Poverty, economic freedom, and the size of government in the eurozone

This paper investigates the connection between economic freedom and poverty, with a particular attention devoted to the size of government. We focus on 12 eurozone countries in the period between 2000 and 2019. The common framework of these countries is the adherence to a policy model relying on competition, flexibility, and a non-active role of government intervention in the belief that through economic freedom, the common currency is able to achieve prosperity and growth. We connect monetary poverty with liberalization indexes released by the Fraser institute through a long-run dynamic cointegration technique. The general results tell us that the higher the freedom index the higher the number of people living below the median income. When considering the components of the economic freedom index related to the size of government, we find that the higher the sub-indexes—meaning lower public investments, consumption and top-marginal tax rates—the higher the percentage of people living below the poverty threshold. The results—verified through several robustness checks related to the alternative indicator and the sample—support the conclusion that wider liberalizations worsened the general living conditions and that government intervention is an important tool to redistribute resources and reduce the income gap among individuals.