Working Paper: CEPR ID: DP9679
Authors: Luigi Guiso; Helios Herrera; Massimo Morelli
Abstract: If voters of different countries adhere to different and deeply rooted cultural norms, when these countries interact their leaders may find it impossible to agree on effcient policies especially in hard times. Political leaders?actions are bound by a ?conformity constraint?that requires them to express policies that do not violate these norms. This inhibits politicians from adopting the optimal policies as they may clash with either one or the other of the cultures of the interacting countries. We model this mechanism and argue that conformity constraints and cultural clash can help us understand the poor management of the Greek crisis and the resulting European Sovereign debt crisis. We show the conditions under which the introduction in Europe of a fiscal union can be obtained with consensus and be beneficial. Perhaps counter-intuitively, cultural diversity makes a fiscal union even more desirable.
Keywords: conformity constraint; culture; debt crisis; fiscal union
JEL Codes: D72
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Cultural norms (Z13) | Political behavior (D72) |
| Cultural attitudes of Germans towards Greeks (F01) | Policy response to the Greek crisis (H12) |
| Cultural clash (Z19) | Establishment of a fiscal union (F36) |
| Cultural distance (Z10) | Political failures (H12) |
| Cultural diversity (Z10) | Desirability of a fiscal union (F36) |