In the most literal sense of the term, a zombie business is a business that generates revenue, but doesn’t have enough to pay off debts after all fixed costs like wages and rent have been paid. “Sometimes there isn’t even enough to pay the interest on the debt,” Mujagic says. “And not just because interest rates have been 0% for the past five or 10 years.”
“It is a grave mistake to conclude that zombie companies were created by the corona pandemic and low interest rates”
Mujagic therefore calls it “a big mistake” to conclude that zombie companies were only created by the corona pandemic and low interest rates. He says the problem has been going on for decades. ‘You can clearly see an upward trend since the late 1970s. Since then, the number of zombie companies in the Western economy has been steadily increasing.’
Long term problem
This means that the advance originated long before interest rates were kept artificially low. According to Mujagic, the reason it’s more apparent now is because the problem was much smaller before. “It’s grown over time, although it’s mostly stayed small,” he explains. “So the economy hasn’t been affected much by that.”
As an example, he cites the early 1980s, when two out of every hundred companies had zombie status. “An economy can handle that very well, but in the meantime, estimates for European countries range from 10 to 15 percent,” Mujagic says. ‘And if you assume that northern European countries are in a stronger position, one in four companies in the south are a zombie company. And this is a very negative development for the economy.’
No added value
Something that is entirely due to those companies’ lack of added value, Mujagic argues. These businesses not only require capital, but they also need people who can be better used elsewhere. ‘So they slow down economic growth.’