The Ecofin deceives the SMEs with the EIB €10bn capital increase

The Ecofin Council prepares to start it’s October meeting in Luxembourg, on 15/10/2013. (The Council of the European Union Photographic Library).

Shakespeare’s comedy play title “Much Ado About Nothing” best describes the 28 Ecofin ministers for Finance discussion on the EU Commission and European Investment Bank initiative, wishfully aimed at facilitating the access to finance for SMEs. The programme extends over the next few years and foresees an increase of EIB’s capital by €10 billion. This money is to allegedly help EU’s disadvantaged SMEs to get access to finance. The Ecofin decided that “Preparations are being made to allow the new instruments to start operating in January 2014, at the start of the 2014-20 programming period for the structural funds”.

The whole affair is about a decision by the European Summit of the 28 EU leaders taken last January. The subject matter of it is, that the €10bn increase in the EIB’s capital will “enable it to provide over a three-year period up to €60bn in additional lending to projects in support of growth and employment”. Hypocrisy and wishful thinking deeply permeates this affair.

Curing all woes with €10bn

For one thing, the €10bn capital increase will be magically inflated to €60bn, by a guarantee and possibly a securitisation instrument yet to be decided and already criticised for sloppiness and misconception of market realities. As for the time span, it is only theoretically restricted to three years, because the new initiative will be embedded in the “2014-20 programming period for the structural funds”.

It’s impossible without extra guarantees to securitise south Eurozone SMEs loans and expect the market to buy them at face value or close to that. Understandably, since no such extra guarantees are being provided, the estimate that the €10bn are to mobilise €60bn in EIB loans, is more that wishful thinking, it’s almost a deception.

Consequently the annual impact of the initial €10bn may be reduced to €1.42bn yearly. With this kind of money the 28 leaders want to “encourage banks and other financial institutions to increase the lending for the benefit of SMEs,” as the Lithuanian minister of Finance Rimantas Šadžius, immoderately observed in the Press conference after the Ecofin council. Not to forget that there are more than 20 million SMEs in the EU, representing 95% of businesses and offering 85% of new jobs in the 28 member states.

Deceiving 20 million SMEs

For all those 20 million of SMEs the European Union can’t spare more than €1.42bn a year. It’s really a ridiculous affair, because this Commission and EIB initiative will be given a great career by being presented in the European Council meetings of 24 and 25 October. The reason is that the 28 leaders will happily endorse the initiative, and then return to their countries and advertise that they have just set aside €60bn for the SMEs. Of course this announcement may secure some more votes for their political parties and add some percentage units in their poll ratings.

It’s not only that. The Press release issued after the Ecofin meeting disclosed that “The timetable for the programming of national allocations from the (structural) funds is therefore tight”. The meaning of this is that the €10bn will be allocated to member states according to the “common provisions applicable for the EU’s structural and investment funds for the 2014-20 period”. In short, the money will be divided to all member states which receive EU aid from structural funds. Consequently, some of this money will be directed probably to Germany, Austria, France, probably Britain and other core EU wealthy countries.

At this point it has to be reminded that only the SMEs of the crisis stricken countries in south of Eurozone, are actually cut off from bank credits. Their counterparts in the core of the EU have no problem whatsoever to secure bank financing for sound business plans. On the contrary, the SMEs in south Eurozone, even the well-established of them and, though being competitive, have no access to credit.

At similar business risks compared to their counterparts in core Eurozone members like Germany and France, the small enterprises in the south, when they finally find bank credit they have to pay at least the triple interest rate costs. This is the famous fragmentation of Eurozone’s financial market, that everybody considers as the major impediment to growth and the EU’s economic unification.

It must also be noted that the European Central Bank has set as its main target to fight this fragmentation and reduce it to levels warranted only by structural reasons. The governments of south Eurozone countries, more so the Italian one, recognise that this fragmentation has developed into a major disadvantage in maintaining let alone increasing the well- being of their citizens. In this way their participation in the single euro money area has become an unbearable burden. This issue is so important that came to constitute the major friction point between Germany and the south EU member states.

Obviously the financial fragmentation of the Eurozone cannot be fought with illusions, like this Commission and EIB initiative. It needs much more than that and the ECB has acknowledged it as the major impediment in the transmission of its monetary policies to all Eurozone member states. As a result, this ECB policy provides abundant and cheap loans only to SMEs of the core Eurozone countries.

It is then, certainly a deception that those €10bn will heal the illness of south Eurozone countries.