The European Investment Bank (EIB) is shifting its focus towards small and medium-size enterprises (SMEs) in Europe in a bid to get economic growth off the ground, its President Werner Hoyer told Emerging Markets in an exclusive interview.
SMEs create 85% of new jobs in the European Union but are dependent on bank loans for their external financing in an environment in which banks are trying to deleverage in order to boost profitability and capital buffers.
“Regional banks sometimes turn into obstacles for SME lending. It is our job to encourage and/or enable them to boost their SME business,” Hoyer said before the EBRD’s annual meeting.
He said small companies were not the main focus of the bank when it was founded within the Treaty of Rome. Initially it focused on financing big infrastructure projects.
“Nowadays the lack of financing for SMEs and mid-caps is one of the key obstacles to growth in Europe. We are addressing roughly a quarter of our lending activity, that’s a quarter out of E70 billion this year, to give finance to SMEs. And we intend to increase our activities in this field.”
Difficult access to credit is one of the top worries for SMEs. A third of them did not obtain the finance they had planned for, a recent survey by the European Commission showed.
Last month, policymakers taking part in a roundtable organized by the European Parliament in Brussels said Europe should learn from the experience of the US in capital market funding for SMEs. In the US, securitization via asset-backed securities plays an important role in financing small companies.
“I think one should not be loath towards creativity in this field but at the same time we should remember the consequences of the mistakes that have been made before the collapse of Lehman Brothers,” Hoyer said. “When we approach new products, they have to be very sound, and tested.”
At the EIB, approvals of loans for SMEs rose by 14% last year compared to 2011, to E14 billion. Of this, E12.8 billion were loans to companies within the EU, an increase of 18% over 2011.
EIB loans for SMEs are managed locally by partner commercial banks. At the end of last year the bank had funding programmes with more than 230 banks in 24 member states. The EIB’s European Investment Fund manages financial instruments under the EU’s programme to boost lending to small firms.
“We are giving this field absolute priority,” Hoyer said. “Lending to SMEs helps reduce unemployment and also takes into account the fact that SMEs and mid-caps are the backbone of Europe’s economy.”
He said that Europe was “not out of the woods yet” although “unprecedented action” had been taken to address the effects of the crisis.
“Challenges remain,” Hoyer said. “The fragmentation of the EU financial market is a very pressing issue, but important challenges are also the fight against unemployment, in particular to address the growing problem of youth unemployment, and the risks of reform fatigue,” he said.
“On the other hand, the euro area and the EU are proving that they are able to take unprecedented steps at various levels to fight the crisis and there is a coherent response that improves the economic outlook.”
The “dichotomy” between reform and growth must be overcome and reforms must continue, “otherwise the growth policies might end up in a vacuum,” Hoyer said. “The question is how this will be accepted by the public, who in many countries has gone through difficult times already.”
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