An alternative proposal to support SMEs in Europe
The Centre for European Policy Studies (CEPS), the leading European think tank, released this paper explaining the European Pandemic Equity Fund (EPEF), a proposal to help small and medium enterprises to mitigate the economic consequences of the pandemic through a European equity-like investment instrument in SMEs, in exchange for a proportionate participation in the companies’ earnings.
According to the report the European Pandemic Equity Fund (EPEF) proposal will address at an European level the inefficiencies of current rescue programs across EU member states, which basically are two:
- They are largely debt based, increasing bank risk and sovereign exposure resulting “in an alarming rise in corporate leverage, to the point of heightening firms’ default risk”.
- They are not coordinated at European level and differ greatly in their volume, scope and availability across member states.
How would the EPEF´s instrument work?
- It should be a legal entity, supported by all national governments and managed by an EU agency (for instance the European Investment bank). It should be allowed to issue its own bonds open to private investors.
- The EPEF would offer cash to firms in exchange for a temporary increase in the corporate profit tax rate once the crisis has receded. The additional tax income raised in this way will be channeled back to the Fund in the future, representing its return on investment. The proposal could also be structured through the VAT (value added tax).
- It would provide “a termination option” that gives firms the right to buy out the EPEF in the future, by repaying – after a specified number of years.
Advantages of this instrument:
- It does not increase corporate leverage, and it would allow “small, young and innovative companies accessing alternative funding sources”, which sometimes depend on “more difficult-to-value intangible assets”.
- It creates a common perception of shared responsibility and could help to make the European rescue programs more integrated and coordinated.
- It is a temporary instrument, transitional and therefore “it does not challenge the current ownership structure or the corporate governance of the firm”, which is very relevant for SMEs.
The authors explain how this initiative should be accompanied by reforming the European equity market regulation for SMEs in order to simplify administrative processes, reducing admission costs or providing a clear and consistent definition of SMEs across different legal frameworks. The new Capital Markets Union (CMU) Action Plan is tackling part of these challenges and “correctly underlines the need for further harmonization of the EU capital markets rules”.