France and Germany head European insolvency league

Citation

(1998), "France and Germany head European insolvency league", European Business Review, Vol. 98 No. 6. https://doi.org/10.1108/ebr.1998.05498fab.001

France and Germany head European insolvency league

France and Germany head European insolvency league

More companies fail in high tax economies

France had 66,000 company insolvencies in 1997 and has the highest rate of insolvency in Europe, with 337 companies in every 10,000 failing last year. This compares with 138 in the UK and 107 in Germany, where insolvencies rose by 8.4 per cent to a record 34,100.

The research, by Experian, the global information services company, also revealed that those countries leading the push towards the Single European Currency ­ Germany, France, Italy, Luxembourg and Belgium ­ saw insolvencies rise during 1997, whereas the UK, Denmark and Sweden, which are refusing to join in the first wave, all saw insolvencies fall.

"Insolvencies in Germany rose by 8.4 per cent to 34,100 in 1997 ­ on top of a 55 per cent increase between 1993 and 1996", said Peter Brooker of Experian, "while in France the increase was 1.7 per cent to 66,000, the highest number in Europe. Between them, France and Germany accounted for virtually half all insolvencies in Europe. At the same time, the level of insolvencies in the UK has progressively fallen since 1993 from 58,982 to 40,200 in 1997."

The overall number of insolvencies across Europe (excluding Portugal, where no reporting structure exists) fell by 1.0 per cent to 207,810 in 1997 after a small increase 1996. The sharpest rise in insolvencies was in Luxembourg, up 20.5 per cent; the greatest decline was in Spain, down 18.2 per cent.

The research revealed a link between insolvency trends, capital investment, post-tax profit margins and business tax rates (see Table I). In those countries where tax rates are low and margins and investment are high, insolvencies have consistently fallen over the last four years. Where the opposite is true, insolvencies have risen.

"One of the countries that has been most successful in reducing insolvencies, The Netherlands, has undergone a complete overhaul of its economic policy, similar to that seen in the UK in the 1980s", said Peter Brooker. "This 'consensus' style has resulted in wage restraint, tax cuts, a reduction in social security contributions, a fall in unemployment and employment costs which are just two-thirds of those in Germany.

"Germany has the largest and most influential economy in the European Union and is a major export market for British companies. The level of insolvencies among its companies is a cause for concern among British exporters. New insolvency regulations in Germany, to be introduced shortly, will cause the number of insolvencies to rise further in 1998.

"Germany is also suffering from high unemployment, losing over half a million jobs last year through insolvencies alone, a 13 per cent increase on the previous year. British exporters need to be particularly careful to check how long their customers in Germany have been trading as public 'start-up' funds support companies during their first two years, with the result that over half the insolvencies in Germany are among companies that have been trading between two and four years."

Although insolvencies in the UK were just over 40,000 in 1997, the long-term trend in the UK has been downwards. The 1997 figure was down by almost a third on 1993, another illustration of the UK's improving economic performance compared with many of our European partners over that period (see Table II).

Along with Germany, France and Luxembourg, the other countries where company insolvency rose in 1997 were Belgium (5.4 per cent) and Italy (2.6 per cent). Although the number of insolvencies in Sweden has declined in every one of the last four years, the rate of insolvency in the country is running at almost the same as France ­ 334 per 10,000 companies. In Luxembourg, 313 in every 10,000 companies failed in 1997 and in Austria the rate was 271 per 10,000 companies.

"Over the next two years, it is not just the economic performance of our trading partners which will influence the level on insolvencies in each country", warned Peter Brooker.

"Small- and medium-sized companies will have difficulty in making the necessary adjustments for the Euro ­ and many more will find themselves unable to cope with the cost of preparing for the 'millennium timebomb' ­ all of which will result in a rise in the number of insolvencies across Europe over the next two years.

"The difficulties facing companies in Europe over the single currency and the millennium are simply adding to the risks inherent in trading with our European partners. In Britain as elsewhere, payment delays, bad debts and poor financing impact directly on company insolvency. In the UK, company managements need to become more aware of the value of rigorous credit management to reduce the financial risk of trading on credit with their customers.

"With the value of the pound so high, leading to reduced margins if companies are to remain competitive in international markets, the importance of exercising the same disciplines when dealing with overseas companies to avoid the financially weak and late payers is clearer than ever. Otherwise, we shall see insolvencies start to rise again in the UK, putting many people out of work."

For further press information please contact Peter Brooker, associate director, Press Relations, Experian, Talbot House, Talbot Street, Nottingham NGI 5HF. Tel: 0115 934 4548; Email: peter.brooker@experian.com