The strength of the economic recovery largely depends on the fortunes of the SME sector over the medium to long term.
Foreign multinationals may have created much needed employment and contributed to a current account surplus from 2009 onwards, but if the economy is to generate the 3%-plus growth needed to help pay down the national debt and create the robust employment levels to make a dent in the jobless numbers, then the domestic sector has to start moving.
The good news is that there is a huge entrepreneurial spirit in the country, with a number of start-ups and SMEs in lucrative sectors.
The problem is that the flow of credit to the wider economy is constrained. Prior to the collapse of the financial system in 2008, Irish companies relied on traditional bank lending for 85% of their funding needs.
Even though the banking system is on the mend, it is still a far cry from being fit for purpose. Bank of Ireland, AIB, and Permanent TSB are all struggling with high levels of non-performing loans and mortgage arrears. They have to undergo stress tests this year to determine whether they have sufficient levels of capital.
Under new international regulations known as Basel III, banks will have to reach higher capital targets before 2019. In other words, traditional bank lending will not be as accommodating in the future, which means alternative funding models will have to be looked at.
One of the inherent dangers of investment funds is that they seek out the best returns in the shortest time possible. In the years before the crash, there was a disproportionate amount of domestic and international money going into the property market at the expense of the real economy.
Once again, this is becoming a problem. The commercial property market is attracting a significant amount of international funds. The hope is this does not lead to a longer term misallocation of capital.
The securitisation market is one obvious funding model that could be hugely effective in improving the flow of credit to SMEs. However, without support from the ECB and the European Investment Bank, it is unlikely to get off the ground.
Unfortunately, time is an implacable foe. Solutions are needed in the short term.
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