The impact of interest rate changes on the evolution of zombie firms in Europe

Abstract

This study analyses the relationship between interest rate changes and the prevalence of zombie firms in eight European countries between 2012 and 2023. Using firm-level data and a regression analysis, no significant relationship is found between short-term interest rates and the survival of zombie firms. Instead, fiscal interventions during the COVID 19 pandemic, borrowing costs, and credit demand were found to be key factors. The results emphasise the complexity of zombie firm dynamics and highlight the importance of targeted structural reforms, efficient credit allocation, and balanced policy measures to eliminate inefficiencies, improve resource allocation, and promote long-term productivity.