As Europe is overshadowed by sovereign debt crisis, EU core and peripheral countries seem to be drifting apart. A recent survey by the Creditreform Economic Research Unit attempts to analyse the current situation while EU core countries keep insolvency total in check. Peripheral countries, it seems are those most strongly affected.
The pace of economic growth slowed in 2011, resulting in a year overshadowed by the European debt crisis. In Greece, in particular, the crisis assumed such serious proportions that there was a risk of it spreading to other – basically solvent – national economies. As a result of sustained tension in the financial markets, both financing conditions and business and consumer confidence in Europe deteriorated. Coupled with massive austerity programs, these developments curbed the dynamism of economic activity across Europe. Within Europe, however, growth varied considerably. Some national economies such as Germany, Netherlands and Denmark produced growth rates that were almost as high as before the financial crisis. On the other hand, countries such as Greece, Ireland and Portugal registered dramatic falls. In some cases, worse outcomes were averted only by financial support from the euro bail-out fund.
Even though the German economy was not immune to these events, it managed to cut loose and become a kind of economic dynamo for the eurozone. In the first half of the year, the main driving force for the German economy came from sharply rising exports. And although the economy appreciably lost momentum in the second half of the year, it proved extremely robust on the whole. Regarding insolvency figures across Europe, 2011 presents a mixed picture: while the incidence of insolvency decreased in a large number of core countries such as Germany and Denmark, the crisis left its mark on the corporate failure figures of the periphery.
Economic activity in Europe was dominated in 2011 by the European debt crisis. In the EU-15 plus Norway and Switzerland, the impacts of the crisis were clearly apparent. The number of corporate insolvencies rose to 174,917 in 2011. This reflected a marginal increase of 0.3 percent against the prior year, when 174,463 businesses were hit by insolvency. In historical terms, the insolvency total is still at a worryingly high level. The fact that the insolvency situation did not assume more dramatic proportions last year was due only to the comparatively positive developments in the core European countries.
In Western Europe, a clear trend is emerging in the pattern of insolvency. Indeed, it is almost possible to say that Western Europe is divided into two parts. While developments in the business sectors and the corresponding insolvency figures in core countries such as Germany (30,200 cases; minus 5.8 percent), France (49,506 cases; minus 3.0 percent), Denmark (5,447 cases; minus 15.7 percent) and the Netherlands (7,000 cases; minus 2.9 percent) were relatively positive, the situation on the periphery, in Greece (452 cases; plus 27.3 percent), Spain (5,752 cases; plus 18.7 percent), Italy (11,792 cases; plus 16.9 percent) and Portugal (6,025 cases; plus 17.1 percent) was poor. The problems and impact vectors are certainly a great deal more complex and convoluted.
Nevertheless, the present economic situation in the shadow of the debt crisis seems almost to mirror the present insolvency situation across Europe. It is particularly noticeable that the economies worst affected – Greece, Spain, Italy, Portugal and Ireland – are the ones that fare worst in the corporate insolvency statistics for Western Europe.
The branch of the economy accounting for the largest share of insolvency was the service sector. Service providers made up 36.9 percent of all registered insolvencies, retaining their top-of-the-table position with approximately 65,598 reported corporate failures. In second place came commerce and catering with around 54,574 insolvent businesses, which was 31.2 percent of the total. In the construction sector, more than one in five enterprises (21.4 percent) filed for bankruptcy – a total of 37,432 building firms. One in ten insolvencies (10.5 percent) involved a manufacturing enterprise – 18,366 businesses in absolute terms. Downturns in insolvency figures were noted in manufacturing (minus 3.2 percent) and services (minus 1.7 percent) while upturns due to the difficult economic climate were seen in the construction sector (plus 2.2 percent) and commerce (plus 2.4 percent).
One would go on to ask how the employment industry would be affected. The worsening of the insolvency situation in Europe impacted on insolvency-related unemployment. The number of jobs threatened by insolvency in 2011 increased by 7.1 percent to 1.5 million (2010: 1.4 million). The sustained high level of insolvency overall and the growing number of major corporate failures involving thousands of dismissals led to an increase in insolvency-related job losses.
The private insolvency situation eased moderately. While 2010 saw a marked rise in the number of insolvency cases involving private individuals, the figure in 2011 was recessive. In the countries that collect private insolvency data, a total of 373,284 private insolvency proceedings were recorded – 1.5 percent fewer than the year before. In absolute terms, this means around 5,800 fewer persons were registered as insolvent. Sharp rises in private insolvency were noted in France (56,079 cases; plus 26.4 percent), the Netherlands (14,344 cases; plus 26.0 percent) and Finland (3,531 cases; plus 19.7 percent). Although the biggest contributors to private insolvency were Germany and the UK, the figures in both these countries were lower than in 2010. While the number of private insolvencies in Germany fell by 5.8 percent (129,800 cases), the UK registered 13,841 fewer cases (143,871 cases; minus 8.8 percent).
An appreciable rise (plus 6.1 percent) was seen in the number of corporate insolvencies in Central and Eastern Europe. After 37,139 corporate failures in 2010, last year produced a total of 39,423 cases. The sharpest increases were noted in Bulgaria (1,500 cases; plus 114.3 percent), Hungary (20,322 cases; plus 16.2 percent), Czech Republic (6,753 cases; plus 21.5 percent) and Slovenia (675 cases; plus 32.4 percent). Notable downturns in corporate failure were registered in Romania (4,580 cases; minus 16.4 percent), Lithuania (800 cases; minus 66.8 percent) and Estonia (256 cases; minus 49.2 percent). The largest sectoral contributors to insolvency figures were commerce and catering (37.0 percent) and services (28.2 percent). Manufacturing and construction accounted for smaller shares of 19.2 and 15.6 percent respectively.
What are the prospects for 2012? It would appear that such prospects are clouded. Major Western European economies – including Spain and Italy – are expected to slip into recession. Even in Germany, the economic recovery will peter out (0.7 percent; Federal Economics Ministry), a further fall prevented only by robust domestic demand. And while the credit squeeze now seems to have reached Central and Eastern Europe, fears of a credit crunch are widespread in Western Europe. In some national economies, lending appears to be severely disrupted at present. Under these auspices, corporate insolvency is expected to rise again this year – at a significantly sharper rate than in 2011.
How steeply the number of corporate insolvencies increases depends largely on how swiftly policy makers get to grips with the sovereign debt crisis. If the crisis is not under control by the summer, serious consequences are anticipated for corporate borrowing, economic performance and insolvency. This annual report, compiled by the Creditreform Economic Research Unit provides statistical data on both corporate and private insolvencies in Europe. Founded in 1879 in Mainz, Germany, it has the form of an association, backed by a network of 172 individual agencies and offices in Europe.
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