by Ambrose Evans-Pritchard
February 5, 2016
You may have heard of the “Brexit” – Britain’s opportunity to leave the EU via a referendum. As early as this June, British voters will be asked this question: “Should the United Kingdom remain a member of the European Union or leave the European Union?”
The odds they will choose the latter greatly improved this week, with the United States slipping behind Great Britain to 11th place in the 2016 Global Index of Economic Freedom.
What is even more striking about the 2016 index released Monday (2/01) by the Heritage Foundation is the shockingly “unfree” state of the European Union.
What you have is a northern free-zone clustered around the UK (10th), Ireland (7th), the Netherlands (16th), and the Nordic-Baltic region of the old Hanseatic League, with Estonia (9th), then Switzerland (4) as ever near the top, and safely beyond the clutches of Brussels and regulatory asphyxiation.
Or put another way, it is the Protestant alliance that battled reactionary Habsburg absolutism in the late 16th and early 17th Centuries – with Germany split within, torn in both directions.
This Northern grouping is roughly that which would emerge as a closely linked area of prosperity if Britain left the EU. In my view most of these states would also pull out within 10 to 15 years – de facto, if not jure – once Britain had set the ball rolling.
Germany would be left trying to manage two deeply troubled blocs with demographic crises: a poor sphere to the East where a fragile rule of law is breaking down in one country after another; and a heavily indebted bloc in the South that is trapped in deflation and labor hysteresis, and has yet to claw back its lost competitiveness within the structure of monetary union.
The index shows that EU countries are on average less free than other countries with a comparable per capita income and level of development, an indictment that should give cause for thought. Several of them are disasters.
Greece is ranked “mostly unfree” and is deteriorating five years after it crashed into the arms of the Troika, which claimed to be pushing through reforms to make the country more efficient, transparent, modern and competitive – but was in reality collecting debts for northern creditors under false guise.
Greece has dropped to 138th – sandwiched between Bangladesh and Mozambique – precisely because it has lost control over its economic levers and monetary policy. Capital controls have been relaxed somewhat since the banking crisis last summer, yet Greeks are still limited to ATM withdrawals of €420 a week.
Italy is only “moderately free” at 86th. Heritage says it is plagued by high taxes and rigid labor laws. It has yet to sell off the rump of state-owned industries. Court procedures are “extremely slow”. State contracts are tainted by “high-level corruption scandals” and the “involvement of local organized crime.”
France is also only “moderately free” at 75th. It is well-run but the state share of GDP has risen to 57.5pc of GDP, a Scandinavian level without Nordic labor flexibility. “The labor code’s rigid regulations have hurt competitiveness and increased unemployment. Price controls affect a number of products and services,” says Heritage.
Germany at 18th is the only other large EU state anywhere close to Britain in the rankings of economic freedom, which raises a pertinent question about the value of such a union in a fast-moving world of open trade and capital flows.
What is true is that EU membership has not actually stopped Ireland, Estonia, and the UK reaching the top 10, with Denmark (12th) and Lithuania (13th) close behind.
Britain has been able to climb up the rankings by cutting corporation tax to 20% and shrinking the state share of GDP regardless. It is very easy to create a new business in the UK. Labor laws are flexible, while the US interestingly is slipping in the other direction. The claim that EU membership necessarily imposes crippling red tape is exaggerated.
So yes, the message of the Heritage report is that a country can keep most of its economic freedoms within the EU (provided it does not join the euro and suffer an asymmetric shock). But is this a club of countries that is broadly aligned with the economic outlook of the British people?
A third of the union shares our economic philosophy. Two thirds do not. The EU is patently not an optimal political and economic area. It continues to exist only out of inertia.
Which is why the Brexit may fast become an inevitability.