The European Systemic Risk Board (ESRB) has delivered a damning assessment of the economic crisis in Europe as much of the continent continues to battle a third wave of coronavirus infections. The finance body, chaired by European Central Bank president Christine Lagarde, warned firms may struggle to stay afloat as they continue to rely on emergency life-support funding from the state.
Thousands of businesses across the eurozone, including in France and Germany, remain closed due to strict lockdown rules.
The dire outlook from the ESRB comes despite firms across the bloc claiming grants, tax breaks and loans to the tune of £1.3trillion.
The latest report by the ESRB said: “In a worst-case scenario, the postponed insolvencies would suddenly materialise and trigger a recessionary dynamic, potentially causing further insolvencies.
“The current low rate of insolvencies would then be similar to the sea retreating before a tsunami.”
The ESRB warned when the economy eventually re-opens and financial support is scaled back, the number of insolvencies in Europe could increase by around a third.
Economists noted the number of bankruptcies fell by almost 20 percent between July and September in 2020, compared with before the COVID-19 crisis.
But, the ESRB has shared forecasts by finance giants Allianz and Euler Hermes, which suggested the number of insolvencies could spike by 32 percent across western Europe by the end of this year.
Central and eastern Europe is predicted to see even more firms struggle to survive with a 34 percent increase in those regions.
The EU finance watchdog has made a series of recommendations to try and stem the exodus of businesses going under and the widespread job losses that it will entail.
It has urged governments to widen state aid rules and convert expensive loans into grants.
The financial body has also encouraged EU leaders to use efficient insolvency procedures to avoid a rise in so-called “zombie” firms.
The ESRB acknowledged some EU member states may struggle to turn the tide for its businesses and warned the fallout could cause “political and economic instability” for the entire bloc.
READ MORE: UK plans major change after reminding EU who’s in charge
Finance Minister Olaf Scholz and Economy Minister Peter Altmaier have both said existing restrictions are set to remain in place until at least the end of May.
The GfK research institute said its consumer sentiment index, based on a survey of around 2,000 Germans, fell to -8.8 points from a revised -6.1 in April.
GfK consumer expert Rolf Buerkl said: “Hopes for further easing of restrictions and a revival of consumption have been noticeably dampened.”