A Cultural Clash View of the EU Crisis by Luigi Guiso ( EIEF and CEPR ) Helios

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 effi cient 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.