Shifting Europe to a Free Market

The long-standing attitude toward Europe is that it is an anti-free-market continent that should be of little interest to investors. That was the right view, but the recent European election results may suggest otherwise – which should be hugely interesting to international investors.

It has been becoming more free-market oriented, coming closer to the US economic system as evidently in the last four European elections – 1994, 1999, 2004 and 2009 over a period of rapid EU expansion with membership from 12 countries in 1994 to 27 now.

Couple of weeks back, someone sent me an interesting article that classify the various EU parties and their alliances and that will be a platform for formation of my point of view.

Broadly, we can classify Europe into three broad groupings – (i) Socialist/Green – believing in strong state control over the economy, (ii) Centre-right, which often nationalist but believing in a free-market economy but more welfare payment than in the United States and finally (iii) Centrist/Other, either small centre parties holding the balance of power in domestic parliaments or the inevitable residue of the unclassified.

Since 1994, EU elections have shown the following trend:

• 1994 – 12 countries with Socialist Group 1 parties 249 seats of 567 (44%), Group II of 40% and Group III of 16%

• 1999 – 15 countries with Socialist Group 1 parties 270 of 626 (43%), Group II of 45% and Group III of 12%

• 2004 – 25 countries with Socialist Group 1 parties 283 of 732 (39%), Group II of 45% and Group III of 16%

• 2009 – 27 countries with Socialist Group 1 parties 243 of 736 (33%), Group Ii of 45% and Group III of 22%.

Can you see the trend now? This is because with more new countries of former members of the communist bloc with an aversion to many aspects of government control. Productivity growth has been generally slower in Eastern Europe than in the United States – but not much slower with good education systems and heavy foreign direct investment of those countries that allowed them to catch up with the rich West.

Look for my next point of view on the US economy under Obama.