Why Europe doesn’t have a Tesla (Pieter Garicano, 17th February 2026, Works in Progress)
What really sets Europe apart from states like California is different. Relative to income, it costs large companies four times more to lay off Germans and French than American workers, a difference arising entirely from different regulatory approaches. As a result, it virtually never happens: Americans are ten times more likely to be fired than Germans in any given year. In this respect, the European economy differs greatly from the American one. By American standards, a European business has to be exceptionally confident that it will want an employee for a long time before hiring them.This may sound like a great virtue of European life, and in a way it is. But it has costs. If it is expensive to fire people, then companies may pay them less in order to balance out employment costs, or they may not employ people at all. To understand the innovation gap, however, there is a third effect that is even more important. If it is expensive to lay people off, employers avoid creating jobs that they might subsequently discontinue. Innovation involves experimentation and risk, so jobs in innovative areas of the economy are more likely to be discontinued than jobs elsewhere. High severance costs create a fundamental incentive for European businesses to avoid innovative areas and concentrate on safe, unchanging ones. In the long run, this is a recipe for decline.