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Culture and European Integration

- March 19, 2013

Gideon Rachman argues in the Financial Times that cultural differences between Northern and Southern Europe remain at the root of the problems facing the European Union:

The bigger problem remains, however, the gap in trust and political cultures between northern and southern Europe. Back before the crisis, when things were going well, it was considered politically incorrect, even xenophobic, to suggest that standards of probity in public life vary widely across Europe and that this is a problem for an organisation dedicated to “ever closer union”.

A difficulty with cultural arguments is that even if they are right, they are often quite vague. Vague arguments are easily abused by opportunists and easily rejected by hard-nosed analysts. One challenge for scholars then is to more precisely identify what work culture is doing, how cultural differences could complicate integration, and how these differences can be overcome.

An interesting attempt to do all this is a working paper by Luigi Guiso, Helios Herrera, and Massimo Morelli. The authors analyze a dynamic game in which economies can either converge to a “cheat and forgive” equilibrium or to a “responsible actions and commitment to punish otherwise” equilibrium. Greece and Germany are the prototypical examples of either. The authors use survey and experimental evidence to illustrate that Germans and Greeks indeed exhibit the behavioral traits associated with each equilibrium. So: Greeks are not just more likely to cheat but also more likely to forgive others who cheat. Germans will punish cheaters even if it is not in their self-interest to do so.

They then assume that leaders are constrained by the cultural norms of their respective societies. This allows them to analyze what happens when exogenous factors make a monetary union between heterogeneous economies  attractive. In the model, the likelihood of fiscal union (in response to an exogenous shock to the monetary union) is increasing in the degree of cultural heterogeneity. The welfare cost of excessive cheating by the Greeks and excessive punishment by the Germans cannot be addressed by retaining national sovereignty if heterogeneity (and the benefits of integration) are too large. That is: cultural heterogeneity should be an argument for increased centralization rather than against it; as is commonly posited. This is, of course, a highly stylized model but interesting nonetheless.