Has “Super” Mario Draghi saved the euro? Last week, the European Central Bank chief announced a trillion-euro scheme to buy up government debt, a policy that has already led to a softening of the value of the Single Currency, hopefully boosting European exports and staving off the threat of deflation.
However, will the ECB’s plan really help normal Europeans? Will all the extra money created to buy bonds and other assets stay locked up in the banking system, or will it work its way out into the wider economy? We had a comment from Marcel, who argued that poor and middle class families won’t feel any of the benefits of Quantitative Easing:
These programmes benefit the rich (buying/guaranteeing their assets) and end up hurting the poor and middle class (via higher inflation).
How can we ensure that banks don’t just sit on that money, and instead loan it out and invest in the wider economy? For example, we had a comment sent in from Guido arguing that access to start-up credit is one of the biggest challenges facing small businesses in Europe. He argued that finding the financing to start a small business in the EU is much too hard, and more often than not it means investing all your personal wealth, or even taking out personal loans – usually against your house. If the business goes belly-up, then you lose the roof over your head, which obviously cools the entrepreneurial flame.
We recently spoke to Marjut Santoni, Deputy Chief Executive at the European Investment Fund (EIF). The EIF is a European Union agency that provides risk finance to benefit small and medium-sized enterprises across Europe. It offers targeted financial products to banks and other intermediaries, guaranteeing and leasing companies, micro-credit providers and private equity funds. In other words, the EIF is exactly the EU agency designed to encourage banks to lend to small businesses. How, then, would Marjut Santoni respond to Guido’s criticism?
I would agree with him. And I would say that this is exactly what the European Commission has recognised, and that is why they have set up financial instruments that try to help banks to take more risks in order to provide credit to start-up companies. And these are exactly programmes like the COSME [Competitiveness of Enterprises and Small and Medium-sized Enterprises] programme, or the programmes under Horizon 2020 [the EU’s Framework Programme for Research and Innovation], which are aimed at facilitating access to financing by entrepreneurs and SMEs.
Furthermore, EU structural funds can be used by Member States to establish financial instruments, under which banks and other credit institutions can provide credit to start-up companies. So, I absolutely agree with him, and I’m glad that the European Commission has taken steps to try and improve the situation.
We also had a comment from Mihai, who thinks the best way to support small businesses – especially new businesses – would be providing access to investment loans for more than 10 years. These would offer a smaller repayment rate monthly which would make credit more attractive. How would Santoni respond?
I would also answer positively, and say that I’m exactly of the same view. And, again, the programmes that we’re managing on behalf of the European Commission tend to promote longer maturities. So, as banks tend to provide more mid-term credit, European entrepreneurs are eligible under the programmes like COSME and the Horizon 2020 programmes for more long-term credit.
How can we encourage European banks to lend to small businesses? Let us know your thoughts and comments in the form below, and we’ll take them to policy-makers and experts for their reactions!