The crisis and its aftermath: SMEs performance

and macroeconomic policies

SMEs, Crafts and the Professions Category meeting– 2 December 2016

Lucio R. Pench

Director, Fiscal policy and policy mix

European Commission DG Economic and Financial Affairs

Euro area GDP: annual growth rate and cumulative change, 2008-18,

Recovery remains fragile, with slack in the economy

Employment, total hours worked, euro area

90

92

94

96

98

100

102

08 09 10 11 12 13 14 15 16

Employment Total hours worked

index, 2008-Q1 = 100

Small and medium-sized enterprises (SMEs) in Europe

• SMEs form the backbone of the EU28 economy.

• In 2015, just under 23 million SMEs generated €3.9 trillion in value added and employed 90 million people.

• They accounted in 2015 for two thirds of EU28 employment and slightly less than three fifths of EU28 value added in the non-financial business sector.

• The vast majority of SMEs are micro enterprises with less than 10 employees – such very small firms account for almost 93% of all enterprises in the non–financial business sector.

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Effects of the economic crisis on SMEs and their recovery

Firm growth can be associated with productivity growth

5

Figure: Labour productivity growth in EU industry by size class (N of persons employed) 2008-2014

Source: Single market integration and competitiveness report 2016, based on Eurostat data

Factors affecting SMEs' size and growth

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• Factors that are critical for SMEs growth include their capital intensity, investment rate, access to finance, availability of high-quality workforce, etc.

• These factors are sensitive to economic policy. Research shows that some structural reforms can have a significant impact on SMEs' growth rate.

• The design of public policies matter: their impact is different according to the size of the firm.

• Policies recommended in the European Semester and the Juncker Investment Plan should help increase the shares of fast growing SMEs.

Three fiscal stances

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Public spending becoming less growth-oriented

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16.25%

27.21%56.54%

Long-term spending Other spending

Welfare spending

14.97%

29.68%55.35%

Long-term spending Other spending

Welfare spending

a) 2014 b) 2000

Diverse situations across MSs and diverse

responses Euro area Fiscal Map

Note: Based on COM forecast, S1 to measure consolidation needs, 2016 output gaps for good/bad times

9

10

Accommodative monetary policy in the euro area

-3

-2

-1

0

1

2

3

4

5

6

08 09 10 11 12 13 14 15 16 17 18

%

Short term Long term

Short term (real) Long term (real)

Short term rate: 3M Euribor; Long term rate: 10Y interest swap;

forecast

Short- and long-term market rates

100

110

120

130

140

150

160

170

180

190

200

-1

0

1

2

3

4

Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Oct-16

ECB policy rate, Eurosystem BS size

ECB deposit facility rate

EONIA rate

Eurosystem BS size (Jan 2010=100)

%

Source: IHS, ECB, Commission services

index

11

-3

0

3

6

9

12

15

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

M3 & Credit Growth(last obs. October 2016)

MFI loans to the Private Sector (YoY)

M3 YoY SA

%

Source: ECB

Credit provision to private sector supported by ample liquidity and low financing costs

0

1

2

3

4

5

6

7

2004 2006 2008 2010 2012 2014 2016

Composite credit cost indicators (CCCIs)

CCCI of HHs CCCI of NFCs

Sources: ECB, Bloomberg, IHS, DG ECFIN calculations

Last observation: September 2016

12

Receding financial fragmentation among countries and companies

0

5

10

15

20

25

30

35

40

45

1

2

3

4

5

6

7

8

2008 2010 2012 2014 2016

Country-specific CCCIs for NFCs

DE FR

IT ES

PT NL

Source: ECB, Bloomberg, BofA ML, DG ECFIN calculations

% Coefficient of Variation* (STDEV/AVG, 3M mov avg.)

Note: * Based on available data for 9 EA countries

0

50

100

150

200

250

300

350

Jan

-10

Ma

y-1

0

Sep

-10

Jan

-11

Ma

y-1

1

Sep

-11

Jan

-12

Ma

y-1

2

Sep

-12

Jan

-13

Ma

y-1

3

Sep

-13

Jan

-14

Ma

y-1

4

Sep

-14

Jan

-15

Ma

y-1

5

Sep

-15

Jan

-16

Ma

y-1

6

Sep

-16

EA Spain

Italy Germany

Interest rate spread on small (SMEs) and large loans to NFCs

bps

Background graphs

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Frequency of multiple investments by funds in the same company (2010-15)

42%

33%

25%

57%

31%

12%

0%

20%

40%

60%

1 round 2 rounds >2 rounds

US EU

START-UP SCALE-UP

Source: Preqin Venture Capital database as quoted in Duruflé, Hellman, Wilson (2016)

• The figure shows the frequency of multiple investments in EU compared to the US.

• In the EU start-ups do receive financing, but less of them received investments in following rounds, which is essential for their scale-up.

• Scale-ups need PATIENT venture capitalists.

The European Union supports SMEs across different areas

• Improving SMEs access to finance: CMU, Investment Plan, Fund-of-funds, COSME.

• Supporting SMEs innovation activities: H2020, clusters, KETs, public procurement for innovation, DSM, IPR.

• Facilitating access to markets: SMS, DSM, public procurement, Enterprise Europe Network.

• Reducing regulatory burden: SMS, DSM, REFIT.

• Creating a business friendly environment: SBA, entrepreneurship action plan, insolvency and second chance, European Semester.

• Easing access to skilled workers/ talent: skills agenda.

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