EUROPE’S economy is fundamentally flawed with the European Central Bank (ECB) keeping alive “zombie” companies and banks, the head of a German economic think tank has warned.
The Institute for Economic Research (IFO) in Munich has revealed that the economies across the European Union (EU) are still being hindered by the large amount of “zombie” economies – those companies and banks that are in difficulties but are being kept alive by toxic loans and debts.
President of the IFO Clemens Fuest said: “The problem of zombie companies and banks is still serious. Especially in Greece, Italy and Portugal, the proportion of bad loans in bank balances is still far too high.”
According to a recent study by the Bank of America, some nine per cent of the largest exchange-traded companies in Europe are currently such undead companies.
This refers to highly indebted, unprofitable enterprises, that while are still generating cash and managing to cover both fixed and running costs they only have enough money to cover the interest on outstanding loans but not the actual debt itself and as such rely on the banks for their continued existence.
Last summer, up to 11 per cent of the companies included in the Euro Stoxx-600 were temporarily included.
Before the outbreak of the financial crisis in 2008, the share of zombie companies in Europe was only six per cent.
The loose monetary policy of the ECB is an important, albeit not the only, reason for this distortion according to the economist.
He said: “The zero interest rate policy is certainly helping companies, which would have to file for bankruptcy with higher interest rates, stay on the market.
President of the European Central Bank Mario Draghi (R) and Vice President Vitor Constancio
A conflict would arise if the inflation rate continues to rise higher than it was today and the mandate of the ECB to maintain price-level easing would conflict with the efforts to avoid burdening heavily indebted states and banks.
Deka’s chief economist Ulrich Kater also warned of possible conflicts the European monetary watchdogs might face because of the zombifying of the economy as soon as the current economic climate changes.
The headquarters of the ECB
“Some states in Europe, whose debt rates would rise uncontrollable as a result of exceeding certain interest thresholds might also find themselves becoming zombie companies in the broader sense.”
He added: ”Europe must at some time decide whether it can control public debt dynamics jointly within the framework of the European monetary union, or whether this would be left up to each state itself with its own currency. In the latter case the whole monetary union would have been a zombie company.”