Paying Debt All the Way into a Recession
November 22, 2002
Germany’s weak economic growth has driven a record number of companies to the wall over the last year. The Hamburg-based Federal Association of Debt Collection Agencies estimates that 41,500 companies will go bankrupt this year, an increase of one third over 2001.
Speaking at a press conference in Berlin on Thursday, the association’s chairman, Dieter Plambeck, said that the bankruptcies could cost the German economy as much 50 billion euros - also a new record. He also said as many as 650,000 jobs could be lost as a result.
The announcement is more bad news in a Germany where high public debt and sluggish economic growth dominate daily headlines.
Can't pay, won't pay
The failure to settle bills promptly is a major cause of the current rash of bankruptcies. Faced with a shortage of cash, many companies decide to delay payment of bills, which in turn harms other companies. More than half of the businesses in Germany are currently having financial problems, most of them due to payment delays.
"The worst hit are small and medium-sized companies with up to five employees," says Plambeck. "They make up half of the bankruptcies. The big names - Kirch, Babcock, Holzmann - aren’t as important as they’re made out to be in the media. But small companies die quietly and have next to no lobby."
Private debt also a big issue
The problem is not just limited to businesses. An estimated two million households are currently financially overstretched, and some 800,000 people have declared themselves bankrupt so far this year - 30,000 of them will end up in court.
Plambeck believes the state should teach its citizens how to manage their financial affairs. "We want to see personal finances and the consequences of indebtedness on school and college curricula. The vicious circle of rising private debt, reluctance to pay and more and more business going bust has to be broken."
But, with the average German household almost 40,000 euros in the red and the economy slipping into recession, the trend shows no sign of abating any time soon.