Peter Harasztosi, Laurent Maurin, Rozália Pál, Debora Revoltella, Wouter van der Wielen, 18 November 2021

Massive policy support sheltered many European firms from the unprecedented Covid shock. However, a debate has emerged regarding the potential side effects of continued support for long-term growth hampering the creative destruction process. This column uses data from the EIB Investment Survey to analyse the impact of policy support in detail. It shows that support went primarily to the most affected firms and does not find evidence of misallocation to zombie firms. In addition, policy support enhanced firms’ capacity to rebound from the crisis, enabling recapitalisation and promoting investment in digitalisation. 

Daan Freeman, Leon Bettendorf, Yvonne Adema, 03 November 2021

As in most other countries, the government in the Netherlands implemented generous support measures for firms during the Covid-19 crisis. This column shows that unlike in other countries, however, government support disrupted the creative destruction process in the Netherlands by saving a disproportionately high number of low-productivity firms. The authors suggest this might be because the support measures were more widely and easily available. The speed of the phasing out will play an important role in determining how many firms that have been propped up fail once the support is removed or even has to be paid back.

Viral Acharya, Simone Lenzu, Olivier Wang, 29 October 2021

Banking crises of the past several decades have encouraged regulatory forbearance towards banks combined with accommodative monetary policy. This column argues that such policies, if used too aggressively, lead to ‘zombie lending’ – the extension of new credit or prolonging of existing loans to low-productivity firms. While such policies may stabilise the economy in the short run, they risk transforming transitory shocks into phases of delayed recovery and permanent productivity and output losses. 

Dan Andrews, Elif Bahar, Jonathan Hambur, 30 September 2021

Job retention schemes during the pandemic prioritised preservation over reallocation, but evidence on their allocative and productivity consequences is scarce. Using tax data for Australia, this column shows that job reallocation and firm exit remained connected to firm productivity over the course of the pandemic. Australia’s job retention scheme, JobKeeper, initially shielded productive and financially fragile firms, contributing positively to aggregate productivity. But as the economy recovered, the scheme grew more distortive, justifying its timely withdrawal – on productivity grounds at least.

Sebastian Barnes, Robert Hillman, George Wharf, Duncan MacDonald, 16 July 2021

As the economy locked down in March 2020, businesses across the UK struggled to operate. And yet, fewer firms declared bankruptcy during the pandemic than in preceding years. This column introduces a model designed to examine the economic impact of Covid-19. It determines that government assistance rescued previously profitable firms that might not have survived lockdowns, but also propped up weaker firms that would have failed in normal times. The difficulties in effectively targeting aid justifies the expansive support distributed during the crisis.

Damien Puy, Lukasz Rawdanowicz, 22 June 2021

The Covid-19 crisis has had a largely negative effect on firms, harming corporate profitability and leverage around the world. This column presents findings from the recent OECD Economic Outlook, highlighting how these negative effects have in fact varied across firms. In maintaining the buffer against corporate bankruptcies, the authors identify three clear policy challenges: debt overhang, financial instability, and the rise of ‘zombie’ firms.

Mathieu Cros, Anne Epaulard, Philippe Martin, 04 March 2021

Concerns have emerged that public support to firms in the COVID-19 crisis has been too generous, reducing exit of unproductive firms and preventing Schumpeterian creative destruction. Using data on French firm failures in 2020, this column suggests that these concerns are, at this stage, unwarranted. Although the number of firms filing for bankruptcy was well below its normal level, the same factors that predicted firm failures in 2019 – primarily low productivity and debt – were at work in a similar way in 2020. Overall, the findings point to hibernation rather than zombification.

Alexander Hodbod, Cars Hommes, Stefanie J. Huber, Isabelle Salle, 21 December 2020

The profound and protracted experience of the COVID-19 crisis may fundamentally change consumer preferences. This column reveals how a representative consumer survey in five EU countries indicates that many consumers do not miss certain goods and services they have cut down on since the COVID-19 outbreak. It concludes that fiscal policy must recognise that some firms will become obsolete in the altered post-COVID-19 environment. To achieve a swift recovery, these obsolete firms must be allowed to fail fast so that resources can be reallocated to more efficient uses. 

Luc Laeven, Glenn Schepens, Isabel Schnabel, 11 October 2020

Large-scale government and central bank interventions in the context of the COVID-19 crisis have reinvigorated the debate on the threat of a zombification of the economy if unviable firms are kept alive. This column surveys the existing literature and argues that the COVID-19 crisis is very different from previous experience. It proposes a number of policy actions that can prevent a zombification of the economy.

Viral Acharya, 07 August 2020

Viral Acharya tell Tim Phillips that the action to save Europe's financial sector after 2008 has delayed reform in the banking sector - creating a decade of lending to zombie firms that has stifled economic growth.

Bo Li, Jacopo Ponticelli, 06 August 2020

The lack of an efficient and independent judicial system can impede economic development by negatively affecting firms’ ability to invest, innovate, and reallocate capital towards more productive projects. This is indeed a concern for China. This column exploits the introduction of specialised bankruptcy courts in different Chinese cities between 2007 and 2017 to examine its effects on the local economy. Specialisation leads to faster resolution of bankruptcy cases, especially for state-owned firms. It also increased local firms’ average product of capital and decreased the share of labour employed in zombie-intensive industries compared to cities where insolvency is still resolved exclusively by civil courts.

Christian Keuschnigg, Michael Kogler, 04 March 2019

Only strong banks can fulfil their Schumpeterian role by efficiently reallocating credit. The column argues that high capital standards, efficient bankruptcy laws, and a lower cost of bank equity improve credit reallocation and thereby support the productive specialisation of the economy. An efficient banking sector also magnifies the gains from trade liberalisation by easing the process of capital reallocation.

Paolo Angelini, 12 April 2018

It has recently been argued that high non-performing loan stocks can limit banks’ lending ability, and thus impair the effectiveness of monetary policy. This column questions this claim and argues for a more nuanced view. It points to the lack of a serious theoretical analysis of the relationship between non-performing loan stocks and credit dynamics. Policy should focus on maximising the ‘cure rate’ rather than eliminating non-performing loans entirely.

Maurice Obstfeld, Romain Duval, 10 January 2018

The widespread and persistent productivity slowdown witnessed since the Global Crisis had already begun in advanced and low-income countries prior to the crisis. This column argues that the crisis amplified the slowdown by creating ‘productivity hysteresis’, and that monetary policy played an ambiguous role. Policymakers must now address the legacies of the crisis through innovation, education policies, and structural reforms.


CEPR Policy Research