EU legislation prevents small firms from thinking big

The EU needs to cut down on the regulatory and administrative burden for SMEs - in order for them to grow – argues campaign group

Earlier this week, a report was released by the European Firms in a Global Economy, an EU-funded project under the supervision of well-known think-tank Bruegel. The report states that large companies contribute disproportionately more to a country's economic performance than smaller ones. Bigger enterprises pay higher wages, their turnover and profits are higher and they are more successful international players. The number of large businesses indicates how well a country performs economically.

There is something fundamentally wrong with this picture. Large companies constitute only 0.2 per cent of European Union businesses. Some 99.8 per cent of EU businesses are small and medium-sized enterprises and 92.1 per cent are in fact micro businesses, with less than 10 employees. Moreover, a recent study shows that 85 per cent of all new employment in the EU is created by SMEs. Should the main focus then be on large businesses when the EU legislates or should Europe focus on creating a healthier legislative environment for its smallest businesses to reap the benefits of their vast, but untapped potential?

The phrase 'SMEs are the backbone of the European economy' has become one of the most popular pieces of political rhetoric. If this is so, then why are we not taking better care of this backbone? It is exactly this failure by the European Institutions as well as the member states to 'think small first' that causes the continuous struggle of the smallest businesses and their inability to innovate, grow and employ.

An Organisation for Economic Cooperation and Development study in April showed that the crisis has hit entrepreneurs and small business hardest . The interest rates on loans are higher for SMEs as compared to the rates for large companies. And SMEs have to provide more collateral in order to obtain loans. Since 2007, the number of loans provided to SMEs has fallen sharply. The new capital requirement rules, resulting from the Basel III negotiations, will only worsen access to finance for small businesses. Apart from a lack of access to finance, regulatory and administrative burdens are still named by entrepreneurs as the most important obstacles to the development of small companies.

The European Small Business Alliance has been advocating this message for years. The EU needs to cut down on the regulatory and administrative burden for SMEs, improve access to and the cost of finance. The one-size-fits-all approach does not work. Small businesses cannot deal with the same rules and regulations as their large counterparts. Where a large company will have the resources and perhaps dedicated staff to deal with a piece of European legislation, small companies often lack the resources to properly comply with the same laws.

The cumulative effect of this has proven to be detrimental to many a European company. This is why legislation affecting SMEs should be tailored to their needs and capabilities. A systematic SME-test should be incorporated in all impact assessments accompanying European Commission laws. And the commission's own 'think small first' principle, requiring that legislation takes SMEs' interests into account at the very early stages of policy-making in order to make legislation more SME friendly, needs to be fully implemented.

Another important aspect hampering SME growth is the European aversion to risk. Much emphasis is placed by the EU on the need for small companies to be innovative, but with innovation comes risk-taking. Contrary to the United States, where failure in business is accepted and a legitimate bankruptcy is seen as being part of the learning curve of a successful entrepreneur, a bankrupt entrepreneur in the EU is stigmatised and will find it virtually impossible to receive another bank loan - or to start a new business. Second chances for entrepreneurs are vital to the innovation process.

We must truly start thinking small first by creating a regulatory environment where small firms can focus on their business. A landscape where SMEs feel confident to take risks and to innovate. And a situation where they can find the financial support to do so. Only then will there be a realistic chance that European SMEs can organically grow into successful larger enterprises.

Patrick Gibbels is Brussels representative for the European Small Business Alliance campaign group