30 June 2015

EurActiv: Cameron should not ignore EU CMU reforms

Thomas Aubrey is a senior adviser at Policy Network and chief executive and founder of Credit Capital Advisory. Renaud Thillaye is deputy director of Policy Network and Alastair Reed is a policy researcher at Policy Network.

One item that is unlikely to be top of David Cameron’s EU reform agenda is the Capital Markets Union (CMU). Immigration, access to welfare benefits and democratic legitimacy appeared to dominate Cameron’s discussions with his fellow leaders at the European council meeting last week. Beyond its mundane title though, the CMU has the potential to transform the way that European businesses are funded, thereby bringing much needed dynamism to the economy. This is the sort of pro-growth European reform that the UK should be leading. But for such reforms to work, the UK must cooperate with other member states to hold Jean-Claude Juncker to his commitment for the EU to be “big on the big things and small on the small things”.

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Europe has plenty of capital for businesses. There is more SME financing in Europe than the US. But this is not allocated to where it is needed most. Many high growth and innovative businesses consequently struggle to get the financing they need. Above all, Europe lacks equity financing that can help transform young firms into larger and more successful enterprises.

The levels of business angel and venture capital investment are respectively three- and five-times higher in the US due to a number of factors. Most countries in Europe tax equity far more heavily than debt. The returns on venture capital in Europe have been close to zero for the last decade. And rigid insolvency legislation in some states prevents firms from restructuring, which on top of long pay-back periods, punishes failure and discourages entrepreneurship. In 2009 the European economy lost around 1.7 million jobs due to insolvency.

The draft proposals outlined by the European Commission in February for SME financing were broad in scope. But to ensure that firms are able to finance their growth activities and drive job creation, there needs to be a greater focus on creating a deeper equity culture. Three policies in particular would help support this drive.

First, tax incentives for business angel and venture capital investors should be encouraged. [...]

Second, the European Investment Fund should start issuing long-term, low-cost loans to new “small business investment companies”. [...]

Third, minimum insolvency standards should be enforced across the EU with a directive if necessary. [...]

Alongside these policies, the Commission should continue its work on high-quality securitisation to help free up capital for the banking sector. It also needs to do a better job of persuading member states to learn from each other’s world-leading best practices on business support. [...]

The Commission has been clear from the outset that the CMU project is one for the long term. The big challenges of reform, many of which are at the member state level, should therefore be tackled head-on. Politically challenging reforms to the tax, legal and business support environment in member states must be prioritised if Europe’s economy is to boom once more. A booming European economy is clearly in the interests of the UK, and something that David Cameron can ill afford to ignore.

Full article on EurActiv

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