October 22, 2020

More than half of small European firms at risk of closure

More than half of small European firms at risk of closure

According to survey results conducted by the management consultancy McKinsey, more than half of the small and medium sized firms in Europe fear bankruptcy in the next year. They provide employment to two-thirds of European workers. The survey was carried out in August, before the spike in cases of Covid-19 across the continent, which forced governments to create new restrictions and talks of further lockdowns.

IZA World of Labor authors Pierluigi Balduzzi, Emanuele Brancati, Marco Brianti and Fabio Schiantarelli conducted a study in which they surveyed Italian firms in the manufacturing and production services sectors and obtained information on their expectations and plans immediately before and immediately after the coronavirus pandemic outbreak. “The data suggest that the Covid-19 outbreak reduced expected sales growth and increased the prices that firms expected to charge,” they write in their opinion piece. They add that “firms that are subjected to more stringent restrictions, because their work is deemed to be non-essential, have more pessimistic sales and order expectations and plan larger decreases in both employment and investment.”

McKinsey’s survey results come at a time when the International Monetary Fund (IMF), amongst others, urges the continent’s local governments to increase state support in order to help firms survive the slump caused by Covid-19. The data shows that in France, Germany, Italy, Spain and Britain, of more than 2,200 companies, 55% expect that they will shut down by September 2021 if their revenues remain at current levels. “This is a substantial burden on the financial sector,” report co-author Zdravko Mladenoc commented.

Small and medium-sized enterprises (SMEs) are firms with 250 or fewer employees and employ more than 90 million people in Europe. Their size makes them vulnerable to cash flow crises, and Spain is just one example. In the country, 83% of 85,500 businesses that have gone under since February employed less than five workers. “Policymakers need to do whatever it takes to contain the pandemic and its economic damage, and not withdraw support prematurely to avoid repeating the mistake of the global financial crisis,” the IMF wrote in their blog this week.

Read Pierluigi Balduzzi, Emanuele Brancati, Marco Brianti and Fabio Schiantarelli’s opinion piece Economic effects of Covid-19: The importance of credit constraints.

Find more IZA World of Labor coronavirus content on our curated topics pages: National responses to Covid-19 and Covid-19—Pandemics and the labor market.