Traditionally strong showings in property rights, freedom from corruption and business and trade freedom helped Europe post another year of strong scores in the 2012 Index of Economic Freedom, published annually by The Wall Street Journal and The Heritage Foundation.
But Europe is slipping in many ways, the Index’s editors cautioned, and trouble lies ahead if European governments don’t address their spending crises. Already, Europe ranks last among six regions in the world in fiscal freedom and government spending.
“The region has been undergoing tumultuous and uncertain times epitomized by the ongoing sovereign debt crisis,” Index editors wrote. “Europe’s overall economic freedom rating is seriously undermined by weak scores in the management of government spending.”
Launched in 1995, the Index evaluates countries in four broad areas of economic freedom: rule of law; regulatory efficiency; limited government; and open markets. Based on its aggregate score, each of 179 countries was classified as “free” (i.e. combined scores of 80 or higher); “mostly free” (70-79.9); “moderately free” (60-69.9); “mostly unfree” (50-59.9); or “repressed” (under 50).
Of the region’s 43 countries, 80 percent of the economies rank as “moderately free” or “mostly free.” Nine economies rank among the world’s 20 freest.
Switzerland’s economy is rated as free and it ranks fifth in the world. Ireland is ninth. Great Britain climbed back into the Top 15 after implementing austerity measures and tax cuts, and Iceland returned to the “mostly free” category with a gain of 2.7 points – the third-largest score increase in the world.
But Greece – where a sovereign debt crisis rages – dropped 4.9 points, the largest score decline in the world, to fall into the “mostly unfree” category. And Ireland, Denmark, Luxembourg, Estonia, Finland, Cyprus, Norway and Slovakia all fell by 1.5 points or more.
For now, the continent seems on solid ground in many areas of economic freedom. Europe exceeds the world average in seven of 10 categories. It is 15 points ahead in property rights and freedom from corruption and 10 points ahead in business and trade freedom.
Overall, only five countries in the world were classified as “free.” A total of 23 were rated “mostly free,” 62 “moderately free” and 89 “mostly unfree” or “repressed.”
The world average score for economic freedom dipped to 59.5, a drop of two-tenths of a point, and the second-lowest score of the past 10 years. Scores improved for 75 of the 179 countries rated and declined for 90. Scores for 14 others stayed the same.
Index results continued to demonstrate that when countries adopt policies leading to high scores, they also enjoy prosperity and economic security. In the United Nations’ assessment of what it calls poverty intensity, “mostly free” and “moderately free” countries perform three times better than “mostly unfree” and “repressed” countries.
The freest countries in each region have per-capita incomes far higher than the least free. The top one-fifth of countries in the Index grew at an average rate of 3.7 percent. The bottom fifth grew 2.1 percent.