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There is overblown alarm about a possible wave of insolvencies engulfing the European economy as governments taper aid for firms, Bank of France Governor Francois Villeroy de Galhau said.

The number of insolvencies has been around 40% below normal since the pandemic struck Europe, making it difficult for courts to operate normally and prompting governments to provide blanket support to companies.

Going Broke

The number of bankruptcies in Europe is rising after a lull during lockdowns

Source: Eurostat

Note: 2015 = 100

“A catch-up effect in the coming period would not signify an economic breakdown, but a return to a more natural tempo,” Villeroy said in a speech at a European Investment Bank conference.

Nothing points to a jump in insolvencies beyond the catch-up from 2020, Villeroy said, citing surveys of firms’ cash positions and the absence of an increase in the use of credit mediation and restructuring mechanisms.

Still, the Bank of France governor said that to catch up a growth deficit with the U.S., Europe needs to do more to embrace Joseph Schumpeter’s ideas of creative destruction, in addition to the Keynesian economic policies used to combat the crisis. In that respect, the current EU and French recovery plans are correct to target investment in digital and green transitions, said Villeroy, who also is a member of the European Central Bank’s Governing Council.

“There needs to be a sufficiently selective approach to help the recovery: support from public authorities to build back better must not seek at call costs to preserve the yesterday’s world,” Villeroy said.