Why Europe Doesn't Have a Tesla

 

Why Europe doesn’t have a Tesla

Words by Pieter Garicano | 17th February 2026

Europe’s cutting edge firms are falling far behind the American frontier because of restrictive labor laws. In recent decades, Europe has fallen behind the United States; in 2000, incomes in the original six members of the European Union were just 10 percent behind Americans, whereas today they are 20 percent lower. One major factor is a lack of innovation; Europe lacks tech giants like Google, Meta, and Amazon, and has even failed to keep up in industries it traditionally excelled in, such as carmaking. While Tesla is now worth more than the next nine largest carmakers put together and Waymo serves six American cities with robotaxis, Europe’s lack of a "Tesla" is seen as existential.

Common explanations—high energy prices, expensive housing, high taxes, and proceduralism—also apply to California, which still birthed Tesla and Waymo. Furthermore, European governments often spend more on research than the US, and companies like Volkswagen are among the world's top R&D spenders. What truly distinguishes Europe is the cost of labor: relative to income, it costs large companies four times more to lay off French and German workers than American ones, making Americans ten times more likely to be fired in any given year. This makes European businesses exceptionally hesitant to hire unless they are certain they want an employee long-term. Because innovation requires experimentation and risk, and risky jobs are more likely to be discontinued, high severance costs incentivize European firms to stick to "safe," unchanging areas, leading to long-term decline.

Failure costs

Innovation is expensive because failure is expensive. Even in the US, Google spent $2.1 billion laying off 12,000 workers in 2023 (about $175,000 per person). However, US labor law is generally "at-will," with only narrow exceptions for public policy, implied contracts, or good faith. In contrast, most European countries mandate large severance payments; in Germany, a fairly dismissed worker is entitled to 15 days of pay for every year of service.

German employers must also pass a social selection test (Sozialauswahl) for redundancies over ten employees, prioritizing the dismissal of those with the "weakest social claim" based on age, tenure, and family obligations. Dismissing disabled employees requires public office approval, and caregivers cannot be dismissed for two years after notifying their employer. Large companies must also deal with works councils, which can block major decisions. In 2024, Volkswagen’s works council blocked plans to close three factories, leading the company to halt compulsory redundancies until 2030.

In France, restructuring more than ten employees requires regulator approval and a "good faith" attempt to protect jobs, often leading to company-wide hiring freezes. If courts find a lack of "economic justification," they can impose massive fines; Continental was once ordered to pay up to three years of salary to 680 employees. Consequently, companies often "bribe" workers to leave: Amazon offered French employees a year’s salary to quit, and Bayer offered some German workers over four years' worth of pay. Estimates suggest restructuring costs per employee are roughly 7 months of salary in the US, compared to 31 in Germany, 38 in France, 52 in Italy, and 62 in Spain.

Risky business

While employment levels in the Euro area (71%) are now similar to the US (72%), European companies have shifted away from risky areas where layoffs are likely. Innovation requires accepting failure: Apple spent $10 billion on a failed car project, and GM lost $3.4 billion on Cruise in 2023 alone. These failures are the price of successes like Waymo.

For European firms, the downside of a failed bet is much higher. When Audi cancelled its weak-selling Q8 E-Tron and moved to close its Brussels factory, it had to spend €610 million on severance (over €200,000 per employee), which doubled the cost of the closure and exceeded the cost of writing off the factory's assets. Such experiences teach executives to avoid innovation or move it abroad; future Audi electric models will be built in Mexico. Volkswagen similarly ignored electric vehicles for years before a disastrous, multi-billion-dollar attempt to develop software in-house that resulted in 300 bugs a day. Ultimately, VW had to license technology from the American startup Rivian for $5 billion.

This pattern is seen elsewhere: Nokia spent €1.8 billion in 2012 alone on employee termination benefits. High failure costs also explain why European venture capital returns are five points lower than in the US, leading to less investment due to a lack of opportunity rather than a lack of capital.

Keeping small business small

While startups are often exempt from these laws, they face them as soon as they grow. This deters growth and acquisitions; 79% of startup acquisitions between 2012 and 2016 occurred in the US, and European firms made only 7% of acquisitions of American startups. Successful European founders often move their companies to the US or elsewhere to avoid these regulations.

When the rubber leaves the road

The European model excels at incremental innovation. For a century, carmaking involved making existing designs more efficient. A 2025 VW Polo is a third more fuel-efficient than the 1975 original, and European internal combustion engines are "engineering miracles." This system benefits from specialized knowledge and long tenures (the average VW employee is 45). However, it fails at radical innovation, like the shift to electric or autonomous vehicles.

The best of both

Europe can protect workers without stifling innovation by adopting "flexicurity" models.

• Austria: Uses portable savings accounts for severance.
• Switzerland: Has no mandatory severance.
• Denmark: Allows firing almost at-will but provides unemployment insurance covering 90% of income, funded by the government spending 2% of GDP on retraining.

Denmark and Switzerland are Europe’s innovation heavyweights, home to firms like Novo Nordisk and Novartis. Even limited reforms, such as allowing high-earners (above the 90th percentile) to opt out of employment legislation, could make European services competitive.

Europe had Teslas once

Current labor laws are a form of "one-way feudalism" where employees can leave but employers cannot. Yet, Europe once innovated like America. In the 1880s, the French firm De Dion-Bouton invested heavily in steam cars, failed, and discontinued the experiment in 1894. They then tried petrol engines, became the world's largest automaker, and pioneered a key 20th-century invention. Europe has had its "Teslas" before and, with institutional reform, can have them again.