If the road to Hell is paved with good intentions, in economic terms the paving is done by zombies. We’ve all heard of the convention regarding Japanification. In desperation trying to avoid a worse fate, many of Japan’s tortured financial institutions were left open and operating so as to not force losses too much at a time. Rather than allow for recovery, these zombie banks locked Japan’s economy into its so-called deflationary mindset from which it has yet to escape almost three decades later.

Zombie banks were not the only undead firms in Japan’s lasting fall. These eventually gave way to a proliferation of zombie firms, largely industrial, who made up the vast majority of that country’s NPL problem lingering well into the 21st century. Firms that creative destruction would have destroyed long ago were purposefully propped up often on official approval simply because central bankers fear 1929 as if that is the only route to long-lasting depression.

Just as the global economy has exhibited the same symptoms as Japan’s did in the nineties, starting with one lost decade for it already, several OECD researchers last year raised the zombie issue in the non-financial context (at least with regard to Europe).

Policies that spur more efficient corporate restructuring can revive productivity growth by targeting three inter-related sources of labour productivity weakness: the survival of “zombie” firms (low productivity firms that would typically exit in a competitive market), capital misallocation and stalling technological diffusion…As the zombie firm problem may partly stem from bank forbearance, complementary reforms to insolvency regimes are essential to ensure that a more aggressive policy to resolve non-performing loans is effective.

In places like Italy where Italian banks are bursting with NPL’s, there is an obvious link between them and Italy’s descent into further upheaval.