For weeks now, the “Frugal Four,” a group of northern European states including Denmark, the Netherlands, Austria, and Sweden, plus Finland, have been facing off against France and the continent’s southern member states, especially Italy and Spain. The occasion for debate has been a proposed 750 billion euro coronavirus recovery package. The southern nations want their northern counterparts to approve billions in grants, but the Frugal Four are determined to attach conditions to any handouts.
Austria’s Chancellor Sebastian Kurz, for one, has called on Europe’s southern countries to reform their labor markets and pension systems, cut red tape, and tackle corruption. Dutch Prime Minister Mark Rutte has demanded that recipients of European Union aid should not only promise reforms before any grants are paid out but should have already implemented them. He called for an “absolute guarantee” that the reforms have actually taken place.
On the surface, the summit’s main aim is to approve a coronavirus relief fund to help the continent’s hardest hit countries, which include Italy and Spain. In reality, there is far more at stake than merely providing temporary aid. After all, the coronavirus crisis is not the reason that the economies of Italy and others are in such a mess. The pandemic has simply exposed existing faults, and these weaknesses all boil down to three words: not enough capitalism.
The southern European failings are evident in the Index of Economic Freedom, which has been compiled by the Heritage Foundation every year since 1995. The index, which sociologist Erich Weede has referred to as the “capitalism scale,” measures the economic freedom of 180 countries around the world. The Frugal Four plus Finland are all countries that score relatively high for economic freedom. In the ranking (the lower the score, the greater the economic freedom) the five countries place as follows:
8. Denmark
14. Netherlands
20. Finland
22. Sweden
29. Austria
In contrast, France and the Mediterranean-rim countries are far less economically free:
58. Spain
64. France
74. Italy
100. Greece
A glance at Transparency International’s annual Corruption Perceptions Index also confirms that the Frugal Four are justified in being wary of an uncontrolled flow of money to Europe’s southern countries. Perceptions of corruption within the group nations are very low (the lower the score, the lower a country’s perceived level of public sector corruption):
1. Denmark
3. Finland
4. Sweden
8. Netherlands
12. Austria
The picture is very different in southern Europe:
30. Spain
51. Italy
60. Greece
When countries are ranked according to the burden of labor market regulations and bureaucracy, the results are also very similar. History has repeatedly demonstrated that national economic crises are often the result of too much government interference and not enough free market capitalism. The only way out of the crisis is to introduce a program of free market reforms.
In the 1970s, the United Kingdom was known as “the sick man of Europe” and only recovered thanks to Margaret Thatcher’s free market economic reforms. In the early 1990s, Sweden also reformed its economic system: taxes were cut (some taxes, including property, inheritance, and gift taxes, were even abolished completely), the labor market deregulated, and welfare state excesses were eliminated. In the Index of Economic Freedom, Sweden’s score increased by 13.5 points between 1995 and 2019, from 61.4 to 74.9. The reforms laid the foundations for the Swedish economy’s subsequent recovery. In Germany, Gerhard Schroder’s Agenda 2010 reforms also led to a halving of unemployment and a long-term economic boom.
None of these countries returned to economic health because of handouts from other countries — they all recovered thanks to extensive capitalist reforms. These historical experiences leave no doubt as to what would most help countries such as Italy right now. The southern European countries’ structural problems will not be solved by handouts and bailouts. What would help is more capitalism. This is, for instance, also very much what is needed in France, a country that is stubbornly resisting Emmanuel Macron’s attempts to implement a program of economic reforms.
Moreover, even the countries that are doing relatively well today, such as Germany, are in urgent need of further economic reforms. Today, Germany is resting on the laurels of Schroder’s reforms of almost two decades ago. In the intervening years, nothing positive has happened. On the contrary: Germany has effectively transformed its energy industry into a planned economy and is in the process of doing the same with its automotive industry. In housing, too, growing government interference and regulation is putting the squeeze on market forces. In reality, it is not merely Europe’s southern countries but the whole of Europe that needs more capitalism.
Dr. Rainer Zitelmann is also the author of The Power of Capitalism.
