A Culture Based Theory of Fiscal Union Desirability

If voters of different countries adhere to different and deeply rooted cultural norms, the country leaders may fi nd it impossible to agree on efficient policies especially in hard times. The conformity constraint -political leaders unwillingness or impossibility to depart from these norms - has resulted in lack of timely intervention which has ampli ed an initially manageable debt crisis for some European countries to the point of threatening the Euro as a single currency. We show the conditions under which the introduction of a fi scal union can be obtained with consensus and be bene cial. Perhaps counter- intuitively, cultural diversity makes a fi scal union even more desirable. Some general lessons can also be drawn on the interaction of cultural evolution and institutional choice.