Eurosclerosis

What Is Eurosclerosis?

The term "Eurosclerosis" was popularized by German economist Herbert Giersch in a 1985 paper of the same name. He used it to refer to the economic stagnation that can result from excessive regulation, labor market rigidities, and overly generous welfare policies. Eurosclerosis (which stems from the medical term sclerosis, meaning the hardening of tissue) describes countries experiencing high rates of unemployment, even during periods of economic growth, due to inflexible market conditions. Although originally used to refer to the European Community (EC), it is now used more broadly as a term for countries experiencing similar conditions.

Understanding Eurosclerosis

Eurosclerosis originally referred to the EC’s slow economic growth, especially in labor markets. Secondarily, it can refer to its slow political pace towards European integration. Giersch's paper noted that Eurosclerosis had its roots in the 1970s and highlighted how continental Europe grew at a much slower pace than the U.S. and Japan in the early 1980s. Moreover, even when Europe entered an upswing, thanks to positive global momentum, its unemployment rate continued rising. Despite a generally growing economy during the late 1970’s to mid 1980’s, according to Giersch, "The unemployment rate in the EC continuously increased from 5.5% in 1978 to 11.5% in 1985, whereas in the U.S. after 1982 it dramatically fell to about 7%.”

Giersch attributed this to structural rigidities in Europe; industries that had received protection, such as tariffs or government aid, had not used them as a short-term measure to help them improve competitiveness, instead coming to to rely on them, and labor markets were very rigid, principally ascribed to strong trade unions, so that the level and structure of wages led to an inability of the labor market to clear and also incentivized firms to use labor-saving technology. He contrasted this to the U.S. and Japan, which had shown sufficient downward flexibility in real (inflation-adjusted) wages to support their labor markets. Griesch also attributed blame to the large share of government in the European economies, arguing that high taxes and high public expenditure (including welfare payments) were a disincentive to work and take risks, and excessive regulation, which resulted in barriers to entry for both new workers and new firms. Giersch described the situation in Europe as a "kind of syndicalism and guild socialism" that was "diametrically opposed to the requirements of an evolutionary process involving destruction as well as creation."

To combat Eurosclerosis, Giersch urged that the EC turn away from the political and special interest organizations who had no stake in change and toward economic openness to competition and entrepreneurship. Along with tax cuts, in his view this would include the radical proposal of a new basic civil right "to sue in court all those legislative bodies and government agencies which have imposed legal and regulatory barriers to entry, and all those private organisations which are resorting to restrictive practices." He also expressed deep optimism over the growth of the technology sector and the information economy to revitalize the European economy in part due to it being lightly regulated and beyond the immediate grasp of labor unions. However, even here he warned of his suspicions that special interest groups would eventually catch up to the technology revolution, potentially bringing on an Orwellian future. 

The End of Eurosclerosis

Along with the advance of the technology sector, a more solid push towards European integration in the 1990s and 2000s (among other things, allowing more mobility within the European labor market), as well as improved flexibility in regulations, helped end the era of Eurosclerosis in Europe. The term Eurosclerosis is now used more broadly to describe an economy that is experiencing stagnation, especially when that is linked to the factors outlined above of protection, labor market rigidity, regulation, and a large government share of the economy.