Few measures would transform the investment landscape of Southern Europe as much as a European version of the US Chapter 11, observes Nixon in this WSJ article.
Since the financial crisis, the global reform effort has been concerned with trying to remove implicit subsidies from the banking system. But faced with a shortage of SME financing, some politicians might be tempted to introduce new, explicit subsidies. Indeed, the UK has already ventured some way down this path, creating an array of new government and central-bank programmes to encourage lending. The EU is also considering a plan to use EU funds to guarantee SME loans.
But the global economy is littered with examples of what can go wrong when politicians subsidise borrowing and interfere in the allocation of credit: credit is mispriced, capital is misallocated and the bad debts will eventually pile up. Governments would do better to tackle the structural obstacles to SME funding directly and then allow the market to engineer solutions.
The first priority is to frame regulation to support alternative sources of finance such as securitisation, direct lending by insurers and asset managers, and new technology-based solutions, including peer-to-peer lending and crowdfunding.
Policymakers should also encourage smaller companies to improve their governance and transparency to attract funding from private- and public-equity markets and facilitating mergers and acquisitions. And they could look for ways to reduce the information deficit, perhaps by creating registries of SME credit information.
But the biggest prize lies in simplifying—or better still harmonising—bankruptcy rules and improving the functioning of justice systems. In Italy, many businesses cite the inadequacies of the justice system as the single biggest impediment to investment. Portuguese entrepreneurs complain that while the government has made it easy to start a business, it remains difficult to close one; venture capitalists encourage Portuguese startups to incorporate in London.
Few measures would transform the investment landscape of Southern Europe as much as a European version of the US Chapter 11. Of course, this won't be easy. Agreeing on a cross-border eurozone resolution regime for banks is proving hard enough. But if Europe can create a Banking Union, then why not a Bankruptcy Union? The eurozone's long-term recovery may depend on it.
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