Government and Institutions

Europe shows sustained growth in economic freedom


Monetary Policy

The SMPC votes six to three against lowering rates
Of the world’s 11 freest countries, six are in Europe, according to the 2006 “Index of Economic Freedom” published by the Heritage Foundation and the Wall Street Journal and launched in the UK at the Institute of Economic Affairs on 25 January 2006.

“Of the countries in this region, 31 exhibited an increase in economic freedom while only ten experienced a decline”, editor Marc A. Miles said at the launch. This continues last year’s trend, where, overall, the scores of 30 European countries improved, while only nine countries in the continent lost ground.

The study has shown that countries with the most economic freedom also have higher rates of long-term economic growth and are more prosperous than those with less economic freedom.

The study is based upon an analysis of 50 independent economic variables divided into 10 categories: trade policy, fiscal burden of government, government intervention, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation and informal market activity. Countries are rated between one and five in each category, one being the best and five the worst. The ratings are then averaged to produce an overall index score.

The United Kingdom, currently the fifth freest economy in the world, has seen a 13 per cent increase in economic freedom since the Labour Party came to power in 1997. While the UK advanced faster than the United States, whose economic freedom grew only 4.6 percent during the same period, it lagged behind the European countries in the top 10, whose growth averaged around 22.8 percent.

Ireland surpassed Luxembourg as the freest country in Europe in the 2006 Index, based on an improvement in its fiscal burden score and sustained low inflation. Italy, on the other hand, was Europe’s biggest loser and saw the Index’s biggest fall, second only to Iran, due to a deterioration in its banking and finance, property rights and informal market scores. The UK is placed joint-fifth in the rankings.

Estonia, which had seen consistent growth over the last 15 years, fell back from being the fourth to the seventh freest country in the region as a result of adopting the European Union’s more restrictive trade policy upon its accession to the EU. Romania showed the biggest improvement, in spite of an increase in its weighted average tariff rates, after implementing a flat tax of 16 per cent on personal and corporate income, cutting inflation and reducing government intervention in the economy.

The accession of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia to the European Union in May 2004 resulted in policy changes that affected their scores in the 2006 Index. While implementation of the EU policies on trade, agriculture, regulation, monetary and fiscal policy has been uneven, with few caveats, their trade policy scores now conform to the EU-wide trade policy. As a result, with the exception of Estonia, the scores for most of the new EU countries have improved.

On a global level, economic freedom has advanced over the year, the scores of 99 countries having improved (up from 86 in 2005), 51 having deteriorated (compared to 57 the year before) and with 5 remaining unchanged. 20 countries have been classified as “free”, an increase from 17 the previous year, with Germany, Austria and Cyprus joining the ranks. 52 countries ranked as “mostly free”, 73 as “mostly unfree” and 12 as “repressed”.

This is the 12th consecutive year The Heritage Foundation and the Wall Street Journal have published the Index. Marc Miles is the director of the Heritage’s Center for International Trade and Economics, Kim Holmes is Heritage’s vice president for foreign affairs, and Mary Anastasia O’Grady edits the “Americas” column and is a senior editorial page writer at the Journal.

Read the full report here.