‘Zombie companies’ temper desired inflation

In 2008, the European Central Bank (ECB) made every effort to increase inflation in the eurozone. But in doing so, it created so-called zombie companies, companies that would have already gone bankrupt without the ECB's extremely low interest rates. Between 2012 and 2016, the number of zombie companies rose from 4.5% to 6.7%. These findings were found in a study by the American research institute NBER. Tim Eisert, Associate Professor of Finance at Erasmus School of Economics and co-author of the study, explains why these companies are such a big problem for the economy and elaborates on his revised paper in Wall Street Journal.

Oversupply and low prices

'Companies that are barely hanging on are getting in the way of healthy competitors in the sector,' says Eisert. ‘Normally they would no longer exist, but because they are still active, they contribute to the production of goods and services in their sector. This results in oversupply. It is therefore difficult for companies to raise their prices. If they want to protect their market share, they have to lower their prices.’

Bitter pill

As a result of the zombie companies, each year, inflation was 0.45 percentage points lower than it would have been if those cheap loans for companies in need did not become available. This is a bitter pill to swallow for the ECB, which had set the target of increasing inflation by 2% a year for the past ten years. In practice, this increase was only 1.3% per year.

Decreasing profitability and increasing debts

In order to achieve its target, the ECB tried to make money cheaper by lowering policy interest rates and reducing long-term interest rates by buying up debt securities. It should have boosted economic activity by making borrowing and investments cheaper, but it also led to more zombie companies. According to the study, the profitability of these companies is systematically decreasing while their debts are increasing, which could cause problems for the banks that have granted credit to these companies.

Not that simple

Does all this mean that the ECB's policy does more harm than good? According to Eisert it’s not that simple. ‘The policy works well in boosting inflation if the monetary system functions normally. In this case, you would have well-capitalized banks, which have few loans outstanding to companies that find it difficult to repay these loans. In Europe, however, the main purpose of the policy is to buy time and tackle the underlying problems in the financial system. This time should be used to recapitalize the banking system and increase the financial health of companies. The longer it takes for the banking sector to restore its health, the bigger the problem of the zombie companies becomes.’


During the pandemic, government aid measures strengthen this process of maintaining zombie companies. Since these businesses are able to remain afloat, production capacity is higher than it would be under normal market circumstances. Because of this, prices artificially remain lower, which in turn effects inflation rates. In zombie industries, mark-ups and productivity are lower and the mechanism of allocating labour and capital is less efficient. However, government policy is understandable, since the timing of support is an intricate question: when the government is too late, healthy companies suffer more, and when the government is too late, zombie businesses will sprout from its policy.

Assistant professor
More information

The full article from Het Financieele Dagblad, 4 June 2020, can be downloaded above (in Dutch). 

The full article from Wall Street Journal, 12 January 2021, can be downloaded above.

The revised paper from Federal Reserve Bank of New York by Eisert, Acharya, Crosignani and Eufinger (December 2020), can be downloaded above.

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