The US needs to act to avoid Eurosclerosis

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The writer is president and chief executive of the US Chamber of Commerce

“Eurosclerosis.” That was the term German economist Herbert Giersch coined in 1985 to describe Europe’s economic stagnation — at that time, a stark contrast to the American economy. Why the disparity? Giersch said structural rigidities in Europe made the difference. Labour markets were sclerotic, excessive regulations hampered businesses, and high taxes disincentivised people from taking risks.

Fast forward almost 40 years and it seems that Europe has caught another bad case of Eurosclerosis, with growth at a mere 0.4 per cent last year. That is one of the key takeaways from former Italian prime minister Mario Draghi’s sobering report on the future of European competitiveness. This should be required reading for all US policymakers as a cautionary tale of where things could go if we don’t get it right. In the absence of pro-growth policies, the US may be headed in the same direction as our European allies.

Where did Europe go wrong? According to Draghi, a significant part of the explanation lies in the proliferation of “inconsistent and restrictive regulations”; a problem the US Chamber of Commerce has also consistently flagged. Draghi points out that, since 2019, the EU has passed around 13,000 pieces of legislation, while the US has adopted 3,500 laws and 2,000 resolutions. The tsunami of regulations has been so great that even European officials increasingly acknowledge that Brussels needs to pump the brake.

Such measures disincentivise business and hamper innovation. In the past five decades, no EU company worth more than $110bn has been created from scratch. Close to 30 per cent of Europe’s unicorns left the bloc between 2008 and 2021 because they could not scale up on the continent. Given all of this, is it any wonder Europe’s growth has stagnated? Government micromanagement and regulatory overreach kill innovation and drive economic decline. And Europeans are paying the price: on a per capita basis, real disposable income has grown almost twice as much in the US as in the EU over the past two decades.

Unfortunately, we are also now witnessing more of the same government-knows-best approach on this side of the Atlantic. The Biden administration is on track to enact a record-breaking 2,524 regulations this year. As of late May, the administration had issued 273 economically significant rules, outpacing what any of the past six administrations did during their first terms. Look no further than Federal Trade Commission chair Lina Khan, who has heard the siren song of EU regulators.

That is worrisome because the US is also facing slower economic growth. Since 2010, growth has averaged only 2.2 per cent a year. The non-partisan Congressional Budget Office projects it will average just 1.8 per cent for the next decade. 

The US Chamber is calling on candidates and elected officials to pursue policies that will restore growth to at least 3 per cent annually to secure a better life for all Americans. To get there, we need to develop a larger, more skilled workforce, encourage investment in cutting-edge technologies and seize the opportunities of international trade and investment, all while refraining from the temptation of tariffs.

The US and Europe enjoy the world’s largest commercial relationship, so what happens in Europe matters to the American business community and vice versa. Draghi is right that Europe is losing ground to the US and China, but we should be equally worried that Europe and the US are falling behind together.

The transatlantic alliance is an anchor for democracy, peace and security. But with authoritarianism challenging the rules-based order, we cannot afford complacency. The warnings are clear. Turning inward is not an option. Now it’s time — on both sides of the Atlantic — to pursue policies that will grow our economies and strengthen our alliance.