Let Them Export Cake: An Examination of The Role of Economic Freedoms in Fostering Intra-EMU Export Growth

By Paul Jeffries
Clocks and Clouds
2015, Vol. 6 No. 1 | pg. 3/3 |

Section VI: Conclusion

This article investigates some of the potential variables that may serve as causal mechanisms behind the intriguing trends in divergent bilateral intra-EMU export growth post-EMU. The outcome variable of interest – bilateral intra-EMU export growth – was drawn from the previous empirical studies of Aristotelous (2006) who utilized an augmented gravity model to identify the disparate effect of EMU on the outwards intra-EMU trade growth of its adherents. In his conclusion, he theorized that the most promising variable that might explain these disparities was trade freedom, arguing that the countries with the highest degree of trade freedom would reap the greatest benefits of the optimal currency area (ibid).

The empirical analysis of this research does not support Aristotelous' claim that trade freedom is the best predictor of bilateral intra-EMU export growth. H3 –the hypothesis that emulates Aristotelous' claim – could not be supported by the empirical analysis of this paper. To recapitulate the main empirical findings, the only hypotheses which were not falsified by my empirical analysis were H1 and H2 – pertaining to Market Freedom and Investment Freedom respectively – both being supported as presenting a statistically significant relationship at the 5% confidence level. Upon further analysis of the regressions, it was discovered that a problematic collinear relationship exists between H1 and H2, which can be attributed to the fact that Investment Freedom (H2) was part of the aggregate variable composition of Market Freedom (H1). As such, the importance of the statistical correlative power of Market Freedom is greatly reduced.

From here, we can return to the theoretical backbone of this paper, using it to better understand the implications of the empirical findings. In an increasingly globalized world, there is both more inter-state cooperation as well as more inter-state competition (Cerny 2010). This paper examines the potential link between various types of economic freedom and bilateral intra-EMU export growth motivated by the theoretically supported presumption that these variables partially constitute state competitiveness. The imperfect R2 values and confidence levels yielded by this empirical analysis, along with the fact that 8/10 hypotheses were rejected and only 1/10 can convincingly be proposed as a general covering law, suggests something that most would have assumed: the economic intricacies of the EMU are incredibly complex, and cannot be explained solely with reference to the variations in economic freedom. That said, what is clear is that differences in Investment Freedom across nations appear to be linked to a nation's bilateral outwards trade growth post-EMU. The question that remains to be answered then, is why it was Investment Freedom alone, and not the other two components of Market Freedom – Trade Freedom and Financial Freedom – that corresponded to higher levels bilateral export growth. One potential explanation stems from topics previously discussed but now deserving of further analysis given the empirical results: EU regulations, enforcement, and homogenization.

As has been previously expounded, empirically evidencing the moderating effects of EMU was not a purpose of this paper, primarily due to data inadequacy. Given the lack of year-by-year data for all data involved it would be impossible to pinpoint a moderating effect as a result of EMU – particularly given that the effect might be a lagged effect. That said, it would appear from the empirical results that the various regulations and treaty obligations that govern EMU and EU economic convergence in general affect various national economic characteristics in heterogeneous ways. Investment Freedom, Trade Freedom, and Financial freedom were not subject to the same degree of homogenization – something that may account for the differences between the correlative power of the regressions ran in this paper. Trade Freedom, for example, is codified examining non-tariff barriers to trade as well as tariff barriers to trade, and other obvious forms of protectionism. Given that EU regulations have largely homogenized – and quite successfully so – tariff policy, as well as eliminated other obvious forms of protectionism4, this means that the Trade Freedom Variable will inherently vary only a small amount at best, as the only codified determinant of real Trade Freedom not homogenized by EU regulations is non-tariff barriers to trade. Even then, nontariff barriers are difficult to identify, further decreasing the utility of a Trade Freedom Variable.

The lack of correlative strength of the Financial Freedom variable is understandable for the same reasons as mentioned previously in the case of Trade Freedom – it would appear as though the elements of Financial Freedom that would be of relevance to the export industry have been subjected to homogenization as a result of EU regulations. When conceptualizing financial freedom, the focal point is the banking system; however, the real role that banks play in affecting exportation specifically is in their influence of exchange rates – controlled by the Central Bank (Alesina et al. 1999). Given that all the Eurozone has a common currency that is regulated unitarily by the European Central Bank, the differences in Central Bank behavior that in part contribute to the codification of the Financial Freedom variable are nullified due to Central Bank homogenization in the EU. Thus, of the three constituent variables of Market Openness, two seem to have been markedly affected by European homogenization. This apparent homogenizing effect was not influential in the case of Investment Freedom, as no EU regulations or treaty obligations – from Maastricht, to the Stability and Growth Pact, to its modern amendments – regulate investment in any substantive capacity, instead focusing on budgetary or monetary restrictions (Crowley 2005). It would thus appear that the relative importance of Investment Freedom in affecting bilateral intra-EMU export growth as compared to the other components of Market Freedom was due to the fact that many elements of economic freedom were homogenized – even if just partially – by EU regulations, while issues of Investment Freedom remains largely unregulated. In summation, the empirical findings of this paper suggest that Investment Freedom is one of the characteristics that still substantially determines a state's competitiveness after the homogenization of various other economic determinants of state competitiveness via EMU and EU regulations.

As with any econometric analysis, the conclusions possible are largely determined by the quality and availability of the data; thus, many of the possible avenues for further research stem from the possibility of the emergence of better data in the future.

First, if year-by-year data for bilateral export growth before 2003 becomes available in the future, a similar study to this could be completed that could also empirically examine the moderating effects of EMU on the various determinants of state competitiveness, while in this paper the moderating effects were only assumed based on theory given lack of necessary data. Moreover, as more recent data become available, a continuation of a study similar to this could be conducted that expands the temporal range considered beyond 2003. Such data would allow for an examination of the potential moderating effects of other important developments in EU/EMU regulations such as the 2005 renegotiation of the Stability and Growth Pact and the more recent developments pertaining the Greek financial crisis.

Aside from possible continuations of research similar to this paper, the empirical findings of this paper suggest a need for different types of research to be conducted to further understand the determinants of intra-EMU export growth, and, by extension, the intricacies of the European economic system. In the section on discussion of empirical findings, a variety of promising potential case studies emerge. The great disparity in Investment Freedom in France when compared to all other EMU nations is definitely a subject that warrants further exploration on a more targeted level, perhaps in the form of a case study. Similarly, the Greek situation is an obvious candidate for case study – something in which many scholars are currently undoubtedly engrossed. These are but a few of the potential avenues for further research that seem particularly appropriate in light of this research. I anticipate a large influx in EMU/EU economics-related scholarly contributions in the coming months, as the precarious Greek situation brings back into question a variety of fundamental issues regarding the strength of the entirety of the Eurozone.

In conclusion, this paper has demonstrated that of all the subcategories of economic freedom, the data suggest that Investment Freedom has the greatest correlative strength in predicting bilateral intra-EMU export growth. The effects of EU economic homogenization and EMU moderation on the various determinants of state competitiveness are incredibly complex, and the dearth of very strong correlative relationships between the independent variables explored in this paper and outwards intra-EMU trade growth suggest that even after homogenization, the determinants of bilateral export growth intra-EMU remain multitudinous, while Investment Freedom appears to be one of the most influential among them.


Paul Jeffries is a student of International Studies and Economics. He graduates in May of 2017. School of International Service (SIS)/College of Arts and Sciences (CAS), American University.


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  1. As a reminder, this paper focuses only on developments intra-EMU nations; hence, the competitiveness of the states within EMU vis-à-vis states outside of EMU will not be broached here.
  2. It merits clarifying that the temporal range of Aristotelous' data (1992-2003) does not match perfectly with the Heritage data set's temporal range (1996-present); hence, for the purpose of statistical reliability, the more constrained temporal range was chosen for the empirical analysis in this paper: 1996-2003.
  3. Some of the independent variables in the study are inextricably influenced by state capacity. For example, freedom from corruptions is one of the independent variables obviously influenced by state capacity. A state with a high amount of corruption may very well aim to reduce said corruption, but lack the capacity to do so due to a variety of events out of its control (Besley et al. 2007). While at first this may seem troublesome, it is a non-issue for the specific purpose of this research, as my focus is only to examine whether or not a relationship exists between certain types of economic freedom/openness and increased outward bilateral trade intra-EMU; I do not purport to offer an explanation for the trends of each type of freedom a nation-specific level. This again is an issue of method and methodology, as the purpose of the type of statistical and econometric research in this paper is to seek out a statistically supported covering law not falsifiable given the chosen data and tests and the resulting empirics. A more in-depth exploration of the state-specific reasons for trends in national econometric freedom of varying types would be better suited for a case study analysis, but such depth is neither the aim nor within the purview of this paper.
  4. See EC regulations 1466/67 – basis of Stability and Growth Pact

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