The core of the European crisis is a lack of economic freedom

As the Greek crisis rapidly turn into the European crisis there is a scramble by world leaders to “fix it.” Of course it isn’t that easy because the real crisis in Europe is a systemic one; the real downfall of Europe is a lack of economic freedom and it isn’t going to be easy for European leaders to change that overnight.

I backed up the claim that a lack of freedom is the primary issue in a recent op-Ed I wrote with Fred McMahon. We examine where the Euro-countries place on the Fraser Institute’s Economic Freedom of the World Index:

A glance at the Eurozone countries shows us that nine out of 16 of the member countries fall under the “mostly free” category, five of the 16 are “relatively free,” and two of the countries are “relatively unfree.” The freest country in the Eurozone is Finland, ranked 11th in the world in the economic freedom index. In contrast the least free country, Greece, ranks 88th in the world. The massive difference in economic freedom enjoyed in different countries in the Eurozone creates a dividing line and it is pretty easy to see conflict arising across that line.

The list of countries that fall into the less free side of the line reads like a list of the economic problem children of Europe. Spain, Italy, and Portugal all fall into the “relatively free” category. Greece, the main problem child, is ranked “relatively unfree” on the index. The only country that has required assistance that is “mostly free” is Ireland, and Ireland has shown the strongest signs of economic recovery.

The “mostly free” United States has also experienced economic turmoil but the downturn there pales in comparison to Greece or Spain. No one but the most exaggerating of alarmists would claim that the American economy is in danger of imminent collapse, while the complete unraveling of the Greek economy is quite real. More so than in America, it is the less economic free countries of Europe that are bearing the brunt of the ongoing global economic crisis.

Some European countries (as we write above) are pretty high on the economic freedom index.
Proponents of economic freedom would expect these countries to be more able to handle the shock of the crisis, and so they are. At the same time, however, the freer Euro-countries are being dragged down with the not so free.

It isn’t because investors don’t trust Germany that the German bond auction went so badly. It is because investors now know that Germany is tied to the hip to countries that they do not trust. The bad economic policies of Italy and Greece are damaging the German economy and finances in a big way. At the same time the only thing that is keeping Greece from completely sinking is that they are tied to the hip of Finland and Germany

Ultimately, for the long run, there can only be one solution to this problem:

Austerity measures are not enough. Greece and the other troubled countries need to take a fundamental look at the very structure of their economies and find a way to increase economic freedom if they want to ensure a prosperous future for their citizens.