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PARIS – Romain Rozier’s café should now go bankrupt.
Since the coronavirus hit last spring, sales at the once bustling lunch spot in northern Paris have fallen by 80%. In recent days, the only customers were a few UberEats couriers and a handful of spaced people at the counter, ordering take out.
“We are on the brink of death,” Rozier said, counting the 300 euros ($ 365) he had earned at lunchtime, well below the 1,200 euros he had. used to go home. “The only reason we didn’t go bankrupt was because of the financial aid. “
France and other European countries are spending huge sums of money to keep businesses afloat during the worst recession since World War II. But some fear that they have gone too far; bankruptcies are plunging to levels not seen in decades.
If aid has prevented a spike in unemployment, the largesse risks turning swathes of the economy into a sort of twilight zone where businesses are inundated with debts they can’t pay back but are getting just enough aid. ‘State to stay alive – so-called zombie companies. 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 have to get rid of all these subsidies at some point – otherwise we will have a zombie economy,” said Carl Bildt, co-chair of the European Council on Foreign Relations and former Prime Minister of Sweden.
Bankruptcies fell by 40% last year in France and Great Britain and by 25% on average in the European Union. Without government intervention, including billions in state-guaranteed loans and subsidized wages, European business bankruptcies would have nearly doubled last year, according to a study by the National Bureau of Economic Research, a private organization American.
At the Paris Commercial Court, judge Patrick Coupeaud, who has dealt with bankruptcy cases for nearly a decade, sees the difference. “I have about a third fewer people coming to see me because there are a lot of struggling businesses that are being helped by the state,” he said, pointing to the almost empty colonnaded marble halls of the courtyard.
In contrast, Chapter 11 bankruptcy filings in the United States rose in the third quarter to reach their highest level since the 2010 financial crisis, a trend that is expected to continue into 2021, according to an index compiled by the firm. of American lawyers Polsinelli.
President Biden has proposed a new $ 1.9 trillion bailout to tackle the economic downturn and the Covid-19 crisis, and last week the government reported that 900,000 Americans had filed new unemployment claims .
These statistics are shaping a debate over whether the European strategy to protect businesses and workers ‘at all costs’ will cement a recovery or make economies less competitive and more dependent on government aid when the pandemic recedes.
“Some of the misery has only been delayed,” said Bert Colijn, chief eurozone economist at Dutch bank ING. He added that there would be “a catch-up of bankruptcies” and a spike in unemployment any time the support measures were removed.
Analysts say government programs are already seeding the economies of thousands of inefficient companies with low productivity, high debt and a high prospect of default once low interest rates normalize.
An estimated 10% of businesses in France have been saved from bankruptcy with public funds, according to Rexecode, a French economic think tank.
Letting unsustainable businesses sink, though painful, will be essential for enabling competitive sectors to thrive, said Jeffrey Franks, the International Monetary Fund’s mission chief for France.
A wave of bankruptcies “is not necessarily something that bad,” he said. “It is part of the normal process of creative destruction of regenerating economies.”
The Organization for Economic Co-operation and Development urges governments to refine their support measures to ensure resumption of growth. “Failure to do so could hamper the recovery by trapping resources in ‘zombie businesses’ and unproductive jobs,” the organization said in a recent assessment.
Most European governments planned to end support last fall, believing the coronavirus would be under control. But a second wave of cases filled hospitals, followed by faster-spreading variants of the virus, all leading to extensions of aid. The European Union approved at the end of last year a stimulus package worth 2 trillion euros.
In France, investments are seen as a way to buy social stability while avoiding mass unemployment. Finance Minister Bruno Le Maire pledged to maintain support “as long as the crisis lasts”, a strategy he described as adding “spirituality” to the economy.
Hardly any business is excluded from largesse if it presses enough – not even French snail farmers, who recently won a battle for limited financial aid while restaurants that are their main buyers remain closed.
As governments’ Covid debts skyrocket, European fiscal rules have been suspended. France is among the countries that say they do not intend to reimburse the huge bill until the economy has recovered.
For now, financial aid is preventing the collapse of many once healthy businesses whose main misfortune was the pandemic. At the Paris Commercial Court, Judge Coupeaud said the measures helped avoid a domino effect by encouraging companies to use state-guaranteed loans and other aid to pay off suppliers and debts.
France’s bankruptcy system is different from that of other countries, in that it encourages troubled companies to come forward before default and offers help in negotiations with creditors.
“Failure is not a word the French like to use,” said Dominique-Paul Vallée, the court judge charged with helping business leaders avoid bankruptcy. “We prefer to say that we are saving businesses.” He added that there had been a surge in the number of businesses asking him for help.
Those who filed for bankruptcy in 2020 were typically large companies with a large workforce, such as retailer Camaïeu, with 3,900 workers, and Alinea, a furniture maker with 2,000 employees. It was a change from the small and medium business cases that the court usually hears.
Yet the safety net only extends so far. Countless companies face growing debt, falling profitability and limited ability to invest as the pandemic lasts.
Mr. Rozier is a good example. He opened his organic-themed café, Make Your Lunch, in 2016 in a bustling shopping and cultural district. The concept was so successful that it opened a second café near the busy Paris Opera.
After the outbreak of the pandemic, business plunged as offices housing thousands of workers lay empty and largely unoccupied most of the year.
The government helped pay the bulk of its employees’ salaries and Mr Rozier secured a state-guaranteed low-interest loan of € 30,000 with payments deferred until May, which the government has secured. extended last week for a year. After another nationwide lockdown in October, restaurants like his received an additional € 10,000 per month in direct aid.
But that money didn’t make up for months of lost sales. “My cash flow is depleted,” said Rozier, who sold his cafe near the opera house in the summer and spent a large chunk of the government loan to repay vendors. With 80% fewer customers, he is three months behind his monthly rent of € 4,000 and struggles to pay social security taxes, electricity and other expenses.
The government allows restaurants to offer take-out only. Mr Rozier has become an unofficial spokesperson for restaurateurs who demand that the government once again let them sit customers, with social distancing, in order to survive.
After the New Years holidays, he said, his morale slumped when he reopened the business.
“I waited. And I waited. And three people walked in the door,” Rozier said.
“At this point, there is a real danger that I will have to close in a few months,” he continued. “I’d rather sell the business than have to go to bankruptcy court.”
Two of his friends, also restaurateurs, have already declared bankruptcy.
“There are many more who will follow in their footsteps,” Rozier said. “We know that for sure.”
Antonella Francini contributed reporting.
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