An Undesirable Side Effect of Coronavirus Measures: Zombies?

The German government has adopted far-reaching economic policy measures to mitigate the consequences of the coronavirus crisis. These appear to be working: in the second quarter of 2020, there were 8.86 percent fewer corporate insolvencies than in the same period last year despite the crisis (German Federal Statistical Office, 2020). At the same time, however, the instruments adopted might help to artificially prolong the life of companies with unsustainable business models. These zombie companies cannot cover their current interest costs with their income in the medium term. The 31st Economists Panel addresses the emergence of zombie companies as a possible side effect of economic policy measures. A total of 120 economists took part in the survey.

Economists See a Rise in Zombie Companies Since the Beginning of the Coronavirus Crisis

Of the participating economists, 86 percent think the number of zombie companies in Germany has risen since the beginning of the coronavirus crisis in March 2020, while 9 percent see no change from pre-crisis levels. None of the respondents assume that the number of zombie companies has declined since the beginning of the coronavirus crisis.

info graphic, Economists Panel October 2020, Development of the number of zombie companies in germany

Waiving of the Obligation to Apply for Insolvency Could Be Responsible for the Emergence of Zombie Companies

Why do zombie companies emerge? The vast majority of economists (86 percent) share the opinion that the waiving of the obligation to file for insolvency is one reason. Meanwhile, 50 percent think it is due to the recent extension of the short-time work allowance until the end of 2021. This is followed by state loans (32 percent) and guarantees (25 percent) from KfW as possible causes. Some economists (22 percent) believe political pressure on banks for less restrictive lending also risks promoting the emergence of zombie companies. The same applies to emergency aid for the self-employed, freelancers, and small business (18 percent). According to some of the participating economists, the ECB’s low interest rate policy is also responsible. In contrast, only a few respondents cited the reduction in VAT (2 percent) or economic policy measures (2 percent) as the cause of zombie companies.

info graphic, Economists Panel October 2020, Reasons for the emergence of zombie companies

Profitability Review and Expansion of Loss Carryforwards and Carrybacks for More Targeted State Support

Many of the participating economists would use the profits that companies made before the coronavirus crisis to offer targeted support to those companies that would have no financial problems were it not for the pandemic. In particular, they advocate the expansion of loss carryforwards and carrybacks. Jan Schnellenbach of Brandenburg University of Technology in Cottbus emphasizes: “It would make sense to expand the tax loss carryback, which would benefit above all those companies that were profitable before the crisis.” Other economists see this proposal as too bureaucratic. Instead, Steffen Müller of the Halle Institute for Economic Research (IWH) proposes a retrospective review based on a key figure established by the German government: “Applicants would then have to confirm that they have complied with the key figure. Help can be paid out quickly and reviewed later.”

Another proposal aims at differentiating between industries. Franziska Peter of Zeppelin University writes that “the phenomenon of zombie companies is more pronounced in certain industries. Consequently, measures to provide support should take these factors into account.” A further position is that aid measures counteract the selection processes inherent in a market economy and should be rejected altogether. However, the most frequently cited answer is that it is not viable to provide targeted support only to companies that would have no economic problems were it not for the coronavirus crisis. “Clearly distinguishing between companies isn’t compatible with both rapid crisis management and manageable bureaucracy,” writes Bochum economist Martin Werding.

Economists Expect More Corporate Insolvencies in the Future

While the number of corporate insolvencies in Germany has in fact fallen since the beginning of the coronavirus crisis in March 2020, this trend will be reversed when economic policy aid measures come to an end. This is the opinion of the overwhelming majority of the participating economists (96 percent); 32 percent even expect a sharp rise in corporate insolvencies once the aid measures end. Meanwhile, 1 percent assume that the number will remain the same and another 1 percent that they will decrease.