Small Business Act: Unlocking SMEs’ potential?


In 2008, the EU adopted a US-style 'Small Business Act' for Europe to improve market conditions for small and medium-sized enterprises and boost the economy. However, SME groups continue to be critical of implementation at national level despite the European Commission highlighting progress by member states.

SMEs, which are defined as companies with no more than 250 employees and a maximum turnover of €50 million, are generally seen as the backbone of the European economy, accounting for 99% of EU businesses and providing around three-quarters of all private sector jobs. 

The Lisbon Growth and Jobs Agenda, adopted in 2000 and aimed at making the EU "the most dynamic and competitive knowledge-based economy in the world by 2010," first recognised the need to boost the competitiveness of SMEs. 

At the June 2000 Feira Summit, the EU endorsed a European Charter of Small Enterprise, the first policy framework seeking to make Europe a "world-class environment" for SMEs. 

Among the many subsequent initiatives was a March 2005 strategy for 'better regulation', aimed at lowering costs for SMEs by reducing the administrative burden they face. 

In November 2005, the Commission presented a new SME policy. Entitled 'Think Small First', it aimed to promote entrepreneurship and skills via education and training, improve market access for SMEs, simplify legislation and improve SMEs' participation in the EU's 7th Framework Programme for Research (FP7) (EURACTIV 10/11/05). 

The European Council endorsed the policy in March 2006, backing the establishment of one-stop shops for company registration and measures to reduce the length of time and expenditure required to start up a business. 

Following the presentation of a mid-term review in October 2007, the Commission presented a proposal for a Small Business Act for Europe (SBA) in June 2008, aiming to unite all the existing the initiatives under a single legislative document while also introducing a series of new measures to speed things up. 

The text was adopted by the EU's industry ministers at their meeting on 1 December 2008 (EURACTIV 02/12/08).

French Presidency made a 'Small Business Act' for Europe a priority

The idea 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 came amid fears that competition from low-wage countries like China and the relocation of heavy industry to Asia could cause major job losses.

French President Nicolas Sarkozy, who held the EU presidency for the second half of 2008, declared the SBA a priority and pushed hard to broker a deal among all 27 member states ahead of the EU summit on 11-12 December so that the package could  be adopted by the European Parliament before the June 2009 elections.

Ten guiding principles for the European SBA

The following principles are at the heart of the SBA:

  • Creating an environment in which entrepreneurship is rewarded. 
  • Ensuring that honest entrepreneurs who have faced bankruptcy get a second chance.
  • Mainstreaming the 'Think Small First' principle into all fields of legislation.
  • Making public administrations more responsive to the needs of SMEs. 
  • Adapting public policy tools to SMEs' needs, notably by facilitating their participation in public procurement and making better use of state aid.
  • Facilitating SMEs' access to finance and developing a legal environment supporting timely payment in commercial transactions. 
  • Helping SMEs benefit more from the opportunities offered by the single market. 
  • Promoting skills upgrades and innovation  in all its forms. 
  • Enabling SMEs to turn environmental challenges into opportunities. 
  • Allowing SMEs to benefit from the growth of markets. 

Four legislative proposals 

The SBA will take the form of a communication and not a binding directive or regulation, which has led to criticism from businesses that it will be no more than a 'paper tiger'. Nevertheless, the package includes four legislative proposals:

Slashing red tape 

The Commission's ambitious better regulation strategy, which aims to reduce the administrative burden on business by 25% by 2012 (see our Links Dossier), is a cornerstone of the SBA. 

Reducing red tape is considered by small and medium-sized enterprises to be the most pressing issue, with reports showing that they bear a disproportionate regulatory and administrative burden compared to larger businesses. It is estimated that while a big company spends an average of €1 per employee on regulatory duties, a small business has to spend up to €10. 

In 2007, the Commission set up a 'high level group' of external experts to focus solely on cutting red tape. The EU executive claims that the measures introduced have already helped lower administrative costs by an average of €813 per year in 2003 to €554 in 2007 (in the EU 15), but business is still asking for more progress, more quickly. 

The Commission announced in March 2009 that it would ditch accounting requirments  for the EU's smallest companies in an effort to ease the administrative burden. The measure, it said, would said each business up to €1,200 per year, or a total of €6.3 billion. 

President Barroso announced in September 2009 that his services would take control of the Better Regulation initiative from 2010 (EURACTIV 3/12/09). 

Keeping track of legislation

One of the measures under consideration by the Commission to reduce the administrative burden is the principle of common commencement dates, meaning new legislation would only be introduced on a few previously announced dates each year, helping SMEs to keep track. 

A European private company statute

High costs and various administrative requirements are also preventing many SMEs from doing business across EU borders. Although SMEs account for more than 99% of EU companies, only 8% of them engage in cross-border trade and just 5% have subsidiaries or joint ventures abroad, according to the Commission. The EU's vast internal market is thus still far from becoming a reality for the vast majority of SMEs. 

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

The minimum amount of capital required to set up a European private company (SPE) has been set at a symbolic €1. 

As the EU presidency holder in 2008, France lobbied hard to persuade the reluctant Commission to propose the statute. Businesses strongly welcomed the move, but it the regulation faced strong reservations from several member states.

Cutting down on late payments

The amendment of the Late Payments Directive, adopted in 2000, is the least disputed of the legislative proposals contained in the SBA, but is nonetheless of vital importance for SMEs. The amended directive, which the Commission proposed in April 2009, is designed to ensure that small businesses are paid for any commercial transaction within 30 days. 

The amendment was a key demand for SMEs, as they run a much higher risk of insolvency than larger businesses, with many of them forced to close down within the first two years due to lack of financial means. 

Reduced VAT rates

One of the most contested proposals is a potential directive on reduced VAT rates for locally-supplied and labour-intensive businesses, which the Commission presented on 8 July (EURACTIV 08/07/08), again following intensive French lobbying.

It 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 SMEs. 

Austria, Belgium, Denmark and Germany are among the strongest opponents of this proposal, questioning whether such a step would actually have a genuine effect on the economy.

For the time being, it seems unlikely that the directive will find approval as early as the December EU summit, diplomatic sources told EURACTIV. 

State aid exemptions

Aimed at simplifying existing rules and increasing direct support from 15% to 20%, the 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.  

The proposal for a General Block Exemption Regulation on State Aid (GBER) would exempt categories of state aid already covered by existing regulations from prior notice. It was adopted by the Commission alongside the Directive on Reduced VAT Rates. But it is also seen as problematic, as different Commission directorates are struggling to work out whether the regulation is compatible with EU competition law. 

Better access to finance 

Getting easier access to sources of funding is a key demand of SMEs, particularly as the global financial crisis makes it "more difficult and more expensive to access the credit needed to finance longer term strategic investment plans". 

In September, EU finance ministers agreed to enlarge the role of the European Investment Bank in assisting SMEs and double available funding to roughly €60 billion. This is to be used by 2011 and will be specifically directed at SMEs (EURACTIV 15/09/08). 

The European Investment Bank has emerged as a major source of finance for SMEs during the credit crisis. It announced a scheme in February which will make €30 billion available over the next three years. It also plans to make technical assistance available to microfinance institutions (EURACTIV 13/02/09)

Easier participation in public tenders

Facilitating SMEs' participation in public procurement across Europe and beyond is another key principle of the SBA. 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 at the beginning of this year in the face of outright opposition from more liberal-minded nations within the bloc, which are against any form of state intervention in the field. 

The measure would also have contradicted a multilateral agreement on public procurement concluded between the EU and 27 other countries, which commits governments to opening up public tenders to international competition. 

France, however, refers to the fact that several parties to the pact, including a number of Europe's major trading partners, have obtained derogations allowing them to favour domestic companies in awarding contracts. It wants the Commission to negotiate a similar clause for European companies. 

"We maintain our demand for an exemption clause, so that European SMEs are put on an equal footing compared to American, Canadian, Japanese or Korean companies," French State Secretary for Enterprise Hervé Novelli said earlier this year. 

France further backed the Commission's proposal to push for further market opening in these countries by insisting on more "reciprocity". "We should establish a system where our own public markets are temporarily less open to foreign companies based in countries where public markets are closed," Novelli said. 

Outstanding issues: implementation now key 

Despite the generally favourable view of the SBA, businesses point to a number of outstanding issues, including the lack of progress on the Community Patent (see our Links Dossier), the lack of reference to the recently adopted Environmental Compliance Assistance Programme (ECAP) and the lack of financial support to back the SBA's ambitious aims. 

Business organisations have made clear that the burden to deliver is on national governments. Considering the ongoing financial crisis and ailing economies, swift implementation is now even more urgent, they argue. 

However, the response of member states has been mixed. Industry groups say Brussels must put more pressure on governments (EURACTIV 3/12/09), but a review by the Commission in December 2009 pointed to several areas where progress had been made (EURACTIV 17/12/09). The EU published a list of specific achievements by member states aimed at implementing the SBA.

The Commission said a number of countries, including Belgium, Denmark, Finland and Germany have introduced "an SME test" to ensure new legislation is business-friendly. In the area of access to finance, Brussels noted changes made to the Late Payments Directive and new rules (currently under discussion) which would allow member states to exempt micro-enterprises from accounting rules.

This position was rejected by business groups, including UEAPME - an SME organisation - which described the assessment as "short and superficial". The group accused the Commission of cherry-picking handful of success stories in order to put a gloss on what it sees as as "lack of ownership" of the SBA.

Implementation of the Services Directive - which has been patchy - will further improve opportunities for SMEs in accessing the internal market, according to the Commmission, although around half of all member states have yet to fully adopt all elements of the Directive.

Promoting entrepreneurship will also continue to have a high profile, not least thanks to the appointment of an EU Commissioner for Industry and Entrepreneurship. In addition, the Erasmus for Entrepreneurs programme and enhanced entrepreneurship education at national level could change Europe's attitude to business and risk taking.

European Commission President José Manuel Barroso said the communication was a "crucial milestone" in the implementation of the Lisbon Strategy for Growth and Jobs that would provide Europe's 23 million SMEs "with less red tape and more red carpet". 

Former Industry Commissioner Günter Verheugen, who introduced the SBA described it as "the final step of a new policy" which "goes the famous extra mile" by fully unlocking the business potential of SMEs. It was "high time" that an SME-friendly policy became "mainstream policy" in the EU, he added. 

In a joint letter to Commission President Barroso, UK Prime Minister Gordon Brown  and French President Nicolas Sarkozy, whose country currently holds the EU presidency, expressed their support for the Commission's initiative, stressing that continued success for SMEs was "key to the future prosperity of the European economy". 

But they also expressed concern regarding access to commercial loans and venture capital, describing the current situation as far from ideal. "The market alone does not provide sufficient finance for the start-up or expansion of innovative, high-growth businesses. This difficulty in accessing commercial finance has been made worse by recent developments in financial markets," they said, referring to the global credit crunch. 

British MEP Malcolm Harbour, internal market spokesman for the Conservatives in the European Parliament, put pressure on national governments: "We have raised their expectations and now the EU and all its member administrations have to deliver," said Harbour, adding: "We are encouraged by this Commission initiative and will continue to campaign strongly on behalf of SMEs." 

The EPP-ED  Group's coordinator on Parliament's legal affairs committee, Klaus-Heiner Lehne, who is the author of the parliamentary resolution on the SBA, said: "It is crucial that, if possible, [the SBA] does not contain any references to national law in order to avoid legal fragmentation." 

Respresentatives of SMEs like UEAPME praised the Commission's initiative, saying: "Despite some shortcomings to be redressed in the next few months, the Small Business Act has the potential to shift SME policy up a gear." 

But contrary to the Commission, businesses see the SBA as a first rather than the final step of a new policy. The SBA was the "minimum" but much more could be done, Luc Hendricks of  UEAPME told EURACTIV. 

He regretted that the SBA was not proposed as a legally-binding act, but backed away from an earlier statement that without such a binding character, the SBA would be no more than a "paper tiger". 

UEAPME called on the French Presidency to do its best to broker an agreement among all 27 member states in 2008, followed by swift and proper implementation at national level. 

BusinessEurope, the European business lobby group, also expressed satisfaction with the initiative, saying the SBA identifies "the right priorities to set SMEs' growth potential free". But it noted that implementation would be the key. 

It also voiced support for the European Private Company Statute, saying it will place SMEs "in a better position to contribute to and benefit from the development of the internal market. Thanks to the new statute, SMEs will be able to substantially reduce the costs they currently face when wanting to go cross-border within the EU". 

Eurochambres, representing over 19 million companies in Europe, said the SBA had "succeeded in identifying and addressing most of the issues of concern for European small and medium-sized enterprises". It reserved particular praise for systematic cost-benefit analysis of all new EU legislation potentially affecting SMEs. 

On the other hand, it criticises the SBA for failing to explicitly refer to the improvement of labour market flexibility as well as neglecting to create a European skills observatory, "which would enable effective monitoring of the skills demand in business".

Eurochambres also regrets the lack of commitment by the Commission to using e-procurement applications for its own tenders and proposals, "which could simplify procedures and make them more transparent". It also laments the absence of an SBA 'review clause' "to adapt the foreseen policy measures to the rapidly changing business environment and introduce new ones if necessary". It further questions the SBA's capacity to deliver concrete results given the non-binding nature of the document, which leaves it to the goodwill of member states to act. 

Reiner Hoffman, deputy general secretary of the European Trade Union Confederation  (ETUC), took the opposite view, saying he was "very concerned" about the participation rights of workers in a European private company. 

"The particular danger we see is if a firm simply moves its mailbox, the seat of the company will be moved abroad in order to escape from workers' participation rights. We will not accept such evasion of workers' participation."

  • 19-20 March 2000: Feira EU summit endorses European Charter of Small Enterprises. 
  • 9 Nov 2005:  Commission presents 'Think Small First', its new SME policy.  
  • 25 July 2008: Commission Communication on Small Business Act. 
  • 11-12 Dec 2008: EU summit approved SBA. 
  • 20 Jan 2009: The European Parliament's legal affairs committee approved European Private Company Statute.
  • 2 Mar 2009: Commission announces plan to ease accounting requirments for micro-enterprises
  • 10 Mar 2009: The Parliament approved the Private Company Statute proposal.
  • 8 April 2009: European Commission publishes updated Late Payments Directive
  • 20 Sept 2009: Commission President José Manuel Barroso announces that the Better Regulation initiative will be run directly by his services in 2010
  • 15 Dec 2009: Commission publishes report on SBA implementation.
  • 23 Feb. 2011: Commission tables SBA review.

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