Interview: Better access to finance needed for SMEs[fr][de] 

• EU financial sector favours large companies

Even though Europe has caught up and sometimes even overtaken the US in developing financial services for large firms, it still falls short of providing the products needed by small companies in emerging economic sectors, said Philippon.

"In Europe, we have traditionally been providing more services to already-established businesses and the process of European integration has even increased this imbalance," Philippon notes. "If you look at the growth in the US financial sector, I would say it is more balanced in the sense that it is providing services to everyone, from General Electric to a start-up in California."

Small and medium-sized enterprises (SMEs) have focused the attention of EU policymakers in the context of the Lisbon strategy for more growth and jobs. But Philippon argues that the right conditions are lacking.

"Of course, it is not just because of finance that small and medium-sized enterprises in Europe do not grow," Philippon said. "But finance is part of the explanation. What I have realised from teaching in the US is that the kids in university know that if they have a crazy idea, they can find someone to finance it, so they try."

The finance professor does not believe, however, that direct support is what is needed for SMEs. "What we need is a good environment for SME financing. That means that the regulators' job should be about disclosure and harmonisation of the various codes," he says.

In particular, he says this means finding ways to streamline the myriad of bankruptcy codes which currently apply across Europe. "Small, emerging firms are very risky, they are likely to end up in financial distress. Therefore for them the bankruptcy code is very important."

However, streamlining bankruptcy codes will be a demanding task for EU regulators should they decide to embark on it. "Bankruptcy rules are completely up to the national level, because they are deeply embedded in the legal system of the respective country so you cannot just change them like that."

But Philippon still believes there is scope for action. "What you need to do is identify areas where, first of all, harmonisation is possible, and, secondly, where you are likely to have a big effect. In the area of financial distress rules, a couple of points exist on which we could make progress – without rewriting the whole bankruptcy code."

"Any kind of standardisation of bankruptcy codes is a very complicated thing to do. That is really the task for regulators in the future."

• Tax competition in Europe "inefficient" and "silly"

Moving on to the topic of tax competition between EU states, Philippon has strong views, arguing that it is "inefficient" and even "silly". "We have tax competition in Europe, with countries who want to attract businesses through their tax systems. This system is very inefficient. All the data show that lowering taxes to attract businesses simply does not work very well. It rather costs you a lot of money so playing this game at the European level is silly."

However, he admitted that applying a single tax rate across Europe would be hard to achieve politically as member states cling to their sovereignty on tax matters. "I would be very much in favour of stronger enforcement on this but I think politically it is going to be hard. But I have to say that when you think about measures which could improve the way Europeans see Europe, I can hardly think about something better than that."

To read the interview with Thomas Philippon in full, please click here.