Brussels, 31/01/2008 (Agence Europe) - Marketing the merits of the financial system in this period of turbulence requires some courage. In a way, this is what Brussels think tank Bruegel attempts to do in a study researching the link between finance and company growth. Reactions to the current situation on the market should not lead people to throw the baby out with the bathwater, explained Nicolas Véron at a press conference on Thursday 31 January presenting the document he wrote with Thomas Philippon. Veron said it was time to recognise the financial needs of start-ups and young companies, which find current financial tools too difficult to access in most European countries. Orienting the financial system in the direction of growth should therefore be a priority for the EU and its member states, on a par with financial integration and financial stability targets, explains Bruegel, noting the causal link between the financial development of an economy and its growth potential.
In the Lisbon Strategy's 24 integrated growth and employment guidelines, there is no specific mention of financial issues, although access to funding is a key factor in the growth and start-up of the most dynamic companies. By underestimating the link between these financial aspects and growth, expanding companies are not provided with the tools they need. Such companies are not necessarily SMEs but also include other companies whose growth dynamics require external finance. Few new 'champions' have developed in Europe at all since the Second World War, explains Bruegel, noting that of the world's biggest 500 companies, only 3 were established in Europe after 1975, compared with 23 in the United States and 21 in emerging economies. Many new companies are actually set up in Europe, but they tend to grow slower than in other economies. This start-up phase requires innovative, made-to-measure, incentive-driven funding mechanisms, different from the solutions provided to well-established companies, which find it easier to stump up capital on the money markets.
Rather than priority funding (like traditional bank loans based on physical assets), start-ups require subordinated financial tools. Such products range from high yield bonds to mezzanine debt and investment funds, which are not as evolved in Europe as in the United States, explains Bruegel, arguing that the public authorities should help establish a level playing field by favouring competition between intermediary finance (non-banking institutions and banks); adapting regulations governing securities to promote an EU market in shares among professional investors (with lower transaction costs); clearly defining rights and procedures to be followed in the event of insolvability; removing existing fiscal distortions, particularly between own funding and debt; and pursuing efforts to scrap prudential rules that unduly prevent institutional investors (pension funds, insurance companies and the like) from investing in shares. (A.B.)