Lack of economic freedom threatens Eurozone

The economy of the Eurozone is fundamentally flawed

November 24, 2011

By Fred McMahon
Vice-President – International Policy Research
and Hugh MacIntyre
The Fraser Institute

VANCOUVER B.C. and TORONTO, ON, Nov. 24, 2011/ Troy Media/ – The initial reaction by the markets to the plan for dealing with Greece’s debt was optimistic, but the optimism quickly began to lag as the public waited for the details. The reality is that, regardless of how the bailout fund and debt haircut are structured, both are short term fixes to what is a long-term problem.

The economy of the Eurozone is fundamentally flawed. Within the Eurozone there are two Europes: the mostly economically free Europe and the not so economically free Europe. It is the second Europe that is pulling down the first.

Economic freedom a cornerstone of prosperity

Economic freedom is one of the cornerstones of prosperity, based on the concept that individuals are permitted to choose for themselves and engage in voluntary transactions as long as they do not harm the person or property of others. Research shows that high levels of economic freedom lead to higher per-capita incomes, economic growth, greater life expectancy, lower child mortality, and development of democratic institutions, as well as civil and political freedoms.

Each year, the Fraser Institute releases an annual economic freedom index that ranks countries on different measures of economic freedom, dividing the world into four broad groups: mostly free, relatively free, relatively unfree, and mostly unfree.

A glance at the Eurozone countries shows us that nine out of 16 of the member countries fall under the “mostly free” category, five of the 16 are “relatively free,” and two of the countries are “relatively unfree.” The freest country in the Eurozone is Finland, ranked 11th in the world in the economic freedom index. In contrast the least free country, Greece, ranks 88th in the world. The massive difference in economic freedom enjoyed in different countries in the Eurozone creates a dividing line and it is pretty easy to see conflict arising across that line.

The list of countries that fall into the less free side of the line reads like a list of the economic problem children of Europe. Spain, Italy, and Portugal all fall into the “relatively free” category. Greece, the main problem child, is ranked “relatively unfree” on the index. The only country that has required assistance that is “mostly free” is Ireland, and Ireland has shown the strongest signs of economic recovery.

The “mostly free” United States has also experienced economic turmoil but the downturn there pales in comparison to Greece or Spain. No one but the most exaggerating of alarmists would claim that the American economy is in danger of imminent collapse, while the complete unraveling of the Greek economy is quite real. More so than in America, it is the less economic free countries of Europe that are bearing the brunt of the ongoing global economic crisis.

This shouldn’t be much of a surprise. The connection between economic freedom and economic prosperity is well documented. The more economically free a country is, the more likely it will become an economic success story and be less crippled by economic difficulties. Economic freedom allows for the initiative and creativity of individuals to be unleashed. In contrast, ultimately state control flounders with often extravagant government spending and regulations erode private initiative.

The “free” shackled by the “unfree”

This is usually not a problem for the economically free countries, but the Euro ties together the economy of Finland to the economy of Greece. Finland can’t simply ignore the economic collapse of Greece because the cost to the Fins would be too high.

So the mostly economically free countries are stuck bailing out the less economically free countries and paying the cost for economic policies that they have no control over. At the same time, the less economically free countries are kept afloat, but they are not compelled to make the changes needed to ensure economic sustainability.

Austerity measures are not enough. Greece and the other troubled countries need to take a fundamental look at the very structure of their economies and find a way to increase economic freedom if they want to ensure a prosperous future for their citizens.

McMahon is Fraser Institute vice-president of international policy research. Hugh MacIntyre has an MSc in political science from the University of Edinburgh and works in the Fraser Institute’s Toronto office.