1The concept of inter-firm credit (IFC) covers a diversity of practices, such as trade credit, intra-group loans, “partner” credit (or “back-to-back” borrowing). This book deals primarily with two practices¹:

• trade credit, which is credit relating to an exchange of goods or services. This exchange may take place before the credit is granted, as in the case of credit periods granted to customers or obtained from suppliers, or after, as in the case of prepayments from customers or to suppliers.²

• Intra-group financing, or intercompany loans, is a form of credit related to financial rather than business relations between two firms. Unlike credit periods for customers and from suppliers, this form of credit results in financial flows, as do prepayments. These may be direct flows from one firm to another or flows that are transmitted through a subsidiary acting as the group’s cash manager and banker.³ Both types of credit may be used together and affect one another.⁴ However, it is sometimes hard to distinguish between them in corporate accounts if they appear at all, which makes comparisons between countries difficult.⁵

2There are hybrid solutions between these two types of credit that may put firms in situations of virtual consolidation, such as subcontracting agreements, brewery agreements and distributorship agreements as in the petroleum industry.

3In the first section we analyse the functions of IFC. The second section explores the differences in the importance of IFC in European Union countries and the third section puts forward a new hypothesis based on sellers’ needs to ensure payment rather than buyers’ financing needs.

4Our study focuses primarily on manufacturing firms in the period from 1980 to 2000. The reasons for choosing this period relate to sources, with the creation of BACH⁶, the first large harmonised statistical database on firms’ financial structures, and to the method used. European Regulations introduced after 2000 aimed to remedy the disadvantages suffered by certain firms, such as SMEs and subcontractors, by ensuring more uniform inter-firm payments practices.

IFC functions

Financing function

5Trade credit and intra-group financing could be seen as a joint response to flaws in the financial system that make access to credit difficult or expensive for some or all firms. These flaws relate to legal rules or the inability of jurisdictions to protect creditors and they squeeze the firms most exposed to asymmetrical information and monitoring problems out of financing circuits. These firms need to rely on others, who as “insiders”, such as suppliers or shareholders, have advantages in terms of inside information, contract fulfilment, pricing and sales of goods and agency relationships.

6In the case of trade credit, the hypothesis that suppliers are substitutes for banks, when the latter cannot provide loans, is substantiated by the characteristics of net lenders and net borrowers. Net lenders are sounder financially, more solvent and better connected to banking circuits than net borrowers. By granting credit periods to their customers, net lenders act as “financial intermediaries”, redistributing the credit granted to them by their suppliers and by financial institutions to their customers.⁷

7Intra-group financing can be seen in the same light. Business groups are widely used in Europe to organize and develop firms. To varying degrees and depending on the organisation types and strategies chosen, groups create internal factor markets for transactions that would not have taken place without the creation of the group.⁸ Internal capital markets are at the very core of this type of analysis, even though their efficiency may be disputed.⁹ The resources available to parent firms, especially in groups with pyramid structures, make them natural lenders for affiliated firms. The role of internal capital markets in many countries can be seen in the size of transfers between subsidiaries within the same group¹⁰, the higher gearing of subsidiaries compared to independent firms, and the relatively low level of debt owed to creditors outside the group.¹¹

Business motivations

8Regardless of the form its takes, however, IFC fulfils more than just a financial function. Firms use IFC to reduce transaction costs through better synchronisation of sales with payments and smaller precautionary balances.¹² From the lending firms’ point of view, IFC is a tool for business development. This can be seen in the amount of trade credit in highly competitive markets¹³, or when the quality of the seller or the quality of the product is uncertain.¹⁴ Trade credit can also be used to regulate demand¹⁵, especially when demand is highly volatile.¹⁶ As suggested by the link between firms’ gross profit margins and their accounts receivable, trade credit can also be used as a means of price discrimination.¹⁷

9Meanwhile, intra-group financing is one financial arrangement that groups can use to expand their business without separating ownership from control. More specifically, in continental Europe after the 1980s and the 1990s credit became an instrument for governance of pyramid groups by the majority shareholder, be it a family, bank or government.¹⁸ Furthermore, in some cases, by escaping the oversight of financial markets and institutions, intragroup financing made it possible to use transfer pricing to divert subsidiaries’ cash flow to the majority shareholder.¹⁹

A means of coordination

10IFC may also be seen as a means of coordination. This is obvious when intra-group financing follows the pattern of pre-existing ownership links. However, Japan’s Keiretsu show that both trade credit and intra-group financing are means of strengthening group cohesion by increasing internal surveillance of subsidiaries.²⁰

11The question is whether trade credit can be a partial substitute for ownership links. There are many indications, such as suppliers’ tendency to lend to unprofitable, but rapidly growing firms, that trade credit is often used to build long-term relationships with customers or suppliers.²¹ This link works both ways. On the one hand, longstanding business relationships facilitate the granting of trade credit.²² On the other hand, credit may be the starting point of lasting business relationships that could influence the firm’s business policy.²³

12The scale of IFC between firms that are very dependent on each other for their business suggests that this link between IFC and long-term relationships can be seen as an implicit equity interest. This is the case for firms that are the sole supplier or customer for the other firm, suppliers of differentiated or custom-made goods and producers of highly sophisticated goods that are in the habit of coope­rating with their customers. In any case, the lack of an alternative supplier or customer encourages credit relationships by both reducing the alternative-use value of the goods and by increasing the cost of replacing the supplier or customer. It also facilitates credit by creating a mutual interest in the long-term survival of the supplier or the customer. This aspect of IFC is not restricted to cases where firms are in mutual positions of “virtual consolidation”.²⁴ IFC is a form of relationship contract, which means it reinforces the interpersonal or inter-organisational aspect of business compared to the transactional.²⁵ In this capacity, IFC can be seen as one of the means firms can use to reduce uncertainty in their operating environment.

13This role merely extends a longstanding practice that makes trade credit a factor for shaping markets and corporate organisation. In 18^th century Europe, trade credit was not only a major source of profit for economic agents; it was also the medium for powerful specialised credit networks that enabled their most prominent members to dominate local markets.²⁶ With industrialisation in the 19^th century, trade credit sometimes resulted in partnerships that enabled firms to control a segment of an industry without having to bear all of the risks and organisational costs.²⁷ As markets grow and production is integrated, trade credit becomes one of several different types of contract available to firms, in addition to time-and-materials contracts, toll processing contracts and others, to avoid the alternative of commercial contracts and contracts of employment (e.g. textile subcontractors controlling their principal through credit periods and advances).²⁸

IFC in Europe

14The two main types of IFC in Europe followed very different trends at the end of the 20^th century, with a decline in trade credit and an increase in intra-group financing (Figures 1 and 2).

15The decline in trade credit was sharper on the assets side of firms’ balance sheets (credit to customers) than on the liabilities side (credit from suppliers). This signals a decline in the intermediation function of non-financial corporations in Europe, even though the balance of customer credit net of supplier credit is still positive. It also signals a decline in trade credit as a percentage of business financing, as shown by a smaller ratio of the trade credit balance to revenue. This trend is particularly marked in the Mediterranean countries. On the other hand, the balance of intra-group financing fluctuated more over time and from place to place. In general, it was positive, with firms being net lenders in aggregate, as is the case for trade credit, but it occasionally turned negative.

16In addition to differing trends, there are major differences in the geographical distribution of credit (Figures 1 and 2). Trade credit²⁹, whether measured in balance sheet terms or as a share of firms’ purchases and sales, is a major source of financing throughout the Mediterranean countries, including France,³⁰ as well as in Poland and Czechoslovakia in Europe and, beyond Europe, in Japan. Much less use is made of trade credit in the Germanic and Nordic countries (Figures 3, 4 and 5), with use in the Netherlands and the United Kingdom somewhere in the middle. The same differences are present in the trade credit balance (customers net of suppliers): the greater the amount of credit, the larger the balance.

17Intra-group financing is less well known, but it is most widely used in Germanic countries, as well as in France. Even though groups have a strong presence in Mediterranean countries³¹, intra-group financing is a major factor in Spain only, and only in the case of very large businesses. Furthermore, the intra-group financing balance is always negative in Spain, which illustrates the relatively large financing needs of major Spanish firms. This is an exception, since SMEs have the greatest need for intra-group financing in our survey population. This often leads to negative balances for SMEs in France, Germany and Austria. Large firms, on the other hand, are net lenders to their subsidiaries.

Figure 1 (1^st graphic). Trade credit in Europe (1986-1996)³². Trade creditors as a % of total assets

Figure 1 (2^nd graphic). Trade credit in Europe (1986-1996). Trade debtors as a % of total assets

Figure 1 (3^rd graphic). Trade credit in Europe (1986-1996). Trade credit balance (debtors-creditors) as a % of total assets

Figure 2 (1^st graphics). Intra-group financing in Europe (1986‑1996). Intra‑group borrowing as a % of total assets

Figure 2 (2^nd graphics). Intra-group financing in Europe (1986‑1996). Intra‑group lending as a % of total assets

Figure 2 (3^rd  graphics). Intra-group financing in Europe (1986‑1996). Intra‑group financing balance (assets-liabilities) as a % of total assets

The role of legal factors and financial systems

18The diversity of factors underlying the use of IFC makes explaining the different levels of use observed in Europe a delicate exercise. We will start with a highly stylised analysis of the financial function of trade credit, which is the object of most research.

19Trade credit is a function of parameters that are the same across all countries. The main parameters are business sector, since payment terms and balances decrease as we move from upstream sectors toward downstream sectors, and the length of the production cycle, which is related to the previous parameter, but offset by prepayments in some sectors with very long cycles, such as capital goods. How can we explain the fact that payment cycles are so different when the parameters of sector, as well as firm size, are similar and the production cycle is the same?

20Legal factors are of prime importance.³³ Regardless of the criteria used to determine the effectiveness of the legal system ‒ either the government’s capacity to enforce ownership rights (Law and Order approach³⁴) or the creditor rights indicator (Creditor Rights approach³⁵) – most of the studies show a strong geographical link between the level of IFC and the protection of secured creditors. This protection depends on the features of the main legal systems. In continental Europe, the countries where trade credit is most widely used, meaning countries with the longest credit periods, are generally those where secured creditors have weak legal protection which forces buyers to request payment terms from their suppliers. These are the Mediterranean countries that have inherited the tradition of France’s Napoleonic Code, and Belgium. Countries that have inherited the German Civil Code tradition (Germany, Austria, Switzerland) or Scandinavian civil law (Sweden, Norway, Finland) provide creditors with protection that is similar to that afforded by Common Law, but with better enforcement. The use of trade credit is relatively low in these countries, as is the case in the United Kingdom. This seems to verify the canonical model described above: in these countries, suppliers’ advantage over banks as financial intermediaries better able to know and monitor their customers and obtain higher value from collateral is less crucial than in Mediterranean countries³⁶.

21However, when measured as a share of firms’ short-term debt, rather than as a proportion of the overall balance sheet or as a share of their sales and purchases, the level of trade credit expressed as the ratio of trade payables to short-term bank borrowing is higher in the Common Law countries than in the other countries. These firms rely little on IFC for their transactions, but they are more reliant on it for short-term financing. This paradox stems from the fact that banks in these countries still play an even smaller role in financing business transactions than suppliers do. Highly developed financial systems mean that firms are generally less reliant on short-term financing³⁷.

22This is why a study of the role legal factors play is usually supplemented by a study of the banking system, which may act as either a complement or a substitute for IFC.³⁸ But the banks’ role is most commonly considered solely on the basis of their share of the economy, which is positively correlated to the level of IFC. Moreover their role is seen merely as a product of the legal system in which they operate, which is a debatable conclusion. In Germany and the United Kingdom, the major banks founded in the last third of the 19^th century made a major contribution to the decline of IFC. At the major firms’ own request, these banks stopped discounting bills submitted by suppliers and started providing credit to buyers. Meanwhile, in France, banks had to rely on discounting commercial paper for a long time in order to develop their business, thereby consolidating the role of IFC.³⁹

Trade creditor rights: contractual credit periods and overdue payment practices

23The analyses that explain the level of IFC by the weak legal protection for creditors need to be more specific. At best, these analyses consider the rights of secured creditors and ignore the specific rights attaching to trade claims. Furthermore, to a degree not seen in bank credit, credit from suppliers depends not only on the willingness of the creditor to lend, it also depends on the willingness of the debtor to repay on time. Weak legal protection may deter suppliers from lending and encourage buyers to delay repayment.

Trade creditor rights

24Combined with the legal protection criteria mentioned above, the European Commission’s scoreboard maintained since the 1990s on reducing late payments in Europe shows the inverse relationship between trade credit use and creditor rights. Use is high where rights are weak, as in Mediterranean Europe, and low where rights are strong, as in Nordic and Germanic countries.

25For example, prior to 1990, Germanic and Nordic countries had the best payment practices, with very short credit periods. This is because the laws, such as statutory credit periods in Norway and Sweden⁴⁰, protect trade creditors and there are specific sanctions for delinquent debts, such as a statutory right to penalty interest on overdue payments, alignment of penalty interest rates on bank lending rates and a right to recover collection costs. These rights come on top of legal provisions to protect creditors, such as an effective order for payment in Germany and the reservation of title clause, which gives the supplier the right to seize the goods sold, even if they have been processed or resold, until full payment is received. The protection enjoyed by suppliers is an incentive for buyers to pay. Trade creditors in Mediterranean countries do not enjoy the same treatment. France’s Napoleonic Code does not make a distinction between ownership and possession: transfer of title can be achieved by means of a simple agreement. A provision similar to a title retention clause was not introduced in France until much later, in 1980, and it is less comprehensive.⁴¹ Furthermore, in cases of insolvency, creditor rights are “frozen” to prevent premature destruction of the firm’s assets. The priority is not on protecting creditors, but on saving businesses for the purposes of economic and employment policies.⁴²

26In the United Kingdom and Ireland matters are more complex, because the rights of secured creditors are very robust. However, the rights of trade creditors have been somewhat weaker, with lack of a statutory penalty interest rate for overdue payments until 1997, except in the case of disputes referred to a court or where they are written into contracts. Consequently, only 24% of firms in the United Kingdom claim penalty interest, compared to 53% in Europe and 94% in Sweden. The relatively weaker protection for trade creditors, combined with strong protection of secured creditors, may explain the relatively low level of use of trade credit in the United Kingdom.

Contractual credit periods and actual payment periods

27However, weak protection also makes the seller-creditor vulnerable to opportunistic bad payers. Considering late payments, rather than contractual credit periods, makes it possible to ascertain the other impact that laws have on the use of IFC. In Europe, the number of days of late payments accounted for an average of 28% of the number of days in actual payment periods in 1996, 15 days overdue for 54 days of actual payment periods. This proportion varies depending on the market, the firm and the country. In France, for example, sub-contracting SMEs suffer the most from late payments. The geographical distribution of overdue payments is much harder to discern than that of payment periods. Portugal has the highest proportion, with days payments are overdue accounting for 45% of actual payment periods, and Spain has the lowest, with 8%. The Netherlands (41%), the United Kingdom (37%) and Ireland lag behind most of the Mediterranean countries.⁴³ The United Kingdom is regularly the country with the lowest proportion of firms making their payments on time. This proportion stands at 25%, compared to 63% in Germany, 43% in Italy and 32% in France. Overdue payments mean that the geographical distribution of actual payment periods is quite different from that of contractual credit periods. In Nordic and Germanic countries, the small proportion of overdue payments, combined with short contractual credit periods, limits the length of actual payment periods. In contrast, the large proportion of overdue payments in Mediterranean countries other than Spain, combined with long contractual credit periods, increases the length of actual payment periods. In English-speaking countries and in the Netherlands, overdue payments partially cancel out the expected effects of relatively short contractual credit periods (Figure 3).

Figure 3. Payment periods in Europe. Actual deadlines and contractual payment deadlines in 1996 (number of days)

28Analysis of the reasons for these late payments reveals the respective roles of constraints and strategic gamesmanship. In the Mediterranean countries, creditors are more likely to cite debtors’ financial problems as one of the causes for overdue payments. On the other hand, survey respondents are more likely to see late payments as intentional in the English-speaking and Germanic countries, with 54% respondents in the United Kingdom, 53% in Germany, 49% in Belgium and an average of 35% in Europe.⁴⁴ Poor trade creditor protection in the English-speaking countries means that debtors are more likely to engage in dilatory practices. This is “a situation which tends to encourage debtors to develop a business strategy of intentional late payment.”

29More generally the role of late payments as an “advantageous” means of obtaining financing concerns most of the Member States, which have burdensome collection procedures, concentrated distribution sectors and low penalty interest rates.

“Even when compared to commercial rates on negotiated bank overdrafts, the interest rate on late payments is low in Belgium, Germany, Spain, Italy, the Netherlands and Austria.”⁴⁵

30The rare use of cash discounts as an incentive for shortening payment periods underscores the financial advantage of delaying payments. Two-part terms contracts, offering a discount of 2% to 3% for payments before the net term, are used throughout Europe. Despite the cost advantage of such terms⁴⁶, they are less frequently used than net terms contract, which set a hard deadline for payment without any apparent interest. The rare use of two-part terms shows that they are ineffective if the debtor knows that it can count on its economic clout and lax legislation to delay payments. In Italy, for example, nearly 100% of transactions are made on credit and only 6.8% of suppliers offer cash discounts, as is the case in the other Mediterranean countries. Cash discounts have no impact on domestic payment periods in Italy; they only affect export sales, which have shorter credit periods. Italian institutions as a whole favour long credit periods, which are customary and do not involve effective penalties for overdue payments.⁴⁷ The relatively weak advantage of a cash discount versus intentional payment delays by large buying firms can be found in all countries with lax legislation. In the United Kingdom, where 82% of firms report making more than 80% of their purchases on credit, the usual payment term is also the “net term” of 30 days. Only 17.5% of firms offer discounts for early payments and only 20% of firms claim the discount.⁴⁸ The main beneficiaries of this system are large firms that are always the slowest to pay. Cash discounts are only effective for shortening payment periods in countries like Germany⁴⁹, where creditors enjoy robust rights. This effectiveness explains the widespread use of cash discounts in Germany and the reliance on bank overdrafts to finance payments.

31However contract clauses, rather than overdue payments, account for 72% of the actual credit periods (Figure 3). If credit periods are longer in Southern Europe than they are in Northern Europe, it is primarily because the contractual periods are longer in the south. It cannot be shown that trade creditors’ greater tendency to lend when their legal protection is weak is understandable if they enjoy other protection, such as more effective debt collection agencies.⁵⁰ Alternatively, we could ask about the non-financial functions of IFC and turn the question around: perhaps IFC is not the problem, but the solution to another problem.

The Mediterranean problem: more a problem of ensuring payments rather than a problem of financing buyers

32There have been many explanations for the large-scale use of IFC in Mediterranean countries, including religious reasons. Bills of exchange were invented in Italy in the twelfth century. They are inter-firm trade credit instruments that made it possible to reconcile traders’ needs with the Church’s ban on interest. Very early on, it was recognised that exchange risk justified interest payments and bills of exchange facilitated their dissimulation.⁵¹ Therefore, it is claimed, this practice persisted in Mediterranean Europe, while the Protestant schism in the sixteenth century unleashed lending with interest by banks and others in Northern Europe.⁵²

33Our hypothesis is different. We must look at inter-firm trade credit as more than just financing for buyers; it must also be considered for the guarantee that it provides to sellers that sales will be successfully completed. With weak legal protections, suppliers “lend” to their customers to ensure that their trade claims will be paid. The repayment guarantee, which was originally provided by a bill of exchange, can also be found in the long-term relationship established by payment terms. Our hypothesis rests first of all on the very weakness of the protection for sellers/creditors analysed above. The weakness of legal protection for sellers in Mediterranean countries, which probably stems from the Corpus Juris Civilis (Justinian code) applied in Europe since the thirteenth century, is in sharp contrast to the strong protection for creditors in Germanic countries. Our hypothesis also rests on the degree of risk incurred in transactions in Mediterranean Europe.

34Demonstration of our hypothesis is a delicate matter because of risk measurement difficulties, lack of historical IFC data from before the 1970s and the lack of a detailed map of IFC use at regional level. The point of these measurements is to distinguish between institutionalist explanations and “cultural” explanations (relating to anthropological and political factors). In Italy, for example, it would take a regional survey to reveal whether the use of IFC stems from failings that are generally found only in the southern Mezzogiorno region⁵³ (including the inability to cooperate outside of the family circle⁵⁴, weak social capital⁵⁵, and the conflicts and rent-seeking found in societies with weak governments and limited access to economic and political opportunities⁵⁶), or whether it stems from the failings of all national institutions.⁵⁷ The same question arises for France. The exceptionally long payment periods observed on a like-for-like basis in some regions, such as Corsica, compared to Western France and Alsace-Lorraine⁵⁸, suggests the influence of anthropological or political factors that are likely to cause differences in business practices within the same official institutional framework.

35Analysing practices at the national level reveals two major sources of risk.

Governments

36Governments in Mediterranean countries are noted for their own long payment periods and a higher degree of corruption than other areas of Europe.

37Nearly everywhere in Europe, the payment periods of central and local government bodies are longer than those in the private sector, but the correlation between the two is strong: wherever central and local governments pay their suppliers promptly, firms also pay their own suppliers promptly (Germanic, Nordic and English-speaking countries); wherever governments are slow to pay, firms are also slow (Mediterranean countries, including France and Belgium) (Figure 4). The long government payment periods are due to both contractual credit periods and overdue payments. Given the scale of government consumption, we can conceive that there is a direct and mechanical link between payment periods in the public and private sector. We can also conceive that central government sets the example for the behaviour of firms, or that there is a degree of collective indifference about time and rules.

Figure 4. Actual payment periods (numbers of days) by type of customer (2017)

38The length of government payment periods on its own is enough to explain the use of IFC in Mediterranean countries. When these long payment periods are combined with a high level of corruption in the same governments, we think they should also be incorporated into a broader explanation based on high risk levels in the Western Mediterranean countries.

Figure 5. Integrity Index and European Payment Risk Index (2016)⁵⁹

Private sector

39Government corruption is worse in Mediterranean countries (Figure 5) and it is bound to affect behaviour in the private sector. This behaviour can be captured indirectly. Intrum Justitia has measured firms’ overall payment risk perceptions since 2015 (see note to Figure 5). Once again, the highest risk is in the Mediterranean countries.

40This perception stems from an old image of the Mediterranean area as an area of high risk. Genoese merchants and notaries developed the concept of risk at the end of the twelfth century.⁶⁰ This concept was long associated with seafaring and the many dangers involved, from very material risks of piracy and shipwrecks to business risks, such as losses incurred on loans, foreign exchange and sales.⁶¹ The players’ behaviour, which is influenced by environment and operating risks, has often been described as speculative and opportunistic, as in Genoa and Marseilles. This exacerbated risks. Credit relies on trust, which makes it very susceptible to such a climate. This can be seen in the protesting of many bills of exchange in Mediterranean France (as at the end of the 18^th century or in the early 20^th century) or in the difficulty’s banks have establishing themselves in the region, as in Marseilles or in the Mezzogiorno⁶². The particular severity of risk might be suggested by interest rate differentials between Southern and Northern Europe in modern times⁶³, by the relative short maturity of notarised loan contracts in Southern France in the middle of the 19^th century, or in the regional banks’ insider lending strategy and ban on overdrafts at that time.⁶⁴

41The exchange law protection for bearers could lead us to think that the massive and persistent use of bills of exchange in Mediterranean countries, such as Italy and France, has been an effective institutional response to business risks, as were marine insurance and limited partnerships.⁶⁵ This explains why the use of bills of exchange for domestic payments was much greater in France and Italy in the 1960s and, apparently, in the 1900s, than in the other countries that signed the 1930 Geneva Convention⁶⁶, such as Belgium and Germany.⁶⁷ Compliance with the extreme precautions sometimes taken for the production and circulation of bills reinforced their effectiveness. In Southern France, for example, the surprising and pointless notarisation requirement for bills of exchange around 1840 reflected the “fears that haunt lenders...”.⁶⁸ Similarly, the circulation networks for bills of exchange, even when the bill is merely used as virtual money, as it was in Catalonia in the middle of the 19^th century, were intended to enhance the security of the instrument by dealing with a close circle of players.⁶⁹

42With or without bills of exchange, the length of credit periods serves the same function: it reduces high transaction risks by stabilising business relationships. Trade credit transform goods transactions into relational exchanges “with a deliberate long-term orientation”.⁷⁰The long duration of the exchange puts the parties in an interlocked position outside of the market. This position shields them from market risks and provides flexibility in their relationship. It creates trust so that the personal relationship becomes a substitute for inadequate legal guarantees.⁷¹

43IFC in the Mediterranean countries is not a response to buyers’ financing needs; it is a response to sellers’ need to protect their sales in a context of high risk and inadequate legal protection.

44This hypothesis is in line with the questions raised in the 1990s about the role of trust in nations’ economic performance.⁷² Mediterranean countries, including France, are seen as low-trust societies, in contrast to most northern countries, seen as high-trust societies.⁷³ As we mentioned above, it is possible that these perceptions apply more to southern parts of France and Italy than to their northern parts.⁷⁴ According to Alain Peyrefitte, this contrast is a reflection of the differences in Catholic and Protestant ethics regarding individual responsibility rather than matters of usury. We think this contrast between low-trust and high-trust societies may also be a reflection of the parties’ perception of the gap between the degree of risk incurred and the degree of protection provided by the law.

Conclusion: Mediterranean coordination versus Germanic coordination?

45Inter-firm credit, whether based on financial relationships, as in the case of intra-group financing, or trade relationships, as in the case of trade credit, builds long-term relationships between firms that shield them, partially at least, from market forces. As such, inter-firm credit can be seen as a component of the coordinated economy characteristic of continental Europe. This economy is based on off-market relationships and cooperation between firms, in contrast to the liberal market economies of English-speaking countries, based on competition and contractual relationships.⁷⁵ However, the coordination procedures vary from one type of inter-firm credit to another. In the Germanic countries, the relatively strong use of financial inter-firm credit reflects coordination that is structured by equity holdings, making it a strategic matter. With strong legal protection for creditors, trade credit in these countries is more a matter of choice rather than necessity. As is the case in the Nordic countries, trade credit use is limited and controlled by the seller. However, as is the case in English-speaking countries, this does not rule out a certain degree of choice driven by business calculations of the debtor, as we saw with payment delays. In the Mediterranean countries, the relatively widespread use of trade credit reflects more informal and uncontrolled coordination, since it relates to a sale of goods rather than a financial link. Most importantly, this coordination is a necessity because of the weak legal protection for trade creditors in a high-risk environment. With poor protection, sellers rely on building long-term relationships to ensure payment. In Germanic countries, inter-firm relationships established through intra-group financing are sometimes presented as a symbol of the parties’ trust in each other. Meanwhile, in Mediterranean countries, the relationship forged by a large amount of trade credit may be seen as a response to the low-trust environment stemming from weak laws and high risks.