A good friend of mine closed his hair salon last week after finding he couldn’t deal with unfair competition from a company that operated in a gray area of ​​the economy and could therefore afford better prices.

“If you want to be honest with your taxes before the state, I should have set higher rates and paid my employees decently, recording everything in the labor book. But clients preferred to go to a colleague who was 200 meters down and who, if you look at what he declared in Finance, you would say he had 5 clients for the whole year,” says a friend.

The economy is taken over by zombie companies, or the so-called living dead, which are artificially supported by money brought home by partners/shareholders or by various government support programs.

” Debts are increasing, and their efficiency is decreasing. That is, companies live on infusions, work, but accumulate debts. The question we keep asking ourselves is how can we support their recovery and performance in the long term? How do we help them move from treatment to recovery? Undoubtedly, restructuring decisions create prerequisites for healthy development. But further, the turnaround, the innovation, the change in the way of doing business is what sustains the results”, explains Paul-Dieter Cirlenaru, CEO of CITR.

The NBR also analyzed the phenomenon of zombie firms, showing that government loan guarantee programs can have undesirable consequences, such as “financing of economically unviable companies, which are referred to in the specialized literature as zombie firms.” The process of zombification of the economy represents artificial support of unprofitable companies either through state programs, or through bank loans and/or keeping interest rates at a very low level,” the National Bank notes.

In Romania, the segment of zombie companies began to develop after the international financial crisis of 2007-2008. Although these developments were similar to those observed at the European level in the context of the negative economic conditions that followed the crisis, the much larger scale of this phenomenon in the case of Romania was determined by the difficulties faced by companies when restructuring debt and/or exiting the market, but also weak payment discipline, which contributed, among other things, to fiscal optimization.

• The NBR estimated the impact of zombie firms on economic growth at an average of -0.3 percentage points per year and over €10 billion in nominal terms.

• The rapid development of the segment of zombie companies also affected the domestic financial sector, causing losses and limiting its ability to issue new loans to non-financial companies.

• A large number of companies that experienced significant financial difficulties in the period after the financial crisis of 2007-2008 did not recover, but did not leave the market either. A third of zombie companies in 2022 have been in this state for more than 10 years.

• Zombie companies are almost entirely owned by Romanian capital (93 percent of companies have more than 50 percent Romanian capital).

Zombie firms were first reported in Japan decades ago and have since spread to Europe

Zombie firms are generally defined as companies that cannot cover their debts with profits for an extended period of time. These companies were first reported in Japan a decade ago and have since spread across Europe, draining healthy resources from the economy, hampering productivity and economic growth. According to an article published by the Bank for International Settlements, which is considered the “bank of central banks,” “the prevalence of zombie firms has increased since the late 1980s.”

Economists and central bankers say zombie firms underprice healthy firms, creating artificial barriers to entry and fueling the growth of bad loans.

“Zombification of the corporate sector is a risk to the future standard of living,” the governor

“Zombification of the corporate sector is a risk to the future standard of living,” said Klaas Noth, the head of the Netherlands’ central bank, in an interview.

About 10% of companies in six eurozone countries, including France, Germany, Italy and Spain, are zombies, according to the latest central bank figures. The share has doubled compared to the pre-pandemic period.

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In 1788, the French magazine Mercure de France published a travelogue from Saint-Domingue about a man rumored to have been captured by “les Zombis”. An English version of an article in London’s Universal Magazine of Knowledge and Pleasure explained that the “zombies” were supposed to be “spirits of evil people who have died and are allowed to roam and torment the living”.