Geopolitical turbulence puts Europe’s businesses under strain as earnings drop
Deteriorating earnings are the key driver of financial distress, according to a new study from Alvarez & Marsal. With conflicts around the Strait of Hormuz compounding pressures, France and Germany see highest levels of distress, but the UK is also seeing a rise in the number of companies reporting a deterioration in earnings.
The bi-annual Alvarez & Marsal Distress Alert assesses the financial performance and balance sheet robustness of more than 15,000 companies across Europe and the Middle East. The latest edition, which looks at the most recent financial reporting for full-year 2025, finds that corporate distress levels in Europe and the Middle East have risen to 9.2% of companies, an 18.4% increase on the previous three years and a four-year high.
Nearly all regions and sectors saw distress levels rise, suggesting distress is becoming more systemic. Deteriorating earnings is the most significant driver of rising distress, with nearly 15% of companies experiencing weakening performance. This reflects increasing pressure on revenue growth, profitability and cash generation, with geopolitical instability and energy market volatility adding to cost burdens for businesses already operating on thin margins.
France ranks as the market with the highest levels of corporate distress, up 30% YoY to 12.4% - the largest increase of any country. Over one third (38%) of firms lack balance sheet robustness as subdued GDP growth, deteriorating business and consumer sentiment and ongoing political uncertainty continue to weigh heavily on corporate financial health.
Despite the data stabilising at 14.8%, Germany remains the market with the second highest levels of corporate distress in Europe, with 29.7% of companies lacking balance sheet robustness, highlighting underlying fragility.
In the UK, levels of corporate distress have risen to 8.2%, up from 7.5% the year before. The proportion of UK companies experiencing deteriorating earnings has jumped to 14.4% from 13.4% YoY, while a quarter of companies (25.8%) lack sufficient balance sheet robustness.
Chris Johnston, managing director for European restructuring at Alvarez & Marsal, commented, “Balance sheet fragility remains elevated across the UK. Together with rising corporate distress and deteriorating earnings performance, this points to persistent financial strain, leaving businesses with limited headroom to absorb higher costs and softer demand - particularly in sectors exposed to discretionary spending and international supply chains.”
The news comes as Kroll research confirms that the UK has seen a year-on-year spike on administration procedures. A total of 649 companies entered administration between January and June 2026, marking a 6% increase from the same period in 2025, reflecting continued pressure in key sectors, despite monthly figures remaining below pre-pandemic levels.
