One item that is unlikely to be top of David Cameron’s European Union reform agenda is the EU’s proposed capital markets union. Immigration, welfare and human rights appear to be dominating discussions as Cameron continues to meet with all 27 European leaders before the European council meeting at the end of June. Beyond its mundane title though, the CMU has the potential to transform the way that European businesses are funded, thereby supporting the creation of more high-quality jobs. This is the sort of pro-growth European reform that the United Kingdom, and Labour, should be championing.
The UK’s poor levels of productivity and exports are the defining challenges facing our economy, hitting people’s living standards. We need a more dynamic economy which supports the high-growth and innovative businesses that drive the bulk of job creation. And we need a more dynamic European economy too. Europe has far more stable firms that are not adding jobs, while the United States has far more firms that are growing.
As the report that we published for Policy Network this week found, despite there being more SME financing in Europe than the United States, this is not allocated to where it is needed most. Above all, Europe lacks equity financing for early-stage, risky businesses: the levels of Dragon’s-Den-style business angel and venture capital investment are respectively three and five times higher in the US.
Our interviews and analysis across six countries identified three key issues: most countries in Europe tax equity far more heavily than debt; the returns on venture capital in Europe have been close to zero for the last decade; and rigid insolvency legislation in some states prevents firms from restructuring. In 2009 the European economy lost around 1.7 million jobs due to insolvency.
The UK should be pushing for the European commission to drive three policies in particular to help build a deeper equity culture across Europe. First, tax incentives for business angel and venture capital investors – which have been a success in the UK – should be encouraged. These measures should be treated as structural reform and therefore not constitute a breach of the EU’s fiscal rules; and a bond guarantee programme should be considered to help member states fund the upfront cost.
Second, the European Investment Fund should start issuing long-term, low-cost loans to new ‘small business investment companies’. These loans would allow investors to provide a combination of debt and equity to firms, providing a more viable investment model – and as the US has shown this is possible at no cost to the taxpayer.
Third, minimum insolvency standards should be enforced across the EU with a directive if necessary. Many jurisdictions still do not allow debt restructurings, out-of-court settlements and the use of fast-track procedures. These procedures are crucial if businesses are to survive, and to give investors greater confidence to operate across borders.
Our review also highlighted numerous examples of what Europe is good at. From Germany’s system of chambers of commerce, to Turin’s innovation ecosystem, France’s credit mediation scheme, Poland’s education reforms, to the changes to Sweden’s pension system, Europe is a hotbed of policy innovation. The EU should do more to persuade member states to learn from each other.
Labour needs to be leading the charge on a positive UK vision for reform of the EU. A vision of a dynamic economy that is able to create jobs for the future. A dynamic European economy would have significant benefits for Britain, and must be made a top priority.
Progressive centre-ground Labour politics does not come for free.
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