Dare and Care

Dear potential participants in the ‘SME in the crisis’ session as EBS: as moderator of the panel I welcome your views and questions in advance.

You will find below the pre-reading that was prepared for speakers at this panel. It includes links to more information.

The session itself has been adapted after discussion in the EBS steering committee, which I attended, in order to reflect issues raised by the economic crisis.

Does it reflect the issues YOU see? Do you have your personal answers to these issues?

Here are some of the questions we will address:

· Are the current measures taken by the Commission and governments sufficient to ease the impact of the current economic crisis on small businesses?

· Has the EU lived up to its pledge to make SMEs the “linchpin” of its policy?

· SMEs often complain that for them the internal market is not a reality yet. How can measures such as the European Private Company Statue proposed in the Small Business Act or the Services Directive improve this situation?

Do not hesitate to click ‘react’ below in order to post your view, or contact me personally at publisher@euractiv.com . Thanks in advance for your views,

Christophe Leclercq

1. Facts and figures about SME policy

Small- and medium-sized enterprises, defined as companies with no more than 250 employees and a maximum turnover of €50 million, represent 99% of all companies in the EU. They account for the creation of one in every two new jobs and produce considerably more than half the bloc’s GDP. With 23 million enterprises employing around 75 million people, SMEs are also the biggest sector of the EU economy.

2. The main pillars of the European SME policy
EU leaders first recognised the need to boost the competitiveness of SMEs in the Lisbon Growth and Jobs Strategy adopted in 2000.

Several major initiatives such as the European Charter of Small Enterprise, the first policy framework seeking to make Europe a “world-class environment” for SMEs, and the first comprehensive SME policy followed..
However, the impact of those measures has been very limited, businesses argue. They put their hope in the recently adopted Small Business Act (SBA), the successor to the failed European Charter of Small Enterprise.
The SBA merges all existing initiatives under a single legislative document while also introducing a series of new measures. . The idea of the SBA is to put SMEs at the forefront of decision-making and shift the focus of EU job creation policies from industry to SMEs. The initiative has come amid fears that competition from low-wage countries like China and the relocation of heavy industry to Asia could cause major job losses.

3. Issues and challenges

As the ‘backbone’ of the European economy, small businesses play a key role in creating growth and jobs. This key function is critically endangered as the global recession bites.

Impact of the financial crisis

The key problem SMEs face in the current crisis is the drying up of the credit market. Commercial banks, the main source of loans and credits for smaller firms, are increasingly reluctant of providing fresh money or have tightened lending conditions.

Access to fresh capital is crucial for small businesses as they run a far higher risk of solvency than larger firms. According to European Chambers of Commerce data, 30% of SMEs face liquidity problems, a quarter of which are due to denied credits by banks.

Against this background, several measures have been put together on the European and national level to ease the impact on SMEs. A key element was the EU’s finance minister decision last September to double the lending capacity of the European Investment Bank (EIB) to € 30 billion. The funds will be granted via commercial banks in the form of loans and are to be used by 2011.

Moreover, the EIB is reinforcing its lending to small and mid-sized companies by €1 billion per year. An additional €1 billion goes to the European Investment Fund (EIF), is the Unions’ specialized financial body for SMEs for a mezzanine finance facility. The measures were approved by the EU leaders at their summit in December.

Cutting down on late payments

Many of them are forced to close down within the first two years due to lack of financial means. Against this background, being paid on time is vital for the survival of small businesses. The Commission plans to propose in 2009 an amended directive to ensure that SMEs are paid for any commercial transaction within 30 days.

Venture Capital

An equally important issue, especially for start-ups, is the access to venture capital. The early stage venture capital market in Europe represents only about €2 billion per year – about 25% of its US equivalent. Only one in 50 SMEs (6%) turns to a venture capital company.

Another hurdle is that national governments are allowed to only grant risk capital up to €1.5 million per SME per year, and only in cases where at least 50% of the investment comes from the private sector. The Commission recently proposed to raise the ceiling to €2.5 million and limit the minimum private investment to 30%.

Basel II and new rules on rating and capital requirement

The SME community is concerned about the new capital adequacy directive, known as Basel II, which businesses fear could complicate access to smaller loans (below 100,000 euro).

Easier access to state aid

Following EU leaders’ agreement, the Commission also adopted a temporary framework easing member states’ hurdles to grant – without notification – subsidised loans, loan guarantees, risk capital and direct aids of up to €500,000 annually until 2010. This sum represents a seven-fold increase in comparison to previous rules, under which up to €200,000 could be granted over a period of three years.

The sector’s reactions to this move were split. Some feared the move would distort competition and aggravate public scrutiny, while others lauded it as a major success for their sector.

Earlier last year, the EU Commission had proposed a new regulation on state aid exemptions aimed at simplifying existing requirements and increasing direct support from 15% to 20%. If approved by government, the new regulation would exempt small businesses from having to notify the EU in advance for state aid received in fields such as training, employment, R&D and regional aid.

Swift action is key

Businesses lauded the recent actions, including the Small Business Act, but stressed that they would fail to meet the objectives if they are not implemented swiftly.

Better regulation

Regardless of the current crisis, reducing red tape is the number one priority for small businesses, which bear a disproportionate regulatory and administrative burden compared to larger businesses, reports show. While a big company spends an average of €1 per employee on regulatory duties, a small business has to spend up to €10.

The overall costs amount to around 3.5% of the EU’s GDP, the EU estimates. It thus proposed setting a legally binding target for cutting these costs by 25% by 2012 as agreed by EU leaders in March 2007 – a move which officials claim could save €150 billion.

In its latest progress report, the Commission claimed the initiative a success, saying that some 1,300 acts, equivalent to around 10% of current EU legislation, have been removed. The latest proposal has been to allow companies to invoice their taxes electronically, which the EU executive claimed could save companies €18 billion every year.
Reduced VAT rates

One of the most contested measures included in the Small Business Act is a directive on reduced VAT rates for locally-supplied and labour-intensive businesses, which the Commission presented on 8 July (EurActiv 08/07/08).

The directive would allow all member states to apply a reduced VAT rate of as low as 5% for labour-intensive services – such as hairdressing, house cleaning and renovation, vehicle repairs and restaurant catering, which are mainly provided by small businesses.

Businesses pushing for this move for years strongly welcomed it, but several member states, including Germany and Austria, rejected the idea, questioning whether such a step would have a genuine effect on the economy.

The Internal Market – for SMEs not a reality yet

High costs and various administrative requirements are preventing many SMEs from doing business across EU borders. Only 8% of Europe’s SMEs engage in cross-border trade and just 5% have subsidiaries or joint ventures abroad.

The European Private Company Statute (EPC) proposed as part of the SBA, would simplify the legal framework and allow for businesses to be established and run across borders under the same rules in all member states.

The EPC took the first legislative hurdle with the approval of the European Parliament’s legal affairs committee in January 2009, but despite strong endorsement by the previous French EU Presidency and the business lobby member states failed to find an agreement.

Easier participation in public tenders

Facilitating SMEs’ participation in public procurement across Europe and beyond is another key principle of the Small Business Act.. France had originally envisaged copying an American scheme whereby a set share (23%) of public markets is reserved for small and medium-sized businesses.

But it backed down in the face of outright opposition from more liberal-minded nations within the bloc, which oppose any form of state intervention in the field.

4. Possible questions for the session

• Are the current measures taken by the Commission and governments sufficient to ease the impact of the current economic crisis on small businesses?
• Has the EU lived up to its pledge to make SMEs the “linchpin” of its policy?
• SMEs often complain that for them the internal market is not a reality yet. How can measures such as the European Private Company Statue proposed in the Small Business Act or the Services Directive improve this situation?

5. Further reading
EurActiv : Small Business Act: Unlocking SMEs’ potential? (Last update: 2 December 2008)

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