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.