Thursday, December 14, 2006

Why The EU Is Statist

The EU is destroying the economy Mrs T built for the Brits. That's in part anti-Anglo vindictiveness, but also because the average EU nation is statist, and the Brits are not.

Statism is:
A form of government or economic system that involves significant state intervention in personal, social or economic matters.
Statism doesn't work - here's a current example (WSJ, $):
America's rate of growth in CO2 emissions from 2000-04 was eight percentage points lower than from 1995-2000. By comparison, the EU-15 saw an increase of 2.3 points...

Europe's dismal record is explained by its approach to reducing emissions. The centerpiece of the Continent's plan is a carbon-trading scheme in which companies in CO2-heavy industries receive tradable permits for a certain amount of emissions. If they emit more CO2, they must buy credits from firms that are under quota. The idea is to force companies to emit less CO2 by making it prohibitively expensive to keep the status quo.

All this scheme has done so far is provide further proof that government cannot replicate the wisdom of markets. A red-faced European Commission recently admitted that it allowed more permits than there were emissions in 2005-07, keeping permit prices low and undermining the entire system.

When Brussels tried to make amends by ordering several member states to cut carbon permits by 7% more than expected for 2008-2012, industry and national capitals squealed. The market hadn't priced in such a dramatic reduction. With carbon permits trading relatively cheaply, firms have been able to get by with minimal changes to the way they do business. That has minimized Kyoto's economic impact.

The EU is statist because its member states are mostly statist. And since EU employees come from these same states, they're statist too. Here are the numbers.

The Heritage Foundation's Index of Economic Freedom (IEF), measures the extent to which nations have free markets - the lower the IEF score, the freer (and less statist).

The EU has 25 members and the UK is its economically most free large member with an IEF of 1.74 - only two small EU nations beat it (Ireland IEF 1.58, Luxembourg IEF 1.6).

We can compute the average IEF for the EU by summing the population-weighted IEFs of its members - excluding the UK, that's an IEF of 2.3. This makes the EU much less economically free then any Anglosphere nation - the US has IEF 1.84 and even nanny state Canada has IEF 1.85.

In fact the closest EU nation to an IEF of 2.3 is socialist Portugal (IEF 2.29) - which, appropriately, supplies the current EU chief.

Thus from an economic perspective, the EU is Portugal writ large, so it's bound to screw up markets. And the Brits.