BANKING SYSTEM SOUNDNESS IS THE KEY TO MORE SME FINANCING
BANKING SYSTEM SOUNDNESS IS THE KEY TOMORE SME FINANCING
ZSOLT DARVAS, JULY 2013
1. According to the Euro-pean Commission’s
SmallBusiness Act for Europe(SBA) Fact Sheets 2012
,SMEs accounted for 99.8percent of the number of businesses, 67.4 percent of employment and 58.1 per-cent of GDP in the EuropeanUnion in 2011. In Greece,Italy, Spain and Portugal,the share of SMEs inemployment rangesbetween 75.6 and 85.2 per-cent and the share of SMEsin valued added rangesbetween 65.7 and 70.2 per-cent, well above the EUaverage. In contrast, in Ger-many and especially in theUnited Kingdom, the role of SMEs is well below the EUaverage. Seehttp://ec.europa.eu/enter-prise/policies/sme/facts-figures-analysis/performance-review/.
SMALL AND MEDIUM-SIZED ENTERPRISES
(SMEs)play a major role in the European economy andespecially in southern euro-area countries
–countries that face mounting challenges in achiev-ing sustainable public and private debt positions,sound banking systems and improved competi-tiveness in the midst of a deep economic contrac-tion and high unemployment, which are alsofuelled by major structural weaknesses.Access to finance for SMEs deteriorated in severalcountries after the crisis, as recorded by the OECD(2013), particularly as a result of higher interestrates and greater demand for collateral. The dete-rioration was more significant in the hard-hit coun-tries of southern Europe (Box 1).There is an intense discussion in the EuropeanUnion on redoubling efforts to make it easier forSMEs to have more wide ranging access tofinance. For example, the European Commissionand the European Investment Bank submitted areport to the European Council of 27-28 June 2013on options for increasing lending to the economy,with a focus on SMEs (see European Commissionand European Investment Bank, 2013b).This Policy Contribution assesses the rationale fortargeted European-level support for SMEs, and thevarious options, focusing on broader designissues and the possible role of the EuropeanCentral Bank.
1SHOULD EUROPEAN SCHEMES TO SUPPORTSMES’ ACCESS TO FINANCE BE REVAMPED?
While SMEs play a dominant role in the EUeconomy and there are clear signs of limitationsto credit supply in some countries, the answer tothe question raised in the title of this section is notan unambiguous ‘yes’. There are several reasonswhy there may not be a need for a special newEuropean effort:•Lack of sufficient access to finance for SMEs isnot a systematic problem in the EU, and noteven in the euro area. As noted in Box 1, theredoes not seem to be a problem with access tocredit in Germany and Austria, and the samecan be said about some other better-suited EUcountries. An EU-wide response is definitelyneeded when there is systemic market failurein the EU, such as the paralysis in financial mar-kets after the collapse of Lehman Brothers inSeptember 2008. But when a problem isregional, its causes should be well understoodbefore European-level initiatives are pursued.•In most southern euro-area countries, whereSMEs face severe limitations in accessingfinance, there was too much credit before thecrisis and most likely a number of companiesaccumulated excessive debt. Therefore, a fallin the outstanding amount of credit can be anindication of the necessary deleveragingprocess.•These southern euro-area countries have verybleak economic outlooks, due to their structuralweaknesses, their weak price competitiveness,which significantly deteriorated before thecrisis and has not improved sufficiently since,their still-vulnerable public sector fiscal posi-tions which require further fiscal consolidation,and their banking sector weaknesses, whichare reinforced by the weak economic outlookand the vulnerable public financial accounts(see Darvas, 2012b). This implies that creditrisk must be higher in these countries than ineconomies with better outlooks, such as Ger-many. Consequently, the lending rate to SMEsshould also be higher in southern Europe thanin Germany.•Small companies form a considerably largershare of total firms in southern Europe than inother member states. But SMEs are less pro-ductive than larger companies (see Gill, Raiserand others, 2012), which is particularly true inthe southern euro members. Therefore, limita-