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Europe - Rise of the Zombies: state intervention dragging Europe down

Once the continent of innovation, art, democracy and non-conformity, Europe has been laid low by a heady brew of bureaucracy, over-regulation, over-taxation and debt. A crisis of political leadership has in turn produced a deficiency of bold, innovative ideas, a shortage of vision and a huge expansion of government intervention. Nowhere is this clearer than in the EU’s ill-fated monetary misadventures.

Throughout the last decade, the European Central Bank has pursued a program of Quantitative Easing program that has pushed interest rates into negative territory, all in the name of keeping the EU together. Unlike the US Federal Reserve, however, the ECB has still not unwound its QE program. Meanwhile, national governments continued with failing Keynesian policies instead of desperately needed supply-side reforms. Naturally, this has had negative consequences that far outweigh any benefits that the QE plan might have produced.

One of the costs of endless QE is the growth, at a disturbing pace, of so-called zombie companies. The Bank for International Settlement’s defines a zombie as “any firm which is at least 10 years old, publicly traded and has interest expenses that exceed the company’s earnings before interest and taxes”.

Though this phenomenon is certainly not confined to the EU, it is proving to be deadlier on the old continent when combined with harmful government interventionism that channels capital away from productive companies towards the zombies.

These companies are in a kind of limbo – neither productive, nor seeking to enter formal insolvency proceedings. The zombies are plagued by large amounts of debt, low levels of profitability, negative margins and no capital for growth, meaning they effectively produce nothing. They survive because they get some sort of cash, often from the government, which enables them to pay the interest on their debt. Creditors allow them to continue existing for as long as they continue to pay interest.

The economic consequences appear to be considerable. A 2017