Being serious about SMEs

Written by Lawrence Zammit, 4 April 2014

Last week the Chancellor of the Exchequer of the United Kingdom, George Osborne, stated that his target was to achieve full employment. Earlier on this week, the new Italian Prime Minister, Matteo Renzi, stated that it was unacceptable to have an unemployment rate of thirteen per cent in his country and that his target was to bring it down to ten per cent. One of the reasons for the vote against the Socialist Party in the municipal elections is unemployment.

It is the same theme that is affecting all EU countries. The common message is – enough with fiscal rigour, let us have some economic growth for a change. However when it comes to economic growth and employment growth, it is immediately recognised that within the EU there is little to no space left for large enterprises employing thousands of persons. Mass production has relocated elsewhere. Economic growth and employment growth must come from small and medium sized enterprises. This explains why I believe that in the `European Union there is the need to get really serious about SME’s.

The problem is that given their size, SME’s do not generate growth in one sudden burst but in a gradual manner. Moreover SME’s are the companies that will benefit most from structural reforms in an economy as bureaucracy and restrictive legislation reduce their nimbleness so much that they end up choking them.

And since politicians are very reticent about introducing structural reforms, no one takes SME’s really seriously. Yet EU publicity claims that it believes in the important role that SME’s play in the economy and that they should be supported.

In effect legislation is having the opposite effect. In sectors where there is a strong requirement for compliance with specific rules (such as in areas of financial services), there is little to difference between the requirements that larger companies have to meet and the requirements that smaller companies have to meet.

Certain compliance requirements can easily be absorbed by larger companies because they enjoy economies of scale, while in the case of smaller enterprises, there could be a significant impact on costs resulting from such requirements.

Another element of legislation within the EU that is having a negative impact on SME’s is in the area of employment legislation. Such companies are likely to need to use flexible employment arrangements to take account of fluctuations in demand, skills shortages or even supplier shortcomings.

Yet EU legislation has increased labour costs unnecessarily on SME’s by imposing the adoption of certain working conditions that have reduced flexibility. This makes the employment of persons on the part of SME’s less attractive with the result that one gets an attrition of employment opportunities in the long run.

Yet another piece of EU legislation that militates against SME’s is the new capital requirements directive. Since most SME’s are family owned, they are very likely to provide property as security as collateral against bank loans. The capital requirements directive considers such collateral as speculative in most cases and therefore imposes on banks the rule to consider such collateral as more risky.

As a consequence banks having such a loan portfolio have a larger capital requirement than banks which do not have a portfolio. The end result is that SME’s may either find the door closed if they ask for a loan or may have to pay a higher interest rate.

The final point I wish to make is about the simplification of administrative processes. Practically all EU countries have a Minister whose responsibilities include administrative simplification. Yet when SME’s come to access EU funds, they find a process that is so cumbersome that hinders effective participation in such schemes. To this one can add the processes involving permits, filling in statistical surveys, etc.

Moreover when public entities at various levels (national, regional, municipal) delay payments because of a lack of funds, the ones that suffer most are not the larger enterprises but the smaller enterprises.

On the other hand one may claim that the EU has introduced a number of initiatives that are specifically targeted at SME’s. Yet when one looks at the whole picture, I strongly believe that the EU and individual member states needs to be more serious about SME’s. They are the ones that will drive economic growth in the future and not the larger enterprises.

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