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The great European stagnation

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Over the last 18 months, most governments across Europe have intervened in their economy more heavily than at any other time in the previous generation. The pandemic saw gargantuan levels of government spending, quantitative easing, trade restrictions, handouts, closed borders, and increasing calls for national self-sufficiency become the norm.

Regardless of one’s opinion on whether the abnormality of the last year-and-a-half warranted such intervention, a new report out this morning provides a stark warning to interventionist governments worldwide.

The Fraser Institute’s 25th edition of its annual Economic Freedom of the World (EFW) report shows us once again the intrinsic link between economic freedom and prosperity. It highlights that, on average, freer economies are richer, grow faster, and score better across almost all metrics of global well-being than their least free counterparts.

To determine the level of economic freedom for the 165 economies measured, the EFW report analyses 42 indices across five major areas (size of government, legal systems and property rights, sound money, freedom to trade internationally, and regulation), using figures from 2019 – the most recent year data is available. To analyse the correlation between economic freedom and global well-being, the countries are split into quartiles (i.e. each quartile represents a quarter of the economies) based on their level of economic freedom.

The results are staggering.

Average incomes in the freest (i.e., most capitalist) quartile of countries are more than 8.5 times higher than average incomes in the least free quartile ($50,619 and $5,911, respectively.) Indeed, the gap between the freest and least free economies is so vast that the average incomes of the poorest 10 per cent of people in the freest economies are more than twice average incomes in the least free nations.

Similarly, the bottom 10 per cent of income earners in countries with the least amount of government intervention in their economy make, on average, nine times more than the poorest 10 per cent in the most interventionist economies. When it comes to poverty, more than one-third of people in the least free economies live in extreme poverty (as defined by the World Bank as living on an income of less than $1.90 per day). By comparison, less than 1 per cent of people in the freest economies live in extreme poverty – of course, this figure is still far too high, but it’s about 36.2 times lower than the level in the least free economies.

However, the benefits of economic freedom extend far beyond money. The EFW report found that that on average, those in the freest countries live an eye-watering 15 years longer than those in the most interventionist and restrictive nations. It is not an exaggeration to say that for millions of people, that difference would amount to knowing one’s grandchildren, or indeed great-grandchildren, or dying before their birth.

Compared to the least free quartile, infant mortality rates are almost 10 times lower, and secondary school enrolment is more than twice as high in the freest nations.

The good news is that in 2019 – the year most recent data is available – the world reached new heights of economic freedom and, therefore, prosperity. However, the bad news is that our long-term prospects look increasingly bleak unless governments act fast to stop tinkering with their economy.



European Commission President Ursula Von Der Leyen. EPA-EFE//OLIVIER HOSLET

By the time the 2020 and 2021 data becomes available for the 2022 and 2023 report, respectively, given nearly every government’s response to COVID-19, global economic freedom will have declined. This won’t just mean that those of us in the west will be a few pounds shorter each month, but rather it means that millions of the world’s poorest people who might have otherwise become richer will remain trapped in abject poverty.

And what about Europe? Overall, the EU has an economic freedom score of 7.78 out of 10, which has been stable for the past decade. To put this in perspective, if the EU was a country, it would jointly rank 35th with Peru, and marginally above Jamaica and Bulgaria. Compared to, say, the U.S. which ranks 6th, the EU’s score is feeble at best. 

If the EU was a country, it would rank in the top quartile in three of the five components that make up the EFW ranking. In ‘sound money’ the eurozone would rank a poor 50th, and most embarrassingly, in ‘size of government’ the EU would rank a tragically low 123rd. Indeed, in some metrics within the ‘size of government’ area the EU scores even worse – in ‘transfers and subsidies’ the EU would rank 141st, in ‘government consumption’ it’d rank 137th and in ‘top marginal income and payroll tax rate’ a poor 123rd.

These scores are problematic when we consider that the size of government has exploded over the last year and in the Eurozone as a whole, debt as a percentage of GDP soared from 86.1% in the first quarter of 2020 to more than 100% today. The challenge of nearly all EU governments is to try and return to some degree of normalcy and create a space whereby free exchange is no longer curtailed, intervention in the economy is reduced, and the spending taps are turned off. Doing so will be a key determinant of the bloc’s future growth and prosperity. 

Worldwide, countries should be hesitant about following the in the footsteps of countries like Spain and the UK, who have chosen to raise taxes to pay off, or even maintain colossally high spending. Ultimately, increasing taxes is a foolish way out of the situation we find ourselves in as tax increases work to reduce our future economic freedom and stunt economic growth.

Despite the many challenges that remain, the upside is that as nearly all countries begin to emerge from the worst of the covid pandemic, we have an opportunity to return to our pre-2020 economic freedom trajectory. Rolling back the immense state apparatus that has encroached on nearly all economies since March 2020 won’t be politically easy, but it is economically necessary. As highlighted in the data above, if we are successful in doing so, the economic future will be a brighter one for us all.

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By: Nicholas Waller
Title: The great European stagnation
Sourced From: www.neweurope.eu/article/the-great-european-stagnation/
Published Date: Wed, 15 Sep 2021 23:01:54 +0000

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