IBL’s Trovato Presents Latest Index of Liberalization

The Cato Institute in Washington, D.C., recently hosted Massimiliano Trovato for a policy forum discussing whether the European Union is a friend or foe of economic freedom. The event was moderated by Cato Senior Policy Analyst Marian Tupy with comments from Dr. Richard Rahn, a senior fellow at Cato. Trovato is a Fellow at the Istituto Bruno Leoni (IBL) in Italy and was previously a Charles G. Koch Fellow at the Mercatus Institute in Washington, D.C. Trovato is most known for his work on the digital economy and state paternalism, but his presentation focused on IBL’s recently published 2015 Index of Liberalization. Trovato defines liberalization as a continuous process of deregulation and privatization. He began his discussion by making the general case for liberalizing markets in the EU but quickly moved on to discussing the Index of Liberalization itself. 

IBL initially developed the Index of Liberalization in 2007 as a means of benchmarking the Italian economy. The 2013 report was expanded to include the EU15 countries, and most recently the 2015 report has been updated to account for all 28 EU member states. The index seeks to measure economic freedom by identifying barriers to competition and “best practices” across the EU. Each member state is ranked individually by surveying 10 sectors:

Sectoral scores are averaged to yield a member state’s overall score. Scores can range from zero to 100 percent, with the most liberal nation receiving a nominal score of 100 percent, and the other nations’ scores descend from there. 

One of the most salient questions the Index of Liberalization seeks to answer is whether the formation of the EU has promoted or inhibited economic growth. The report seems to indicate that the benefits of joining the EU, or costs, vary from nation to nation. The three least liberalized countries in the 2015 report are Croatia (56 percent), Latvia (56 percent), and Cyprus (49 percent). The three most liberalized member states are the UK (95 percent), the Netherlands (79 percent), and Spain (77 percent). 

The UK’s overall score of 95 percent makes it the most liberalized member state in the EU by a significant margin. Trovato argues that culture and time are two key factors that help to explain the disparity among nations. The population of countries that score high on the index have traditionally embraced social and economic liberalization, producing sustained growth over time.

On the other hand, former Eastern bloc nations have historically rejected liberalization and have subsequently experienced perpetual turbulence over the last century. In this regard, the liberalization efforts of the EU have benefited member states that have historically rejected liberalization while placing unwarranted, often counterproductive, restraints on traditionally liberal members. The current imbalance of costs and benefits incurred by countries like the UK has sparked an intense debate on the feasibility of the union. The UK is in the process of renegotiating its terms with the EU under the threat of exit if their conditions are not met. If the strongest economy in the EU were to exit the union, other member states may follow, leading to an unravelling of the entire system.   

Trovato, however, expressed hope in the notion that the EU can increase economic freedom and prosperity, but feels that their efforts have fallen short over the last decade. During the early years of the EU, particularly the 1990s and 2000s, personal income and corporate tax rates declined across member states. Easy taxes combined with favorable global economic conditions fostered a period of prosperity throughout much of Europe. However, there has been growing concern that the benefits of the EU’s liberalization efforts are diminishing.

Moreover, the EU may even be the source of economic stagnation in Europe. Trovato partially contributes the economic slowdown to three key factors. First he alludes to the notion that the intellectual climate in the EU is virtually void of free-market ideas. Second he points out the reluctance of member states to discharge their power and authority to the various bureaucracies that govern the Union. Lastly he states the obvious limits of central planning in producing economic growth. 

Overall the event was very informative given the ongoing developments in the UK. It will be interesting to follow the situation in Europe, as the UK is set to vote on an EU exit this summer.