How Economically Free are the EU Member States?
Briana Chui // 27 February 2017
The Heritage Foundation recently posted its Index of Economic Freedom for 2017, the 23rd annual index of its kind. The Member States of the European Union are all over the place within this index, ranking from 6th most economically free to 127th most economically free, out of 180 ranked countries.
In developing this index, the Heritage Foundation awards points to countries on 12 factors, which can be grouped into 4 broad pillars of economic freedom:
– Rule of Law: property rights, government integrity, judicial effectiveness;
– Government Size: government spending, tax burden, fiscal health;
– Regulatory Efficiency: business freedom, labour freedom, monetary freedom; and
– Open Markets: trade freedom, investment freedom, financial freedom.
In each subcategory, each country is awarded up to 100 points for economic freedom, and the country’s overall rating is obtained by averaging its points from each subcategory. Heritage also shows year-on-year changes in a country’s score.
Of the 28 Member States, the average score among the 7 freest is higher than that of the 14 middle Member States and that of the 7 least free Member States in most of the 12 subcategories. That is, the freest Member States, on average, have score higher in most subcategories than the average score of the other Member States.
Interestingly, the countries in the middle half, on average, score higher than those in the upper quartile in the subcategories ‘fiscal health’ and ‘tax burden’. The groups’ (upper quartile, middle half, lower quartile) averages in business freedom, monetary freedom, and trade freedom are within 8 points, 3 points, and 2 points of each other, respectively. This means that the Member States rank fairly closely in these three categories while their scores in government integrity, fiscal health, and financial freedom differ much more widely—with differences of 25 points, 22 points, and 20 points, respectively. When comparing European countries, these are the categories which explain most of the differences in overall outcomes.
The lower quartile of Member States also experienced an average change of -0.1 points while the upper quartile averaged a change of +0.7 and the middle half averaged a change of +1.02. This could mean a number of things, but it is worthwhile to think about why the EU’s 7 least free Member States are, overall, becoming less economically free while the other 21 Member States are becoming more economically free.
For each factor, the highest and lowest ranking Member States are listed below:
So, despite having improved by 1.7 points since the last edition of the report, Greece still ranks as the least free Member State in five categories. Some may think that Greece ought to return to its own national currency, but Greece’s performance in this ranking suggests that the country’s problems run deeper than that. A currency devaluation may help, but ultimately, the country will have to stabilize its institutions.
Heritage’s Index of Economic Freedom leads us to believe that there is a lot of variation in terms of economic freedom within the European Union. It encompasses some of the world’s freest economies (especially Estonia, ranked 6th) and some of the world’s least free economies (especially Greece, ranked 127th).