PARIS – Romain Rozier’s coffee must be broke.
Since the emergence of the coronavirus last spring, sales at the once bustling restaurant in northern Paris have fallen by 80%. The only customers on a recent day were a few UberEats couriers and a handful of people far from each other at the counter, ordering takeaway food.
“We are on the verge of death,” said Rozier, calculating the 300 euros ($ 365) he earned on the lunch shift, well below the € 1,200 he used to pay. “The only reason we are not sinking is because of financial aid. “
France and other European countries are spending huge sums to keep companies running during the worst recession since World War II. But some worry that they have gone too far; bankruptcies are plummeting to levels not seen in decades.
While aid has prevented an increase in unemployment, generosity risks turning sectors of the economy into a kind of obscure zone, where companies are inundated with debts they cannot pay but receive enough state aid to survive – so-called companies zombies. Unable to invest or innovate, these companies could contribute to what the World Bank recently described as a potential “lost decade” of stagnant economic growth caused by the pandemic.
“We need to get rid of all these subsidies at some point – otherwise, we will have a zombie economy,” said Carl Bildt, co-president of the European Council on Foreign Affairs and former Prime Minister of Sweden.
Bankruptcies fell 40% last year in France and Britain, and fell 25% on average in the European Union. Without government intervention, including billions in state-backed loans and subsidized payrolls, the bankruptcies of European companies would almost double in the past year, according to a study by the National Bureau of Economic Research, an American private organization.
At the Commercial Court in Paris, Judge Patrick Coupeaud, who has handled bankruptcy cases for almost a decade, sees the difference. “I have about a third less people coming to me, because many companies in trouble are being helped by the state,” he said, pointing to the marble corridors with almost empty colonnades of the court.
In contrast, Chapter 11 bankruptcy filings in the United States increased in the third quarter to the highest level since the 2010 financial crisis, a trend that is expected to continue in 2021, according to an index compiled by the US law firm. Polsinelli.
President Biden proposed a new $ 1.9 trillion bailout package to combat the economic slowdown and the Covid-19 crisis, and last week the government reported that 900,000 Americans had filed for new unemployment insurance claims.
These statistics are shaping a debate over whether Europe’s strategy to protect companies and workers “at all costs” will cement a recovery or make economies less competitive and more dependent on government aid when the pandemic subsides.
“Parts of the misery have just been delayed,” said Bert Colijn, chief economist for the euro zone at Dutch bank ING. He added that there would be “a recovery from bankruptcies” and an increase in unemployment whenever support measures were withdrawn.
Analysts say government programs are already sowing the economy with thousands of inefficient businesses with low productivity, high indebtedness and a high prospect of default when low interest rates return to normal.
It is estimated that 10% of companies in France were saved from bankruptcy because of government funds, according to Rexecode, a French economic study group.
Allowing unviable companies to sink, while painful, will be essential to allow competitive sectors to thrive, said Jeffrey Franks, head of the International Monetary Fund’s mission to France.
A wave of bankruptcies “isn’t necessarily that bad,” he said. “It is part of the normal process of creative destruction of regenerating economies.”
The Organization for Economic Cooperation and Development is urging governments to refine their support measures to ensure that growth resumes. “Failure to do so can hamper the recovery by locking resources in non-productive ‘zombie companies’ and jobs,” the organization said in a recent assessment.
Most European governments planned to end support last fall, thinking the coronavirus would be under control. But a second wave of cases filled hospitals, followed by variants of the more rapidly spreading virus, all leading to extensions of aid. The European Union approved a € 2 trillion recovery package at the end of last year.
In France, investments are seen as a way to buy social stability, avoiding mass unemployment. Finance Minister Bruno Le Maire pledged to maintain support “as long as the crisis lasts”, a strategy that described how to add “spirituality” to the economy.
Almost no company will be left out of generosity if they lobby hard enough – not even French escargot farmers, who recently won a battle for limited financial aid, while the restaurants that are their main buyers remain closed.
As government debts with Covid skyrocket, European tax rules have been lifted. France is among several countries that have declared that they do not plan to pay the huge bill until the economy recovers.
For now, financial aid is preventing the collapse of many companies that were once healthy and whose main misfortune was the pandemic. At the Paris Commercial Court, Judge Coupeaud said the measures helped to avoid a domino effect, encouraging companies to use state-guaranteed loans and other aid to pay suppliers and debts.
France’s bankruptcy system is different from that of other countries in that it encourages companies in trouble to present themselves before default and offers help in negotiations with creditors.
“Failure is not a word that the French like to use,” said Dominique-Paul Vallée, the court judge charged with helping businesspeople avoid bankruptcy. “We prefer to say that we are saving companies.” He added that there was a huge increase in the number of companies that came to him for help.
Those that filed for bankruptcy in 2020 tend to be large companies with a large workforce, such as retailer Camaïeu, with 3,900 workers, and Alinea, furniture maker with 2,000 employees. This was a change from the small and medium-sized business cases that the court usually hears.
Still, the safety net extends only so far. Countless companies face mounting debt, declining profitability and a limited ability to invest the harder the pandemic.
Mr. Rozier is a good example. He started his organic-themed coffee, Make Your Lunch, in 2016 in a bustling commercial and cultural district. The concept was so successful that he opened a second cafe near the Paris Opera, with a lot of traffic.
After the pandemic hit, business plummeted, as the offices that housed thousands of workers were empty and virtually unoccupied most of the year.
The government helped pay most of its employees’ salaries, and Rozier secured a € 30,000 low-interest state-backed loan with deferred payments until May, which the government extended last week for a year. After a new national blockade in October, restaurants like his received an additional € 10,000 per month in direct aid.
But that money did not make up for months of lost sales. “My treasure is drained,” said Rozier, who sold his coffee near the opera in the summer and spent much of the government loan paying suppliers. With 80% fewer customers, he is three months behind on his € 4,000 monthly rent and struggles to pay social security taxes, electricity and other expenses.
The government allows restaurants to offer only take-out food. Rozier has become an unofficial spokesman for restaurant owners who demand that the government let them accommodate customers again, with social distance, to survive.
After the New Year holiday, he said, his morale plummeted when he reopened the business.
“I waited. And I waited. And three people came through the door,” said Rozier.
“At this point, there is a real danger that I will have to close in a few months,” he continued. “I would rather sell the company than go to bankruptcy court.”
Two of his friends, also owners of restaurants, have already declared bankruptcy.
“There are many more who will follow in your footsteps,” said Rozier. “We know that for sure.”
Antonella Francini contributed reporting.