International Integration and Social Identity

Abstract

This paper contributes to the literature incorporating social identity into international economics. We develop a theoretical framework for studying the interplay between international integration and identity politics, taking into account that both policies and identities are endogenous. We find that, in general, a union is more fragile when peripheral member countries have higher status than the politically dominant “Core” countries, as this leads in equilibrium to stronger national identification in the periphery and a lower willingness to compromise. Low-status countries are less likely to secede, even when between-country differences in optimal policies are large, and although equilibrium union policies impose significant economic hardship. Contrary to the anticipation of many union advocates, mutual solidarity is unlikely to emerge as a result of integration alone.

Keywords: International Integration, Social Identity, Currency Unions, EU, Euro, Brexit, Grexit

JEL Classification: F02, E71, D72, Z1