EU at ‘crunch point’ over future of the Eurozone says expert

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Hundreds of billions of euros have been spent on support measures to help companies throughout the continent stay alive, thus limiting the number of bankruptcies over the past year. During the third quarter of 2020 (July to September), bankruptcies fell by nearly a fifth compared to 12 months earlier. But research from the Bank of America has set alarm bells ringing, with analysts warning the number of companies across Germany, France, Spain and Italy could plunge by up to three percent before the end of 2022 as they struggle for survival.

The report’s modelling uses Eurostat’s 2018 business population figures, and estimates 76,000 firms could collapse in Spain, as well as 59,000 in France, 57,000 in Italy and 27,000 in Germany.

These countries represent the four biggest economies in the EU, worth an eyewatering £7.2trillion combined.

Alessandro Infelise Zhou and Ruben Segura-Cayuela, who co-wrote the report, warned: “Reported bankruptcies may remain ‘ghosts’ for now, but longer-term economic scarring may be waiting for us just around the corner.

“The longer-term damage to Germany’s businesses looks relatively contained, while Spain looks in much more trouble.

“We are very concerned that the ‘ghost’ bankruptcies might translate into a scarred business population in the coming years.

“An incomplete economic recovery across countries is the perfect ingredient for a persistent gap in the business population, with important implications for employment and economic dynamism in the medium and long term.”

Spain’s economy looks particularly vulnerable as it is heavily dependent on tourism, which has taken a massive hit during the Covid pandemic over the past year.

In February, the country’s central bank more than two-thirds of hotel, restaurant and leisure firms could go under unless there is a rapid return of tourists to the popular holiday destination.

Firms throughout Europe have been supported by a combination of loan guarantees, moratoria on administrations and support for workers’ wages, but the report warned that support won’t last for much longer.

The research added: “Transitory support measures have had a crucial role in keeping reported insolvencies down, but any premature policy reversals are likely to deepen the longer-term scarring to the economy in a significant way.”

This is the latest warning after the European Central Bank set alarm bells ringing when forecasting “a sizeable number of firms could be forced to file for bankruptcy if measures are lifted too early or bank lending conditions tighten”.

In March, the central bank accelerated purchases under its €1.85trillion stimulus programme to support the financial recovery.

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But a sudden third wave of Covid quickly sweeping across Europe has seen powerhouses France and Germany tighten strict lockdown restrictions.

European Government will come under further increasing pressure in 2023, with the EU predicted to reintroduce rules that limit debts to 60 percent of GDP.

Oxford Economics economist Nicola Nobile warned: “A rethinking of the fiscal rules is necessary, as applying the current fiscal framework to the future much different economic landscape would very likely result in long-lasting policy mistakes.

“While 2023 seems distant, uncertainty about the fiscal framework and the individual responses national governments are taking could dent the post-Covid recovery and increase divergence among eurozone economies.”

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