An influential Brussels-based think-tank says “zombie” companies – enterprises badly in need of structural reform but kept alive by state subsidies – risk hampering EU growth levels once the economic crisis comes to an end.
“They stifle economic growth, while preventing reallocation of resources to sectors with higher growth potential,” say authors Jean Pisani-Ferry and Bruno van Pottelsberghe of Bruegel in a publication released last week.
“There will always be a political temptation to rescue particularly large industrial companies using government funds.”
The danger risks being compounded by “zombie lending” say the authors, a situation where EU banks prioritise lending to big failing companies as opposed to smaller ones with frequently much higher growth potential.
As banks increasingly rely on bailouts from EU governments, so their lending criteria become more politically motivated while frequently ignoring good economic logic, warn the authors.
Instead Europe should take account of the lessons learnt from Japan in the 1990s where such “zombie” companies stifled growth and added to a period in Japan’s economic history known as the lost decade.
As economic leaders make tentative comments regarding the emergence of the green shoots of recovery, the shape of that recovery and the longer-term consequences of the crisis will depend on current policy choices, says the Bruegel report.
“It is during crises that the seeds of future performance are sown – or not sown,” warn the authors.