EUROPEAN AUTHORITIES ARE CREATING A “ZOMBIE ECONOMY”

European countries are spending fabulous sums trying to keep businesses afloat during a pandemic. An economic recession can lead to stagnation for a decade, which has been recently called "lost" by the World Bank. In this situation, attempts to prevent a surge in mass unemployment through the subsidies from the state treasury to companies mired in debt may lead to the creation of a "zombie economy."

Now there are more and more companies that do not have the opportunity to invest and introduce innovations that exist exclusively thanks to the government subsidies.

This has been recently announced by the co-chairman of the European Council on Foreign Relations and former Prime Minister of Sweden Card Bildt. The diplomat called for abandoning the policy of expanding government subsidies that reduce the number of bankruptcies, because such actions stimulate the emergence of a large number of inefficient enterprises with low productivity.

According to statistics for 2020, the number of bankruptcies in France and the UK fell by 40%.

The average figures for the European Union as a whole were 25%.

Researchers of the National Bureau of Economic Research cite data that if the EU authorities did not allocate government loans and subsidize jobs, this would inevitably cause an increase in the number of bankruptcies. However, as the European authorities continue to use the strategy of expanding state support measures, the number of bankruptcies is only decreasing.

European analysts say that government programs are flooding the economy with zombie companies with high debts and an equally high probability of default immediately after low interest rates are normalized. The French think tank Rexecode reports that about 10% of companies in the country have been saved from bankruptcy solely by government funds.

Jeffrey Franks, the head of the IMF mission in France, believes that unviable companies should be left unsupported by allowing them to be ruined.

This painful process is necessary, believes the expert, so that competitive sectors of the economy can develop. A possible wave of bankruptcies, he believes, is not so bad, as it provides a process of "creative destruction of the resurgent economy."

In contrast to European countries, in the United States, the number of applications to protect companies from bankruptcy in the third quarter of 2020 reached its highest level in the last decade. According to experts from the American law firm Polsinelli, which have compiled the corresponding bankruptcy index, this trend will continue in 2021. At the same time, newly elected President Biden offered to provide additional assistance to American companies to combat the consequences of the pandemic in the amount of $ 1.9 trillion. At the same time, 900 thousand American citizens were included in unemployment statistics last week.

In Europe, the evidence over what strategies should be adopted to protect workers in enterprises without making the economy less competitive is controversial.

In France, public investment is seen as a way to ensure social stability and prevent massive unemployment. Finance Minister Bruno Le Maire called this strategy a "bringing spirituality to the economy" one.