Can Europe Achieve Transformation While Propping Up Zombie Firms?

The paper “Does Zombie Lending Impair Innovation?” highlights how zombie lending, the practice of banks supporting non-viable firms, has a significant negative impact on innovation, particularly in R&D-intensive and high-tech sectors. This outcome is highly relevant to the ongoing transformation efforts in Europe, particularly in green and digital technologies. Europe's push towards sustainability and technological transformation heavily relies on innovation, and any impediments to this process could delay or undermine these initiatives.

One of the key insights from the paper is that zombie lending distorts competition by allowing inefficient firms to remain in the market. This creates barriers to entry for new, innovative firms and reduces the incentives for incumbent firms to innovate. In sectors like green energy and digital technologies, where continuous innovation is vital for progress, such distortions can be particularly damaging. Europe's transformation agenda depends on vibrant, competitive markets where innovation is not stifled by the presence of zombie firms.

In Europe, post-crisis financial systems must focus on ensuring that credit allocation is directed towards healthy, innovative firms that can contribute to the green and digital transitions. By allowing zombie firms to survive, European countries risk not only stalling innovation but also misallocating resources that could otherwise drive the transformation agenda forward.

The findings of the paper also emphasize the need for targeted policies that address the recapitalization of weak banks and the efficient exit of non-viable firms. This is critical for ensuring that financial resources flow towards sectors and firms that can accelerate Europe's green and digital transformation. By focusing on policies that promote healthy competition and innovation, Europe can ensure that its transformation agenda is underpinned by a dynamic and resilient economy.

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