What is 'Eurosclerosis'

The term "Eurosclerosis" was popularized by German economist Herbert Giersch in a 1985 paper of that 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 during periods of economic growth. Although originally used to refer to continental Europe, it is now used more broadly as a term for countries experiencing similar conditions.

BREAKING DOWN 'Eurosclerosis'

Eurosclerosis originally referred to Europe's slow job growth, and, politically, to its slow 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.

Giersch attributed this to structural rigidities in Europe, including (1) 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, but had rather come to rely on them and (2) 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 (3) 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 (4) excessive regulation which resulted in barriers to entry for both new workers and new firms.

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 are two factors that 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.

  1. Demand For Labor

    The demand for labor describes the amount and market wage rate ...
  2. Labor Market

    The labor market refers to the supply and demand for labor in ...
  3. Welfare State

    A Welfare State is a concept of government in which the state ...
  4. Welfare Economics

    Welfare economics focuses on the optimal allocation of resources ...
  5. Labor Intensive

    Labor intensive refers to a process or industry that requires ...
  6. Structural Unemployment

    Structural unemployment is a longer-lasting form of unemployment ...
Related Articles
  1. Insights

    The 6 Most Common Explanations for Economic Stagnation

    Professional economists disagree about why the global economy has stagnated since 2001. Find out what some prominent thinkers have to say on the subject.
  2. Financial Advisor

    How Labor Force Participation Rate Affects U.S. Unemployment

    While a falling unemployment rate sounds like a good thing, it can actually be indicative of people leaving the labor force because they can't find a job.
  3. Insights

    Has the Age of Secular Stagnation Arrived?

    Secular stagnation is an interesting model, but it's not the last word on our economic situation.
  4. Insights

    3 Economic Challenges France in 2019

    France faces three significant economic challenges in 2019: unemployment, lagging competitiveness and sluggish growth.
  5. Personal Finance

    U.S. Labor Participation Rate at Record Lows

    In absolute terms, labor participation hit an all-time low.
  6. Insights

    How The Unemployment Rate Affects Everybody

    Depending on how it's measured, the unemployment rate is open to interpretation. Learn how to find the real rate and how it affects everyone.
  7. Personal Finance

    The History of Unions in the United States

    Although the overall power of labor unions may not be what it once was, they still maintain a great deal of influence in the United States.
  8. Investing

    Bargains Still Abound in European Stocks

    For investors looking for value and growth potential, Europe is it. Here are some ETFs to consider.
  1. Why are the factors of production important to economic growth?

    Find out why the factors of production are critical for real economic growth, where wages rise and consumer goods costs fall ... Read Answer >>
  2. What impact does government regulation have on the financial services sector?

    Learn about how the financial services industry is affected by government regulation, and the different types of regulations ... Read Answer >>
  3. How did World War II impact European GDP?

    Understand the effect of World War II on the European gross domestic product and what foreign and domestic factors influenced ... Read Answer >>
  4. What are the three major economic components necessary for stagflation to occur?

    Dig deeper into the three components of stagflation -- inflation, unemployment and declining output -- as understood by economic ... Read Answer >>
  5. What impact does economics have on government policy?

    Learn about the impact of economic conditions on government policy and understand how governments engineer economic conditions ... Read Answer >>
  6. What's the difference between cyclical unemployment and seasonal unemployment?

    Learn about the key differences between cyclical and seasonal unemployment. Read about distinguishing features of each of ... Read Answer >>
Trading Center