Erik Sonntag is advisor for Entrepreneurship and SMEs at BusinessEurope, the association representing European business.
Is it getting any easier for companies to access credit?
Yes and no. In our last economic outlook in May, we saw an improvement when it comes to the cost of financing – in terms of interest rates. However, access to credit has become even worse, especially for SMEs. Access has worsened compared to earlier this year. Conditions are now stricter, negotiations are taking longer, and the amounts being loaned are smaller.
So are small firms more likely to go out of business than larger, better established companies?
There is a worry that larger companies might crowd out SMEs. Usually, SMEs essentially depend on bank loans – access to financial markets is very limited. The problem is that due to the whole financial crisis, larger companies might be thinking they can't go to the capital markets, so they are going to banks. If you are a bank and you have a larger company and a small company asking for credit, you will probably hand the money to the larger one if you perceive it as less risky.
In an effort to deal with this, the European Investment Bank has announced billions of euros of loans and guarantees. Has this helped and are these funds getting to those who need it most?
In principle, it has helped a lot, I think. BusinessEurope and our member federations very much appreciate all the initiatives the EIB has taken. But there are problems, obviously. One thing is the EIB handed out bigger amounts of cash, bigger envelopes, but sometimes these loans are not very attractive. The EIB works with commercial partner banks – the EIB does not grant the credit itself – so the risk essentially remains with the commercial bank. And in some cases, it doesn't matter to banks if they are getting finance [from the EIB] at 1% less interest, the client risk, i.e. company default, is still the same.
So these commercial banks were less enthusiastic about lending. That's why we have been in constant contact with the EIB, with whom we have good relations, suggesting that developing risk-sharing facilities would be helpful. I doubt that it's simply on foot of our suggestion, but this is what they have done recently. Now they ensure up to 50% of the whole credit portfolio which makes it more attractive to the banks to lend and it is better for SMEs.
Is there a limit to what the EIB can do for SMEs?
Well, the EIB is limited by the statutes which set out what kind of products it can finance. Something we have been raising is working capital. The EIB usually finances investment in longer term products; investment in machinery and R&D, but working capital was not really in their field. However, that's where the biggest problem is for most companies right now. They need to finance their day-to-day business and private banks have cut their credit lines.
So that's where the EIB has started working now too, which is very positive. One remaining issue is trade finance. The market to insure this has fallen. A lot of countries have taken action unilaterally to provide credit insurance for exporters, but our concern is that if everyone does it alone, it creates problems with the internal market. So we would appreciate a European approach and the EIB might be a likely candidate to take a role here.
The Commission and the EIB announced a microcredit initiative earlier this month. Will this help?
Yes. In general in Europe there is a problem with entrepreneurship – people are less likely to start their own business. So, of course, this microcredit facility can help. Often you don't expect the new Googles to come from this type of scheme, but it's definitely a good initiative. The amount involved [€25,000] doesn't sound like very much but if you look at statistics from the US, most companies started on a credit card, so it's a good idea - as long as it's not tied down by paperwork.
You have spoken about the risk of Europe repeating the Japanese experience of economic stagnation. What is your current read on this?
If you compare how Japan and Sweden responded to serious economic crises it definitely shows how important it is to act decisively in the very beginning. The decisions taken now will have an impact in a few years' time. When we talk about how difficult it is to get credit, we are concerned that companies won't invest in research and development. If you cut innovation spending it hampers your growth in five to ten years' time and you follow what happened to Japan.
Similarly, in the labour market, if you can shift to short-time work instead of pushing people out of the workforce altogether, it has a lasting affect on your ability to recover. It is now time to implement things that have been agreed. The first recovery packages were put together in November 2008 and now it's time to implement it fully.
What can be learned from Sweden in the 1990s?
Well, Sweden in the 90s is not Europe in 2009 but Sweden managed to sort out their banking system relatively quickly – some banks were nationalised, some were simply closed – and they restructured them and put the banks back on the market. In Japan there was a period of mock reforms and the outcome was very different.
Is the timing of the crisis particularly bad for Europe given the political changes currently underway?
The timing has been unfortunate terrible. We've had Parliament elections, will have a new Commission, and problems with a presidency – it hasn't helped.
You presented a slide earlier in the year which tentatively referred to a 'V-shaped' recovery. What is your assessment now?
I think forecasts have been adapted since then. Those slides were too optimistic. We are looking at more of an 'L-shaped' curve. The IMF revised its growth forecasts and one of the interesting things was that it was more positive for 2010 globally. But the improvement for the euro zone was marginal compared to the US. This confirms that if you wait too long it makes it more difficult to recover.
What does Europe have to do to position itself to take advantage of the recovery?
For companies, it's important that they can keep up R&D spending and that there are part-time working schemes to improve the skills of employees. Firing employees is really the very last option, but companies also need to get the right incentives from the European Social Funds and others, to keep training people. It's important that this period is not wasted and that start-ups are not hampered too much. There is a debate going on right now about whether too much is being done to protect old and obsolete industries while neglecting more dynamic new businesses that could begin the next industrial revolution.
It's over a year since the Small Business Act was launched. How can this help during the crisis?
The whole 'Think Small First' principle must be really implemented. Within the SBA, if you implement what's already in there, it's a whole recovery plan on its own. Better regulation – you won't achieve the 25% plan of cutting red tape overnight, but it doesn't cost a penny to move ahead there. Late payments are also a huge issue. A lot of companies are struggling with working capital. Well then - public authorities should be encouraged to pay their bills on time.
How satisfied are you with implementation of the SBA in member states?
It think it's mixed. Anecdotal feedback suggests some countries have made a lot of progress, while in others it's not so high on the agenda. The SBA calls for a change in mindset, which is harder to measure. On the concrete proposals that are contained in the Act, there have been some political difficulties for things like the European Company Statute.
Do you have a view on the post-Lisbon strategy?
There's no doubt about the need to continue with a growth and jobs strategy. Labour market reforms, product market reforms, innovation – these things are all the more important now. Demographic changes will start in a few years so we need reforms in pension age and labour participation. So it's definitely one of the priorities.
You have suggested shifting funds from the Common Agricultural Policy (CAP) to R&D. In a broad sense, does this represent a shift from an agricultural way of life to a knowledge economy?
It's a very difficult discussion. Given the EU's history, there's a reason why agriculture takes up such a big chunk of the budget. But now, in the 21st century, what percentage of the labour force still works in food production? Probably 2%-3% in Western Europe. Personally, I don't see it as Europe's big strength. Highly value-added products, research, and innovation are areas where we can compete.
If we want to be the world's best-performing knowledge-based economy then we have to put some money on the table. Changes are necessary. The budget is limited so you have to look at where the added value is biggest, and I think it might be in growth-enhancing strategies. It should reflect the 21st knowledge economy.