Europe won’t innovate more by firing people faster

Brussels is in a peculiar reform mood. Simplification packages and deregulation “omnibuses” have been dispatched, though none has yet returned.

The European Commission is drafting its competitiveness agenda, the European Parliament is debating how to close the technology gap with the US and, increasingly, China, while member states are anxiously watching developments on both sides of the Atlantic and the Pacific.

Into this moment drops a fashionable but flawed thesis, advanced in a working paper by Yann Coatanlem and Olivier Coste at Bocconi University and recently amplified by The Economist, claiming that Europe underperforms in tech and biotech because it is “too expensive” to fire people.

The argument may sound intuitively appealing but it is profoundly misleading.

It is not difficult to understand why these ideas have gained some traction.

Yes, Europe lags behind in investment generally and needs more technological dynamism to avoid losing touch with global leaders in digital and some other technological sectors; much of this was spelled out in the Draghi report.

But while Coatanlem and Coste’s concern with Europe’s failure to catch up is clearly genuine, their central claim — that firing costs are the central impediment in Europe — rests on shaky foundations.

The authors' attempt to measure “restructuring costs” across EU countries uses figures pulled from corporate annual reports.

They themselves call for better measures and acknowledge that these line items bundle together an eclectic mix of severance payments, asset write-downs, facility closures, goodwill impairments and strategic provisions.

They are not indicators of “employment protection.” They simply reflect whatever a company’s finance department chooses to include in a restructuring charge, nothing more.

Bad economics, worse policy-making

For the European Commission and EU institutions, building labour-market policy on such a basis would be bad economics and even worse policy-making.

The paper also presents a tidy correlation between estimated severance costs and national R&D intensity in so-called disruptive sectors.

But correlation is not causation, least of all in innovation policy. And the analysis omits almost all the factors that European researchers know to be decisive: the scale of public research funding; the depth of venture and patient-capital markets; procurement rules; tax incentives; university–industry ecosystems; and the distribution of multinational R&D centres.

These variables shape innovation outcomes far more than redundancy formulas ever could.

This is the classic trap of drawing grand conclusions from patterns that appear only because the underlying data is thin.

Putting up a clutch of dots on a chart does not turn them into a roadmap. Brussels should not pretend that it does.

Misreading Denmark

Coming from a Nordic background, I can attest that the authors’ reading of Denmark is misguided.

They present it as evidence that low “restructuring costs” fuel innovation success. But the Danish model is not reducible to dismissal rules.

Denmark succeeds because it combines world-leading income security with strong social partners and collective bargaining, active labour-market policies and sustained public investment in science and skills. Flexibility exists because of security and that security rests on an advanced system of social dialogue. Remove the security pillar and the model collapses.

Trying to copy Denmark while stripping out its protective elements is like trying to bake a baguette without flour.

Coste’s comparison with the United States also romanticises the speed with which US tech companies adjusted headcount during the AI boom, implying that this sort of “agility” is what Europe lacks.

But America’s tech dominance is not built on rapid layoffs. It rests on decades of federal research funding, vast defence-procurement pipelines, deep risk-capital markets, the advantage of a single continental market and a university system capable of attracting global talent (pre-Trump, at least).

None of these structural advantages will materialise in Europe merely because it becomes easier to dismiss a 50-year-old engineer in Munich or Milan.

The underlying idea that the anticipation of potential layoff costs dampens “animal spirits” and stifles innovation and investment lacks credibility.

Investment is certainly where Europe is falling short.

The Commission estimates the EU’s annual R&D gap with the United States at roughly €300bn. But no labour-market reform will fill that gap.

Europe must mobilise capital; scale EU-level industrial policy in AI, biotech and clean tech; boost public research budgets; accelerate investment in digital and green infrastructure; invest seriously in lifelong learning; and strengthen worker participation in innovation, including through a Just Transition Directive.

These are the reforms that would help European firms scale. Cutting redundancy packages will not.

The authors’ proposal to exempt “high earners” from employment protections is also incoherent.

Workers such as engineers, researchers and technical specialists who actually drive innovation are precisely the workers whose skills are in short supply and whose tacit knowledge underpins Europe’s competitiveness. Making their jobs less secure would make Europe a less attractive place to work, not a more dynamic one.

If Brussels wants these workers to stay, rather than move elsewhere, weakening their rights should be the last thing on the table.

Ironically, Coste’s own dataset highlights Europe’s strongest innovation performers: Denmark, Sweden and Switzerland.

What they share are robust labour protections, strong social-welfare systems, powerful collective-bargaining institutions, excellent training systems and high levels of public investment.

The lesson is not that Europe should deregulate. It is that security, trust and partnership are core to Europe’s productive strength.

Blaming employment protection for the innovation gap is the wrong debate at the wrong time. Europe will not attract leadership in AI, biotech or clean tech by unravelling the social fabric that underpins its stability, skills base and social cohesion.

Europe’s innovation gap is not caused by its workers. It is caused by a failure to invest in them. And that is a challenge Brussels can and must fix. As ever, social dialogue and partnership are the way forward.

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