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 union policies and identities in candidate countries are endogenous. We find that, in general, a union is more fragile when peripheral member countries have higher status than the Core, as this leads to stronger national identification in equilibrium and 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 a common anticipation among union advocates, mutual solidarity is unlikely to emerge as a result of integration. Applied to currency unions, we show that the model helps explain the composition of the euro area.

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

JEL Classification: F02, E71, D72, Z1