Europe’s productivity problem is partly due to the rise of zombie firms that crowd out growth opportunities for others. That’s according to an OECD report, created using data from Orbis, and also covered by the World Economic Forum (WEF).
The WEF article explores the tendency for weak banks to evergreen loans to zombie firms to avoid realizing losses on their balance sheet.
- Zombie firms have a higher likelihood of being connected to a weak bank (see figure 2 below)
- The insolvency framework helps create a link between zombie firms and bank health
- More zombies means capital reallocation has less impact on productivity
- Zombie firms potentially crowd out credit to healthier and more productive firms