Eva Kaili MEP
“SMEs are traditionally the backbone of the European economy. They generate 90% of jobs and vital wealth”
Foreword by Eva Kaili MEP, Member, Industry, Research and Energy Committee, European Parliament, S&D
Small and medium-sized enterprises (SMEs) are traditionally the backbone of the European economy. They generate 90% of jobs and the vital wealth that guarantees economic stability and the quality of life for European citizens.
Significant EU initiatives focus on the provision of enough affordable and high-quality capital for SMEs. The Capital Markets Union (CMU) strategy, as well as the changes in International Financial Reporting Standards, aim to achieve further harmonisation and deepening of the European SME ecosystem of financing and financial reporting. We can already see the first results of this policy. In the case of the European Fund of Strategic Investments for example, we observed that the SMEs Window performed better than the Infrastructure Window, indicating that SMEs were more ready than other sectors to lead economic recovery.
It is important, though, to stress that just a monolithic approach that aims to maximise the flow of capital to SMEs is not necessarily adequate in the long run. It also matters what types of SMEs receive funding. A recent statistic from Eurostat shows that of the funding directed to SMEs, only 6% is allocated to projects and ventures related to advanced technologies that can create both growth and global competitive advantage in the long run for the EU in the new economic era, often described as the ‘Fourth Industrial Revolution’ or the ‘Second Machine Age’. To keep the EU economically competitive and growth-orientated in the long run, we must increase this figure from 6% to 15%
Consequently, it is of paramount economic importance to channel funding to these Second Machine Age SMEs. However, investing in them is difficult because ventures of this type have particularly uncertain future cash flows, and hard to determine hurdle rates. As a result, both the traditional financial channels of banking and the weak VC structures of Europe cannot be easily engaged. To deal with these structural and cultural issues we must be creative. Emerging models of financial disintermediation could be very efficient in bridging the funding gap for high-tech SMEs.
An instrumental element of the CMU’s FinTech Action Plan is the creation of a framework that will allow the channelling of funding to high-tech ventures through crowd funding and initial coin offerings. The European Parliament is at the front line of this initiative and is determined to provide a legally certain environment that will allow for the better allocation of capital and better distribution of risk, taking into account the long-term growth and competitive needs of the EU in the global markets. Starting with the Crowdfunding Regulation, 2018 will be a year of strong and clear political signals indicating the ideas and determination of the EU regulators to assist cutting-edge technology-orientated SMEs and startups.