The End of the Balance Sheet Safety Net

A growing proportion of European companies are running out of financial headroom. After five years of cumulative shocks, permacrisis has become the new normal. Persistent inflation and high interest rates, ballooning energy prices, weak demand, competition from China, trade policy uncertainty—the headwinds are relentless.

Pressure has worsened measurably across the board, to the point where relying on the balance sheet as a buffer will no longer be an option. Restructuring pressure has grown around 40% since last year. In the past year, the number of sectors in Europe with transformation pressure above 25% has jumped from one to four. It’s a clear sign that the stress has spread beyond isolated cases.

For BCG’s fourth annual Transform and Special Situations (TSS) Index, we analyzed 1,700 publicly held European companies, identifying the industries and the regions most at risk based on their financial state and exposure to macroeconomic risk. (See the sidebar, “About the Study.”) As macroeconomic pressures persist and balance sheet flexibility declines, the cost of inaction grows. The need for preemptive transformation is more urgent than ever.

In this article, we present our key findings and recommend seven critical actions that C-suite leaders can take to reduce stress and preserve their company’s financial resilience over the long term.

The Big Picture

Overall, macroeconomic indicators have stabilized in 2026 but remain weaker than before COVID. Company financials have gotten progressively worse.

The share of companies under financial strain—those needing to transform—has risen substantially since last year. Stress is particularly visible in the DACH countries (Germany, Austria, and Switzerland), France, and Iberia (Spain and Portugal).

Company leverage levels throughout Europe are historically high. Bankruptcies rose 9% year to date in 2026, up 39% versus their pre-COVID level. Current company financials suggest that the situation is not likely to improve in the near term.

Our TSS Index indicates that 16% of total company revenues throughout Western Europe are under pressure, the equivalent of 1 out of 6 companies. That’s up from 14% last year. Of that 16%, around 7% are under severe duress—or restructuring pressure—up from 5%.

Although macro conditions are stabilizing, they are doing so at levels weaker than those pre-COVID. Inflation is hovering at historical levels. Interest rates have stabilized but remain elevated, energy prices are now at an all-time high continent-wide, and GDP growth slid back to 2024 levels.

Persistent macroeconomic uncertainty and geopolitical volatility—in particular, the Middle East conflict, the ongoing war in Ukraine, and trade and tariff uncertainty—continue to disrupt energy flows and supply chains more broadly.

Business confidence, although rising slowly, remains below long-term levels, according to the OECD. Financing costs are still above pre-2022 levels. Since we introduced the TSS Index in 2023, net debt/EBITDA levels have grown 22%. Of the companies we surveyed, 31% began 2026 with ratios above 3 (the threshold for stress); of which roughly one-third had a ratio above 5. Resilience is clearly eroding.

The Countries Most at Risk

Across Europe three regions have experienced sharp increases in pressure: the DACH countries, Iberia, and France. (See Exhibit 1.)

In the DACH region, restructuring risk is high: 20% of consumer companies are affected. Automotive companies saw a 16-percentage-point increase over 2025 and materials companies were up 14 percentage points. In Iberia, energy and industrials were largely responsible for the increase in transformation pressure this year: energy, with a 33-percentage-point increase, and industrials, with a 7-percentage-point increase. And while overall pressure in TMT barely changed from 2025, the sector topped the list of those under the greatest total stress (67% of companies). In France, the automotive and energy sectors experienced heightened restructuring pressure over the past year, up 36 and 20 percentage points, respectively.

In the Nordic countries (Denmark, Finland, Norway, and Sweden), the picture was somewhat mixed. Transformation pressure in the energy, TMT, and professional services sectors eased considerably, but automotive companies experienced a significant spike in restructuring risk (a 53-percentage-point increase). Finland and Norway showed signs of recovery overall, with certain sectors in Finland countering the trend.

Italy and the UK were stable, with isolated exceptions; for example, the consumer sector in the UK saw a 12-percentage-point increase in transformation pressure in the past year.

The Sectors Most Under Pressure

Real estate suffered the greatest increase in pressure throughout the continent. Some 62% of real estate companies are now under transformation pressure, a 50-percentage-point rise since 2025. Continued economic uncertainty and long-term rates suppressed commercial investment, weighing on valuations and constraining refinancing and transaction activity. For retail buyers, affordability (exacerbated by a shrinking supply and persistently higher interest rates) worsened.

Across a number of sectors, we found double-digit increases in the share of companies under restructuring pressure. In automotive, 28% face restructuring pressure, as the sector remains hamstrung by weak demand and overcapacity, EV transition costs, and heightened competition from China. Some 20% of media and publishing companies are also under restructuring pressure as audiences and advertising shift to platforms, video formats, creators, and AI-mediated discovery. (See Exhibit 2.)

Sectors experiencing structural disruption, along with sluggish demand and constrained financing, are feeling growing pressure. In addition to those mentioned above, chemicals, apparel, and transportation are being squeezed. The chemicals sector continues to be plagued by weak industrial demand, overcapacity, and high energy costs. Transportation suffers from disruption at chokepoints, rerouting, and congestion, which together exacerbate volatility in freight costs and increase planning uncertainty. (See Exhibit 3.)

Finally, size matters: the smaller the company, the greater the restructuring risk. Companies with under $5 billion in revenue face twice as much restructuring pressure as those with more than $5 billion in revenues. Weaker margins, a reduced ability to absorb fixed costs, and more limited access to reasonably priced refinancing give smaller companies less latitude to weather prolonged macroeconomic and demand shocks.

Weathering the Storm: Seven Essential Actions

Despite the overall financial weakness, CEOs and CFOs across sectors continue to focus on top-line levers like M&A, market opportunities, and growing revenues as our AI-powered analysis of earnings calls reveals. Some consider cost cutting the key to resilience. There are also growing calls for innovation and financial resilience—but in our view, not enough.

Companies under pressure should revisit their financial practices, many of which are holdovers from a zero-rate environment. For example, for cash control, management would be wise to take a short-term (quarterly) liquidity view and monitor weekly. Cash and margin discipline is now more important than volume growth. Over-leveraged businesses that remain viable ought to evaluate their restructuring readiness while they still have latitude.

The following seven practical actions can preserve strategic flexibility and position organizations to outperform in today’s tougher operating environment.

• Strengthen your revenue footprint. Proactively build tariff-resilient revenues by revamping pricing, adapting products, and shifting market focus wherever possible.
• Pressure-test your cost base. Identify three to five high-impact levers (for example, digitizing and automating processes and streamlining sourcing) to protect margins before volatility intensifies.
• Make innovation a strategic engine. Focus investments where innovation (including AI) will drive measurable results; it must fuel core growth, competitiveness, and productivity.
• Make supply chains shockproof. Diversify suppliers across regions to reduce exposure to tariffs, disruptions, and political risk.
• Turn working capital into a liquidity engine. Free up trapped cash; it’s your lowest-cost funding lever in today’s environment.
• Rewire your balance sheet for agility. High funding costs and volatility require leaner, smarter capital structures. Test debt-service capacity against current refinancing costs.
• Turn volatility into opportunity. Instability is unleashing new demand and M&A opportunities. Act fast to capture the advantage.

Finally, keep stakeholders posted as appropriate and before a covenant breach or liquidity event. Maintaining credibility preserves options; once compromised, it is harder to win back.
Above all, in the era of permacrisis, CEOs need to act before stress becomes distress. Through early, disciplined action, they can strengthen performance, bolster liquidity, and reinforce balance sheet resilience before lenders, suppliers, or sheer liquidity constraints determine the course of action.