SMEs are a keystone of our European economy and constitute the vast majority of our firms. Representing a very large share of employment and value added, they provide jobs for most Europeans. In comparison, their share in the business economy is much bigger than in the US and yet, beneficial conditions for them to grow and prosper seem to be hard to establish.
In past years and since the financial crisis, EU policy makers have made efforts to put SMEs at the heart of their concerns, with the aim of fostering their access to finance and enabling them to fully reap the benefits of a more diversified financial offer. Unfortunately, the problem often remains the rigidity of bank credit, which in Europe, no matter what one wishes about a Capital Markets Union, continues to be the most important channel to project financing available to SMEs.
It is true that SMEs have seen the economic environment in which they operate improving but this has not systematically led to more credit flowing their way. As they remained reliant on bank debt and undercapitalised, they are more vulnerable to the current economic downturn. To a large extent, the pandemic crisis and its aftermath will be a particularly delicate time, especially as European economies were just out of a previous recovery phase. While the urgency is to help SMEs navigate cash flow problems and avoid bankruptcy, for which several quick fixes are being adopted, a long-term strategy will be essential.
The first CMU in 2015 came as revamping of the EU capital market ecosystem, a much needed revitalisation after the 2008 crisis.
However, the next chapter should focus on small businesses’ real needs and on investment in the real daily economy.
EQUAL ACCESS TO FINANCE
True, SMEs are a very heterogeneous group of firms, often difficult to put into one basket. Certain types of SMEs need greater consideration than others as the “label” covers an extremely varied range of realities. Some segments of the SME population face extra difficulties in accessing debt finance. Transaction costs are for example higher for micro-enterprises, start-ups and businesses located in remote areas. They are more likely to be excluded from formal external financing. Specific attention should be given to these businesses in the next CMU.
The challenge is also to ensure equal access to financing across Europe. Not all countries will be equally equipped to bounce back in the upcoming crisis. With the pre-existing imbalances in the eurozone, southern Europe is likely to struggle more in the recovery phase. Countries with a big proportion of SMEs are likely as well to be less resilient because small businesses usually have less collateral to offer to banks against loans. As the effects of the pandemic will deepen the north-south and center/periphery divides, extra attention should be given to ensuring access to financing everywhere in Europe, in a context where the clustering of investment opportunities in core regions more than in peripheral regions reinforces credit constraints for SMEs operating in remote regions. Any long-term strategic approach will have to be geographically balanced in the EU.
EASIER FUNDING MADE SAFE
Beyond such need for a balanced repartition, the digital transformation is offering a real new qualitative opportunity for all European SMEs. This could be key too in the recovery phase.
Fintech lenders are indeed offering a faster and easier model. Payment history, online activities and mobile history are used as sources of information to access credit, a method that suits the reality of SMEs and allows for decentralised ways of operating. A lot of potential can be unlocked with these data-and artificial intelligence-led solutions. However, they will need to be adequately supervised. In this regard, the EU’s upcoming Digital Finance Strategy can count on the expertise of EU countries that have already set sound regulatory foundations for fintech operations.
Expanding access to financial services at a rapid pace might create a risk of over-indebtedness for SMEs. After the coronavirus outbreak, many businesses will have to increase their debt exposure simply in order to be able to continue to function. The next moves towards CMU will need to focus as well on fostering financial literacy and awareness among small businesses to avoid inappropriate risk taking.
The challenges being faced by SMEs reflect the challenges of the EU as a whole. Regulators, tech players, banks, alternative lenders: all need to play collectively to close the SME financing gap. Such collaboration will help to combat the economic effects of the pandemic. In the end, the bigger picture is not just about growth and scaling up, it is about supporting the economic and social fabric that SMEs constitute, without which the fulfilment of a greener and more social Europe cannot take place.
This article by MEP Dr Alfred Sant was published in the ‘Parliament’ magazine