelof trust is determined by ‘Bayes factor’ which can be expressed as the ratio K = p (s | δ1)/p (s | δs). If a given signal is equally likely to be sent by trustworthy and untrustworthyactors (i.e. K = 1), the signal carries no information about the other’s type. Such a signalwould hence not change player A’s initial level of trust. In contrast, player B’s signals canonly raise player A’s level of trust α if K > 1. If A beliefs, however, that a signal was
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likely sent by an untrustworthy actor such that K < 1, he will lower his level of trust.These insights are broadly confirmed in recent laboratory experiments (Przepiorka &Diekmann, 2012).
The creation of EMU: Overcoming German mistrust
What do we have to observe for this conception of trust to be empirically valid? In essence,the theoretical model outlined above is predicated on a hypothesised causal mechanismconnecting the independent variable – cooperative preferences –with an observed outcome –the actual realisation of risky cooperation. According to Beach and Pedersen (2013), causalmechanisms consist of several parts that are individually necessary and jointly sufficient foran outcome.Moreover, each single part is sufficient for the occurrence of the subsequent part.Causal mechanisms thus constitute causal chains based on a clearly specified temporalsequence of INUS conditions (Brady, 2008; Goertz & Levy, 2007).
Building on the ‘analytic narrative’ tradition (Bates, Greif, Levi, & Rosenthal, 1998),I argue that game-theoretic models in extensive form are well suited to formalise causalmechanisms. Each node in the game tree displayed in Figure 5 can be seen as a part in acausal mechanism. My aim in this section is to trace the presence and functioning of trust asa casual mechanism by using what Beach and Pedersen (2013, p. 12) call a theory-centricprocess tracing design. While process tracing allows us to open up the black-box ofcausality and to achieve high degrees of internal validity, the generalisation of causalmechanisms across cases is limited to what George and Bennet (2005, p. 112) callcontingent generalisation based on clearly specified theoretical scope conditions. Theuniverse of potential cases is thus clearly delimited by these scope conditions (see above, p.6). In order to trace the existence and function of trust as part of a causal mechanism, wetherefore have to select a positive case from this population, that is, a case where boththe independent (cooperative preferences) and dependent variable (risky cooperation)are present.
Based on these considerations, I chose to analyse the creation of EMU betweenGermany and France as a hard or least likely case for the influence of trust on cooperation(Gerring, 2007). If I can show that my causal mechanism was present and functioned asexpected under these unfavourable scope conditions of high risk (a high level of α*), it islikely that it will also be present in cases where the scope conditions are more favourable
Figure 6. Causal mechanism of trust.
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(lower levels of α*; Eckstein, 2000). Figure 6 visualises the hypothesised causalmechanism underlying the creation of EMU.
EMU as a problem of trust for German decision-makers
On 7th February 1992, the European Community decided to create a common Europeancurrency managed by an independent European Central Bank (ECB). Never before incontemporary history did sovereign nations delegate core powers of the state – the rightto print money and to set interest – to a supranational organisation. For Germany, givingup its cherished DM – the symbol of its post-war economic success – meant that thestability of its new currency suddenly depended on the future behaviour of countries withless anti-inflationary histories (Kaltenthaler, 2002; Loedel, 1999). Under a commoncurrency, the costs of economic misbehaviour by one or several countries are shared byall members of the currency area (De Grauwe, 2009). If others would followexpansionary fiscal and economic policies and thus fail to converge around low inflationrates, balanced budgets and competitive wages and prices once EMU is in place,Germany would face substantial costs in the form of higher inflation and even inter-statetransfers. Moreover, the creation of a common currency was characterised by consider-able uncertainty as to how governments and market actors would ultimately behave oncethe Euro is introduced. As a result, EMU clearly constituted a problem of trust forGerman officials.
It is important to note, however, that governments take risks in order to reap certainbenefits. For Germany, EMU had several benefits. It ruled out competitive devaluationsby Germany’s trading partners in Europe, reduced transaction costs and locked in a morecompetitive exchange rate vis-à-vis the rest of the world thereby promising higher exportmarket shares for German companies. In this vein, many German officials saw EMU ascomplementary to a common European market which could not fully operate without acommon currency (Moravcsik, 1998; Schönfelder & Thiel, 1996).
These benefits, however, depended on the long-term, stability-orientated behaviour ofGermany’s partners inside EMU. Put differently, if Germany’s partners failed to convergearound prudent financial and economic policies in order to reap short-term electoralbenefits, the costs of EMU for Germany would outweigh its benefits (S < R, seeFigure 1). German officials were clearly aware about the risks going along with EMU.They were particularly concerned whether former weak-currency countries such asFrance, Italy, Spain, Portugal or Greece would be able to cope with the constraints of acommon currency. The most crucial candidate, however, was clearly France. While acore-EMU without most of the southern European countries was seen as acceptable if notpreferable by German officials, EMU without France was unthinkable. Yet, Germanofficials were concerned that for their French counterparts EMU was merely aninstrument to get rid of the mighty Bundesbank and to regain political control overmonetary policy (Interview with former Bundesbank official, 9 October 2012). Accordingto Dyson and Featherstone (1999, p. 55), ‘doubts about the seriousness of Frenchcommitment to the principles of monetary stability were never removed from the mindsof many in Bonn and Frankfurt’. In short, German officials’ level of trust α was initiallyclearly below the critical threshold necessary for the creation of a common currency.
I therefore claim that German officials were only willing to give up the DM, whenthey began to trust that their French counterparts’ would favour the long-term benefits ofa stable EMU over the short-term gains of expansionary fiscal and economic policies (seeδ1 in Equation 1). This implied, however, that their low initial level of trust had to be
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raised beyond the necessary threshold determined by EMU’s costs and benefits. Putdifferently, the creation of trust was a necessary part of the causal mechanism that linkedGermany’s general preference for monetary cooperation with the actual creation of a fullmonetary union. French president Mitterrand acknowledged this logic in a conversationwith Italian Prime Minister Ciriaco de Mita:
How can we bring the Germans to accept progress on the road to monetary union? I have theimpression that if they had the guarantee that monetary union would not endanger their goodeconomic health, they would be ready to go forward. (quoted in Marsh, 2011, p. 132)
In what follows, I argue that three French signals were seen costly enough to reassureGerman officials that the Euro would be as stable as the DM: first, the stabilisation of theFrench Franc vis-à-vis the DM after 1983; second, the decision to liberalise capitalmovements in 1988; and third, the consent to make the Banque de France andsubsequently the ECB independent. Although not the main focus of my analysis, itis important to keep in mind that French officials were only willing to send thesesignals because they also believed in the long-term benefits of EMU (see Dyson &Featherstone, 1999).
My main argument is that in the eyes of German officials it was unlikely thatuntrustworthy states would pursue a hard-currency policy while liberalising capitalmovements and making their central bank independent. It can be shown that after thesecostly signals were sent German officials were able to update their level of trust beyondthe necessary threshold for cooperation and subsequently committed to the goal ofcreating a common European currency (see part 3 in Figure 6). Yet, despite thiscommitment, the negotiations on EMU’s institutional design dragged on until February1992 and were still characterised by multiple equilibria. It was then above all Germanofficials’ updated level of trust that shaped their views on how strict the rules underlyinga stable common currency ought to be (part 4 in Figure 6). Due to the limited spaceavailable, I will mainly focus on the emergence of trust through costly signals (part 1 topart 3 of the causal mechanism in Figure 6) while the effect of trust on EMU’sinstitutional design (part 4) will be the basis of future research. As many primary sourceson EMU remain declassified, I will mainly rely on semi-structured interviews withGerman officials, available government documents and on the most recent historicalscholarship on EMU.
Complementary explanations of Germany’s leap into EMU
While studies on the creation of EMU are abundant, the emergence and causal impact oftrust on Germany’s decision to give up the DM has not been explicitly analysed so far.Most existing accounts of EMU focus on countries’ preferences for monetarycooperation, the process of interstate bargaining or the institutional design of EMU (foran overview see Sadeh & Verdun, 2009). The crucial link between countries’ preferencesfor monetary cooperation and the commitment to the risky goal of monetary union – part1, 2 and 3 in the causal mechanism displayed in Figure 6 – often receives less empiricaland theoretical attention. Moravcsik’s (1998) rational institutionalist account, for instance,fully brackets the question of how German officials overcame their initial mistrustregarding France’s stability credentials. It remains unclear why Germany committed tothe goal of EMU in early 1989, thus long before the fall of the berlin wall, withoutknowing whether EMU’s future institutional architecture would ultimately guarantee that
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the Euro would be as stable as the DM. This is all the more puzzling as he later concedesthat particularly for Germany ‘there was considerable economic risk involved in choosingEMU’ (Moravcsik, 1998, p. 470). In addition, Moravcsik’s framework does not allow usto theorise how the bargaining process and the institutional design were itself shaped byGerman officials’ level of trust.
Among existing explanations of EMU, constructivist studies have most directlyaddressed the question of how countries’ overcame their mutual suspicion. McNamara(1998) as well as Dyson and Featherstone (1999), for instance, point to the emergence ofsound money and finance norms throughout the 1980s. Yet, the existence of these normsas such does not allow us to explain how German officials updated their low level oftrust. In the end, they could not know whether French decision-makers only temporarilycomplied with sound-money and finance norms for tactical reasons or because they trulybelieved in their legitimacy. If German negotiators indeed believed in the late 1980s thattheir French peers had already internalised the virtues of stability-orientated policies,there would have been no reason to be distrustful about them in the first place. Yet, incontrast to what constructivists accounts suggest, French officials had to reassure theirGerman counterparts that their participation in EMU would not endanger Germany’seconomic stability. In short, both rational institutionalist and constructivist studies do notprovide us with a coherent theoretical framework to understand how French officials wereable to reassure their German counterparts. The theory of trust outlined above is fillingthis gap and is thus broadly complementary with existing explanations of EMU.
Costly signalling and Germany’s commitment to EMU
Due to Germany’s economic size and the stability of its currency, the DMbecame the anchorcurrency within the European Monetary System (EMS) with the Bundesbank practicallyconducting monetary policy for all member states. Countries that wanted to stabilise theirexchange rates vis-à-vis the DM thus had to mirror the Bundesbank’s anti-inflationarypolicies. This implied bringing inflation rates down towards German levels and settinginterest rates in order to sustain a given exchange rate parity. Under this regime, foreignexchange markets had a disciplinary effect on countries economic policies. If, for instance,market participants expected higher future inflation in France or a future devaluation ofthe Franc, they demanded higher interest rates in order to compensate for future losses.A country that was committed to a stable exchange rate, therefore, had to raise interest ratesat the expense of other domestic goals such as high employment and growth (Gros &Thygesen, 1998). A stable exchange rate vis-à-vis the DM was thus seen as a signal for acountry’s commitment to anti-inflationary policies (Interviews with former Bundesbankofficial, 9 October 2012 and former German Finance Ministry official, 13 August 2012).
As a result, German officials saw countries that were unable to sustain stable paritiestowards the DM as unfit for EMU. Devaluations, in other words, were seen as negativesignals which underlined a government’s untrustworthiness in monetary affairs. Inbetween 1979 and 1983 the French franc devalued four times vis-à-vis the DMcumulatively loosing 29.6% in value (Deutsche Bundesbank, 1989). In the early 1980s,France was hence not seen as a trustworthy partner with regard to monetary cooperation.In a private meeting after the Franc was devalued by 8.8% against the DM in October1981, Chancellor Schmidt told President Mitterrand that France’s economic and monetary‘means and methods are such that we cannot harmonize them’ (quoted in Marsh, 2011,p. 102). After Mitterrand’s radical departure from expansionary policies in 1983, Francefinally accepted the constraints of the EMS and renounced the possibility of adjustments
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through devaluation (Abdelal, 2009, p. 60). By consequence, the Franc merely lost 9.2%in value in between 1984 and 1989. It is hence no coincidence that Germany refused tocommit to the goal of a common European currency in between 1979 and 1988. Seriousdiscussions on EMU did only re-emerge in 1989 after a period of relative currencystability (Dyson & Featherstone, 1999, p. 24).
Both German and French officials acknowledged the trust-inducing function of stableexchange rates. French Finance Minister Pierre Bérégovoy’s long-time adviser AndréGauron reported, for instance, that ‘Bérégovoy believed the only way to convinceGermany to treat France with respect was to have a currency as strong as theirs’ (quotedin Marsh, 2011, p. 114). Along similar lines, German Foreign Minister Genscher arguedthat those countries that already gave up sovereignty in order to stabilise their exchangerates within the EMS were seen as viable candidates for EMU (Interview with formerGerman Foreign Ministry official, 14 August 2012). Yet, despite its reassuring function,stabilising the Franc was not enough for the more sceptical German finance ministry andthe Bundesbank (Dyson & Featherstone, 1999; Kaltenthaler, 2002). In contrast to Foreignminister Genscher who brought EMU back on the European agenda with his personalmemorandum in April 1988 (Genscher, 1988), Finance ministry and Bundesbankofficials’ level of trust α was still below the necessary threshold for deeper monetarycooperation. As a result, they still fiercely opposed any commitment to the goal of EMU(Stoltenberg, 1993).
Only when capital movements within Europe would be liberalised, Finance Ministryand Bundesbank officials emphasised, exchange rates could truly function as a credibleindication for countries’ trustworthiness. As one former German Finance Ministry officialput it, the liberalisation of capital movements ‘would provide the disciplinary instrumentwhich would force actors to converge […] and which would signal whether politiciansare on the right [stability-orientated] path’ (Interview with former German FinanceMinistry official, 13 August 2012). Capital controls – so the argument went – mitigatedthe disciplinary effects of foreign exchange markets by limiting capital outflows fromcountries whose commitments to stability-orientated polices were not fully credible. Theexchange rate therefore lost part of its crucial signalling function. With capital controlsintact, countries pursuing less stability-orientated policies within the EMS could sustainstable exchange rates longer than without these controls (Gros & Thygesen, 1998, p.137). Yet, within the EMS, capital liberalisation could also lead to speculative attacksagainst weaker currencies whose inflation rates still diverged from German rates.
The costliness of liberalising capital was clearly recognised in France where averageannual inflation in 1988 stood 1.5% points higher than in Germany. Jacques de Larosière,governor of the Banque de France at the time, argued for instance that ‘without the rightinstitutions and the right surveillance procedures in place, capital movements could createhavoc’ (quoted in Abdelal, 2009, p. 63). Along similar lines, one German FinanceMinistry official stated that the liberalisation of capital ‘was a great sacrifice for Francewhich, at the time, was not without risks for the French economy’ (Interview with formerGerman Finance ministry official, 16 November 2012). In short, French and Germanofficials were clearly aware about the costliness of capital liberalisation in 1988.
By consequence, the German finance ministry saw capital liberalisation as aprecondition for EMU. In the summer of 1988, Hans Tietmeyer, then its state secretary,recalls in an interview with Abdelal (2009, p. 76), ‘we made it clear to the commissionand the other European countries that Germany would not accept a monetary unionwithout full mobility of capital both inside and outside’. Before capital controls wereultimately abandoned on 13th June 1988, German officials were still hesitant to engage in
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substantial steps towards EMU. Although Foreign minister Genscher’s memo broughtEMU back on the agenda of European governments, the official German position wasstill that EMU was merely a long-term issue. Yet, after President Mitterrand accepted fullcapital mobility at the Franco-German Summit at Evian on 2nd June 1988, the KohlGovernment agreed to set up a committee to study how EMU could be realised at theHannover ECOFIN on 28th June 1988 (Parsons, 2003, p. 205).
In sum, by agreeing on the liberalisation of capital movements, Mitterrand was able tocredibly signal France’s seriousness with regard to monetary stability thereby furtherraising the sceptical German Finance ministry’s and the Bundesbank’s level of trust. This,in turn, allowed Chancellor Kohl to move forward with EMU by setting up a high levelcommittee to study the prospects of EMU (Aeschimann & Riché, 1996, p. 46; Dyson &Featherstone, 1999, pp. 178–179). And yet, Finance ministry and Bundesbank officialswere still not fully convinced about France’s monetary trustworthiness. Their level oftrust α, in other words, was still below the necessary threshold to fully commit to thecreation of EMU. For people like Finance Minister Stoltenberg and his successor Waigelor Bundesbank president Pöhl, it was still questionable whether the negotiations on EMUwould lead to anything substantial (Interview with former German Finance ministryofficial, 16 October 2012 and former Bundesbank official, 29 October 2012).
When the Delors Committee began its deliberations in July 1988, French and Germanpositions on how a future EMU ought to look like still lay widely apart. In the late 1980s,France preferred the creation of a European Reserve Fund in which national central bankswould pool their reserves (De Larosiere, 1989). Decisions to change exchange rates or tointervene in order to stabilise currencies would remain firmly under the control ofEuropean governments. According to this view, any future European monetary institutionwould ultimately be subject to political directives from the European Council. In contrast,German governments since at the least the 1970s rejected these proposals by arguing thatthe political control over monetary policy would only lead to more inflation withoutspurring either growth or pushing down unemployment. Traumatised by two hyperinfla-tions, German officials were highly distrustful of a politicisation of monetary policy onthe European level (Dyson & Featherstone, 1999, p. 31). By delegating monetary policyto an independent central bank – German officials argued – democratic governmentscould be protected from short-sighted, irresponsible decisions leading to sub-optimaleconomic outcomes (Loedel, 1999). France’s republican view on the political dominanceof monetary policy was hence incompatible with Germany’s insistence on a depoliticised,technocratic and independent ECB.
When the negotiations on EMU gained momentum after the publication ofGenscher’s memorandum on EMU, German officials made it crystal clear that centralbank independence would be a non-negotiable condition for them (Interview with formerGerman Foreign Ministry official, 13 August 2012). As Finance minister Waigel recalledin an interview ‘any weakening of independence would be unthinkable’ (quoted inMarsh, 2011, p. 136). The most credible signal for a country’s trustworthiness was henceif it was willing to make its central bank independent. Officials in Bonn and Frankfurtwere clearly aware that this did not fit well with France’s republican tradition and wouldthus be a huge sacrifice. Only countries that were truly committed to a stable Euro wouldhence be willing to pay such a high price.
Given the diverging views between France and Germany on whether a futureEuropean central bank should be independent or subject to political directives, it washence highly unlikely that the Delors Committee would produce any substantial result.Before its first meeting, Bundesbank President Pöhl, the German representative on the
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Delors Committee was still convinced that France ‘did not want an independent centralbank’ (Interview with former Bundesbank official, 29 October 2012). This stalemate,however, radically changed on 1st December 1988 when President Mitterrand met withBanque de France governor De Larosière. De Larosière told the president that:
if France wanted an agreement with the Germans, we had to accept that monetary policywould be a single policy, and that national central banks would be members of a system ofcentral banks where all would have to be independent from governments. (quoted in Marsh,2011, p. 129)
To the surprise of De Larosière, Mitterrand did not categorically oppose central bankindependence (Marsh, 2011, p. 129). Taking this as tacit concession, De Larosière thensignalled to Pöhl that ‘he had persuaded Mitterrand to accept an independent ECB,mandated to achieve price stability, as a non-negotiable basic principle for EMU’ (Dyson &Featherstone, 1999, p. 345).
Dyson and Featherstone describe this as a turning point which – for the first time –made an agreement within the Delors Committee possible. De Larosière’s signal hencealleviated the residual doubts of German Finance Ministry and Bundesbank officials’thereby pushing their level of trust beyond the necessary threshold for cooperation. AsTietmeyer later recalled in an interview with Paul (2010), ‘it was decisive that for the firsttime […] the president of the Banque de France pleaded for an independent central bank[…] Pöhl could have never agreed without that’. The final report (1989, p. 22) which wassigned by all central bank governors later stated that a future European central bank‘should be independent of instructions from national governments and Communityauthorities’. It was subsequently adopted by the European Council of Madrid on 27thJune 1989 and became the blueprint for EMU.
In sum, by stabilising its exchange rate, liberalising capital movements and byagreeing on the principle of central bank independence, French officials were able toconvince their German counterparts that they were serious about a stable Europeancurrency. As an economic adviser to Chancellor Kohl later recalled, ‘I was impressed byFrance’s behaviour, by the seriousness with which France adopted a stability culture’(Interview with former Chancellery official, 20 November 2012). While Germanofficials’ level of trust was by no means absolute, it was high enough to commit to thegoal of establishing a common European currency. The following negotiations on EMU’sinstitutional design were then shaped by Germany’s bargaining power and by Germanofficials’ level of trust (cf. part 4 in Figure 6).
Conclusion
The aim of this paper was to analyse the causal nexus between trust, cooperation andinstitutions. Based on three simple trust games in extensive form, I argued that trust isbest understood as an individually insufficient, but necessary part of a causalconfiguration that is itself unnecessary but exclusively sufficient for cooperation.Trust, in other words, is an INUS condition (Brady, 2008) that helps us to explainparticularly risky forms of international cooperation where the costs of being exploitedoutweigh the potential gains of cooperation, actors have an incentive to defect if otherscooperate, and uncertainty about others’ preferences and constraints cannot be fullyreduced by institutions. As these scope conditions arguably apply to many areas of
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international politics ranging from arms control to cooperation in trade, trust deservesmore attention in IR.
Moreover, I argued that instead of conceiving trust and institutions as mutuallyexclusive substitutes, it is theoretically and empirically more promising to see them ascomplementary mechanisms to absorb the risks of cooperation. My central claim here wasthat without the existence of trust, most institutions would be seen as inefficient mechanismsto absorb the risks of cooperation. The more freedom and discretion institutional rules henceleave, that is, the lower the degree of institutional risk absorption, the higher the degree oftrust-based absorption must be in order to achieve mutually beneficial cooperation in anuncertain environment. It is thus above all an empirical question to what extent uncertaintyis absorbed by trust or institutions in any given cooperative project.
I further showed that the creation of trust is best understood as a process of costlysignalling and updating. I assumed that the trustor’s level of trust α is initially below thenecessary threshold for cooperation. Believing that his counterpart will likely notreciprocate cooperation, he will therefore refuse to cooperate. To overcome this sub-optimal outcome in which both trustor and trustee are worth off, the trustee has to convincethe trustor that she is indeed trustworthy and will not exploit the trustor. Only when thetrustee’s signals are seen as costly enough, I argued, will the trustor risk the leap of trust. Asignal, in turn, is seen as costly when the trustor believes that it is more likely stemmingfrom trustworthy instead of untrustworthy actors. Based on Bayes’ theorem, trustors canthen update their level of trust beyond the necessary threshold for cooperation.
In my case study, I argued that Germany’s willingness to give up the DM and tocreate a common European currency constituted a hard case for an analysis of the causalnexus between trust, cooperation and institutions in IR. I showed that trust is a necessarypart of a causal mechanism linking German officials’ preferences for monetarycooperation with their commitment to create a full monetary union under conditions ofuncertainty and risk. Initially, German officials distrusted France’s stability credentialsand refused to commit to the goal of EMU. Only after France credibly signalled that itwill pursue stability-orientated policies inside EMU throughout the 1980s, Germanofficials updated their level of trust and committed to the goal of EMU. Three signalswere jointly sufficient to raise Germany’s level of trust: first, the stabilisation of theFrench Franc vis-à-vis the DM after 1983; second, the decision to liberalise capitalmovements in 1988; and third, the consent to make the Banque de France andsubsequently the ECB independent. This finding is particularly revealing as Germanofficials could not rely on any institutional risk-absorbers and could not know howEMU’s future design would look like when they committed to the goal of EMU in 1989.While the empirical part of this paper analysed the creation of trust and its effects onactors’ willingness to cooperate, future research should investigate the link between anactors’ level of trust his demand for institutional control mechanisms.
Notes on contributorChristoph Elhardt is a Ph.D. candidate at the Centre for Comparative and International Studies atthe Swiss Federal Institute of Technology Zurich, Switzerland. His research interests include therole of trust in European politics, the politics and economics of European monetary integration andthe philosophy of social science.
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