By Atanas Kolev
For many European firms, life at the beginning of 2020 was looking up.
They had taken advantage of the previous economic upturn to shore up cash and reduce their debt. Higher profits along with low interest rates and plentiful finance helped them to grow their businesses. In the summer of 2020, 80% of the almost 12 500 European firms that participated in the European Investment Bank Investment Survey (EIBIS 2020) said the previous year had been profitable.
That rosy feeling quickly evaporated, however, as the pandemic took hold in March 2020. The lockdowns and social distancing imposed across Europe forced many businesses to close down almost overnight. Some businesses watched their revenues dry up completely, and they had to rely on their cash reserves to pay for hard-to-reduce costs such as real estate and staff.
On average, firms lost one-quarter of their gross income in the second quarter of 2020, according to the Investment Report 2020/2021: Building a smart and green Europe in the COVID-19 era, a comprehensive overview and analysis of investment across the European Union published annually by Economics Department of the European Investment Bank. The decline was significantly more severe than the drop that firms witnessed during the last two recessions – the global financial crisis in 2008 and the European sovereign debt crisis in 2010.
Government turns on the tap
Fearing that the income loss would turn the pandemic into full-blown financial crisis, national governments and the European Central Bank adopted strong policies to maintain the flow of credit.
As a result, borrowing costs remained low, and firms took on more debt to pay their bills while they waited for the pandemic to blow over.
The government intervention avoided a financial crisis, and many businesses were able to stay afloat. Overall investment declined as the economy contracted, but the drop-off was lower than initially feared. While the flow of credit helped some firms to stay on track with their business plans and investments, it had a cost: increased debt.