A Case for EU-Wide Insolvency Reform to Boost Market Efficiency

Jun. 24, 2025

Europe’s fragmented insolvency laws are holding back creditor recoveries, enabling zombie firms to linger, and slowing progress on capital markets integration. SHoF’s Bo Becker says in a new European Systemic Risk Board report.

In the latest ASC Insight, Bo Becker (Stockholm School of Economics) and Martin Oehmke (London School of Economics) write that insolvency frameworks across the EU could be improved further through additional reforms, leading to better outcomes for insolvent firms and enhanced financial stability.

While several reforms have helped modernize national systems, the authors say fundamental weaknesses persist, especially when restructuring large, complex firms.

“Several large European firms have opted to use Chapter 11 of the US Bankruptcy Code to restructure instead of filing for bankruptcy in Europe,” the authors note, referencing recent high-profile cases including Scandinavian Airlines and Northvolt.

“In recent years, no large firm (with a complex balance sheet, intangible assets and multinational operations) has restructured under any of the European insolvency frameworks. This suggests that these are not (yet) fit to deal with complex restructurings.”

Zombie Firms and Fragmented Laws Weigh on Recovery

Becker and Oehmke highlight the economic costs of weak insolvency rules, including the rise of so-called “zombie” firms—non-viable businesses kept alive by bank lending that distorts competition and ties up productive resources.

“Zombie lending misallocates credit away from new firms and firms with growth opportunities towards old firms with existing bank debt,” they write.

Despite the EU’s 2019 directive on preventive restructuring and recent efforts to harmonize certain aspects of insolvency law, the report says key challenges remain: “Insufficient harmonization across countries, poor timing of restructuring processes and insufficient expertise in and around courts handling insolvency.”

The report also notes that the average EU score for resolving insolvency is 70.2 out of 100. This score is lower than the average for high-income OECD countries (74.9) or the scores for Japan (90), Norway (85.4) and the United States (90.5).

Proposal: An EU-Wide Opt-In Framework

To overcome political and legal barriers to full harmonization, the authors propose creating an EU-wide “opt-in” insolvency framework. This “28th regime” would operate alongside national systems and offer firms a predictable, court-supervised process for restructuring.

“Because the EU-wide opt-in insolvency framework would be created from scratch, it could be structured to specifically include the desirable features of efficient insolvency frameworks,” Becker and Oehmke say. These features include multi-entity procedures, cramdown mechanisms to overcome creditor holdouts, contract rejections, and protection of going-concern value.

The framework would target large firms and complex restructurings while allowing smaller firms or those well-served by national regimes to stay within domestic systems.

“An EU-wide insolvency framework that firms can opt into […] would allow firms that benefit from a uniform EU-wide system to reap those benefits, while still allowing others to remain under their current national frameworks,” the authors write.

Capital Markets Union at Stake

Becker and Oehmke tie their proposal directly to the EU’s long-standing ambition to build a stronger Capital Markets Union (CMU).

“Improved European insolvency frameworks would provide a boost for the CMU and help facilitate growth in EU bond markets, bank lending and non-bank private credit,” they write.

Without reform, they warn, Europe’s reliance on bank credit will limit investment capacity, concluding:

“Recessions, financial crises and periods of stress […] highlight the need for orderly, value-maximizing resolution systems.”