Bundesbank’s “Camp” to slow down business dynamics in the euro area – Productivity Key

‘ Counting the percentages of new and closed companies, their potential in the euro area has declined significantly over the last 20 years”, according to the latest monthly report of the German central bank ( ). At the same time, the overall increase in economic productivity has slowed. The authors of the Bundesbank report assume that these developments are interrelated. Imports and exits from the market are important for the efficient distribution of inputs and therefore for productivity: when new firms enter the market, competition increases and increases pressure on competitors to innovate. As a result, less profitable companies leave the market and new companies gain access to productive resources and sales markets. A particular challenge of analysis lies in the difficult situation of data. In addition to conceptual changes in data collection, data gaps prevent the analysis of corporate dynamism in the eurozone. Nevertheless, it can be shown that the slowdown of corporate dynamism has a broad regional basis. A fairly uniform picture also emerges at economic level. Possible reasons for deceleration: circular factors According to experts, the dynamics of the establishment and closure of businesses depend on various factors. On the one hand, there are circular factors such as the economic situation: in growth phases, more companies are usually established, while in recession phases, more companies tend to close. According to the study, increased uncertainty in times of crisis can also be a permanent mound in newly established enterprises. This could explain why the rate of entry into the euro area market remained so low in the years following the global financial and economic crisis and the subsequent European public debt crisis. “The reactions of policy to macroeconomic developments can also have an impact on the dynamics of companies,” writes the authors of the Bundesbank report. For example, the German government’s programme to stabilise the economy during the coronavirus pandemic reduced the possibility of companies leaving the market. Possible reasons for slowing down: Structural factors However, according to the study, alongside the cyclical factors structural factors also play a role, as the rates of establishment and cessation of work were already declining before the global financial and economic crisis. A possible cause could be demographic change, according to the Bundesbank. With ageing the population, labour supply is declining. There is also evidence that innovative activity and willingness to take risks tend to decrease by increasing age, experts write. “However, these factors play a key role in establishing companies”. A functioning legal system and effective administration are also important framework conditions for business activity. For example, insufficient protection of intellectual property, corruption or high administrative burden have a negative impact on the establishment of businesses. The Bundesbank sees the need for reform to stimulate business dynamism Writers see opportunities for reform at European level, but above all at national level. For example, policy measures aimed at improving the institutional and regulatory framework could contribute to a sustainable increase in corporate dynamism and thus to strengthening productivity growth. The Bundesbank experts also stress the importance of a dynamic corporate landscape for the digital and ecological transformation of the European economy: ‘In order to exploit the potential of digitisation, it is necessary to facilitate the access of young and innovative enterprises to sales and production markets’, is stated in the study. The transition to a low-emission economy also requires a dynamic market environment.