The authors claim that Europe's policymakers remain too focused on emphasising labour and product market reforms when debating structural policies and the Lisbon strategy, and in doing so are overlooking the "crucial" importance of corporate finance.
Despite the EU's "world-class financial system for established companies," instruments specifically tailored to the needs of emerging firms are "underdeveloped in most EU countries," observe Philippon and Véron. Moreover, traditional bank loans are insufficient "in a knowledge economy where companies rely less on physical investment," they state.
The Bruegel paper argues that policymakers "should focus on the legal and regulatory environment and on market incentives rather than on subsidies or other direct intervention" to improve financing for emerging companies with high growth potential.
The authors believe that the "ability to foster corporate growth should be given higher priority in EU financial policy" and outline key areas for policy action, including:
- Competition among intermediaries: Allowing non-banking entities to compete with banks on a range of services would foster innovation.
- Securities regulation: Securitisation of corporate debt and cross-border regulatory harmonisation would "better allocate capital", creating a "dynamic European market".
- Insolvency legislation: Clearly defining rights and processes in insolvency situations is more important than solving jurisdictional conflicts.
- Tax: Distortions between equity and debt must be removed and there should be a level-playing field between different financing options.
- Prudential rules that "unduly hamper equity investment by institutional investors" should be removed.
Despite their observation that the policy instruments "most likely to result in better financing of emerging firms" are "in the hands of national governments", Philippon and Véron conclude that EU-level discussion on how to make the financial system more supportive of new companies is "within the scope of EU policy initiatives."
Leveraging comparative strengths between member states and building up comparative data would allow Europe to exploit a vital "goldmine" at "a time of fierce global competition," they add.
