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Covid-19 and zombification in the Eurozone: what is the risk of an heightening?

4/9/2021

Following the Covid-19 crisis, the risk of an increase in the number of zombie firms in the Eurozone cannot be ruled out but it can be tempered. The benefits of the measures taken (preserving productive and human capital) outweigh the risk of zombification. And solutions do exist, notably the strengthening of companies’ equity capital.

TRANSCRIPT // Covid-19 and zombification in the Eurozone: what is the risk of an heightening? : April 2021

3 QUESTIONS

FRANÇOIS DOUX

The Covid-19 shock and the risk of an accelerated zombification of the economy. This was the focus of the March edition of Conjoncture, written by five economists. Today, our guest is Hélène Baudchon. Hello Hélène.

HÉLÈNE BAUDCHON

Hello.

FRANÇOIS DOUX

Before going any further, could you explain what a zombie company is? How do you know one when you see it?

HÉLÈNE BAUDCHON

A zombie company is not very productive. It has high debt and low profitability, and yet it benefits from favourable financing conditions. Generally, it is a small company that has been operating for quite a few years. I say “generally”, because there is not a consensus definition of the term. That’s why it cannot be measured exactly, and why there is no consensus on the scope of the problem. There is a consensus, however, that zombie companies are making up an increasingly big share of the economy.

FRANÇOIS DOUX

So that is what we mean by a zombie company. Why is the situation so alarming today?

HÉLÈNE BAUDCHON

The expansion of zombie companies is alarming because of its negative impact on potential growth, by eroding productivity, corporate investment and employment. With the outbreak of the Covid-19 crisis, although it is still too early and difficult to jump to conclusions at this point, there are fears that the number of zombie companies is rising due not only to the impact of the crisis itself (on corporate liquidity and solvency) but also to the measures taken to buffer the shock and heal the scars. We face two big fears: a wave of bankruptcies, but also that there won’t be enough bankruptcies (which is the sign of zombification). We take a rather favourable view of the sharp decline in the number of bankruptcies in France, as shown in this chart. We think it illustrates the effectiveness of the emergency measures.

FRANÇOIS DOUX

Yet these emergency measures can also be seen as an accelerator of zombification?

HÉLÈNE BAUDCHON

Yes, for two key reasons. First, because a number of companies are mired in even greater debt following the crisis and the measures that were taken. This debt could prove to be excessive relative to the size of profits, which have also eroded with the crisis. Second, the emergency measures may have kept some non-viable companies afloat, unduly extending their lifespan.

FRANÇOIS DOUX

Yes, but wasn’t this indiscriminate, widespread support the right thing to do?

HÉLÈNE BAUDCHON

Yes, that is how we see it. Providing massive, indiscriminate support at the risk of fuelling a zombification movement seems preferable to more closely targeted support measure that leave creative destruction to do its job, but at the price of higher unemployment and at the risk of letting viable companies go under. In our eyes, the benefits of preserving human and productive capital are much higher than the risk of zombification.

FRANÇOIS DOUX

Before we conclude, Hélène Baudchon, let’s talk about the scope of zombification in the Eurozone. Which countries have been hit hardest? France, Germany, Italy, Spain?

HÉLÈNE BAUDCHON

As the chart shows, the percentage of zombie companies differs rather widely from one country to the next. It is lower in Germany and France, and higher in Italy and Spain. To summarize, these differences are largely due to the solidity of their banking systems and the smooth functioning of corporate laws for ailing companies.

FRANÇOIS DOUX

Last question. Are there any solutions? What can be done about these zombie companies?

HÉLÈNE BAUDCHON

First, we must strengthen the financial situation of companies, notably their equity capital. Improving bankruptcy laws and court-ordered liquidation procedures is another solution. We can also step up competition, innovation, training and professional retraining to improve the allocation or reallocation of resources. All in all, it is a matter of strengthening growth, because growth is the best way to curb zombification.

FRANÇOIS DOUX

Stronger growth. With that we conclude this edition of EcoTV. Thank you Hélène Baudchon. We will see you next month.

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