Imagine the economic crisis and hardly any company goes bankrupt! Two years ago, at the beginning of the corona pandemic, that seemed unimaginable. It was generally expected that the number of corporate insolvencies would also increase as a result of the economic slump. Various precautions have been taken. In the Financial Stability Report of October 2020, for example, the Bundesbank recommended creating sufficient administrative capacity in banks and public administration in order to be prepared for rising insolvency figures.
In the same year, the European Central Bank called for a ban on dividends. This should ensure that financial institutions hold sufficient capital to be prepared for the increase in defaulting loans. The Monopolies Commission warned that in future there would be a significantly higher concentration of companies in sectors of the economy that were experiencing a severe economic slump as a result of the crisis. After all, many companies would have to exit the market. Economic research institutes – including the Leibniz Center for European Economic Research (ZEW) – saw a wave of insolvencies rolling towards us.
When the feared insolvency figures failed to materialize, concerns arose that inefficient or even insolvent companies would be artificially maintained, the much-cited “zombie companies”. In December 2020, for example, the Bundesbank recommended not setting the hurdles for market exits too low, because otherwise the emergence of zombie companies would be encouraged, i.e. unprofitable business models would remain in the market. In addition, many financial market experts expected a further increase in corporate insolvencies and loan defaults.
But in 2021 the number of insolvencies fell for the second year in a row – and reached a record low in August/September. A certain increase can now be observed, with the number of standard insolvency proceedings applied for last December increasing by 18 percent compared to the previous month.
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Credit insurers are expecting an increase in the number of insolvencies this year, albeit still below the level of the pre-crisis year 2019. The feared wave of insolvencies is therefore unlikely to materialize for the third year in a row.
There are also few insolvencies in France
The surprising insolvency events in the corona crisis are not a special case in Germany. Other countries such as France and the USA are also seeing falling numbers. In a group of 13 OECD and partner countries, for example, insolvencies in 2020 fell by an average of a good 25 percent compared to the previous year – in the first six months of 2021 even by 40 percent. The massive state support programs and the temporary suspension of the obligation to file for insolvency undoubtedly contributed to this decline.
For example, French President Emmanuel Macron promised in March 2020 that “no company would be exposed to the risk of insolvency”. According to the Organization for Economic Co-operation and Development, March and April 2020 will go down in history as the period when most policy initiatives for small and medium-sized enterprises were launched. This also applies to Germany.
Huge aid programs were also started here very early on: the economic stabilization fund in the amount of 600 billion euros for guarantees and capitalization, the KfW special program for refinancing, bridging aid, hardship aid, the special fund for cultural events and trade fairs, etc. In addition, there was the short-time allowance, the payment of which from the seventh month of reference was even increased to up to 87 percent of the net salary.
A total of around 130 billion euros in company aid has been approved in Germany so far, plus around 42 billion euros for short-time work benefits. The suspension of the obligation to file for insolvency applied until the end of April 2021.
The “cleansing effect” of crises does not occur
It seems plausible that the great concern about a wave of insolvencies has prompted politicians to launch such comprehensive support programs. In addition, there are also special features of the corona crisis, which explain part of the decline in insolvencies: In contrast to the high-tech crisis at the beginning of the 2000s or the financial and economic crisis that was emerging in 2007, financial market bubbles that have not burst are the triggers of the crisis this time the subsequent sectoral market adjustments.
Rather, companies are coming under pressure in the corona crisis because temporary exit restrictions and supply chain problems are hindering them – not because their business model has become fundamentally unprofitable. The aid programs have helped Germany get through the crisis properly.
However, they are not unproblematic for the forthcoming structural change. Because the classic “cleansing effect” of crises – companies with inefficient business models leave the market and the average productivity of the economy increases – did not materialize.
It is not yet possible to conclusively assess how strong the braking effect of the aid programs for structural change is. A look at the short-time allowance may be enlightening. It was paid out to around six million people at its peak in spring 2020 and has risen to around 900,000 this January after a low of 600,000 applications in November 2021. The increase in short-time work in the hospitality and retail trades is attributed to the high number of infections.
The funding programs should now expire
In the auto industry, on the other hand, that seems questionable, where a good 110,000 employees received short-time work benefits last December. Will the effects of the crisis be mitigated in the industry – or will structural change be slowed down? In any case, the low company dynamics should already be a warning signal. If you add to that the fact that innovation activities have declined more than originally expected, a picture of an inhibited economy emerges.
For example, spending on research and development fell by 6.3 percent overall in 2020, and small and medium-sized companies saw a decline of six percent in 2021, and this year the drop is likely to be eight percent.
Market entries and exits are two essential productivity drivers of an economy. New companies with better products and services and more efficient production processes are entering the market and crowding out companies without modern business models.
Unlike previous crises, the crisis has halted this dynamic. The opportunity inherent in every crisis has been wasted. It is now all the more important to switch the course from crisis mode to structural change. It is time to phase out the funding programs in the sectors affected by structural change.
The author: Prof. Achim Wambach is President of the Leibniz Center for European Economic Research (ZEW) in Mannheim.
More: More harm than good: Short-time work has significant side effects.