Current challenges for SMEs and regional banks in the European Union
IED Research Paper by Horst Gischer & Bernhard Herz
This research shows that for a successful fight against the Covid-19 pandemic and the climate crisis, better working conditions for SMEs and local banks, their main funding partners, are indispensable.
#SME, #local bank, #Covid-19, #Green Deal, #unconventional monetary policy
The European Union faces three major challenges: the imminent COVID-19 pandemic; the more fundamental climate crisis, and the longer-time fallout of the ECB's unconventional monetary policy. Households, enterprises, markets, and regions are hit in various ways and along different timelines. Their chances to counter and mitigate these multiple crises vary considerably.
SMEs, the core of the European economy, are particularly hit in the pandemic as they are disproportionately active in the most afflicted service sectors. Simultaneously, they are crucial in the fight against the climate crisis, where new ideas, technologies, business models are to be implemented in a decentralised, local way. To support this transformation process, they depend on vital local banks as their main financiers. Based on proximity, well-informed regional banks can provide lenders with better credit conditions and channel pandemic-related support programmes faster and in a more targeted way. However, regional banks are faced with the double burden of negative interest rates and increasingly burdensome regulations.
In our empirical analysis, we find a major contradiction between, on the one hand, significant heterogeneity in national and regional goods and financial markets and, on the other hand, supranational monetary and regulatory policies of the 'one-size-fits-all' kind. Grounded in institutional complementarities, the differences in national and regional social and economic structures have value in themselves and constitute the basis of comparative advantages. As long as financial and regulatory policies are implemented on a supranational level, diverse and unintended consequences in the individual EU Member States are likely to result, however.
For sustainable development, the principle of subsidiarity is called up, and diversity must be put to work to benefit all. For SMEs to overcome the pandemic-related travails, public support programmes must be adapted and retargeted. During the recovery period, tools have to be designed to fight the already evident follow-up problems of the crisis, namely large debt burdens, to avoid a financial backlash later. Improving SMEs financing conditions remains a major task. For regional banks, a return to positive interest rates and more differentiated regulations in such diverse fields as bank capital and the ESG taxonomy are of utmost importance.
About the Authors
Horst Gischer serves as a Professor of Economics at the University of Magdeburg and managing director of the Research Center for Savings Banks' Development. His fields of interest are financial systems, new empirical industrial organization, and public financial institutions.
Bernhard Herz is a Professor of Economics at the University of Bayreuth and managing director of the Research Center on Banking Law and Banking Policy. His research topics include international and monetary economics, as well as international banking systems.