THE European Commission has finally come to recognise the blindingly obvious: the EU’s banks are neither ready, willing nor able to become the engine for future economic growth.
Yesterday it launched an initiative to encourage non-bank lending across Europe in a bid to boost the overall economy, especially the small and medium-sized business sector.
European businesses are still suffering from the effects of the financial crisis largely due to a reluctance by banks to lend. At present, only 30% of lending to businesses in Europe comes from the non-banking sector, such as equity markets, compared to 70% in the United States.
Ironically, this has meant that the collapse of banks like Lehman Brothers had less far-reaching affects on the US economy than it had on Europe.
New plans to get business to tap investor funds across the EU were outlined yesterday by Britain’s EU Commissioner, Jonathan Hill. He launched what is regarded as a key pillar of Europe’s economic recovery, the so-called Capital Markets Union (CMU) which is designed to free up investment across Europe.
CMU aims to encourage alternatives to banks, from crowd funding to investment funds as well as developing the European pension and insurance markets and other retail financial services.
Lord Hill’s plan is to create the conditions for capital to cross borders and to flow to entrepreneurs. It is designed to break down barriers that are blocking cross-border investments in the EU to make it easier for companies and infrastructure projects to get the finance they need, regardless of where they are located.
As the European Commission has finally realised, banks are not the only source of funding, nor should they be considered the default mechanism for economic expansion.
The insurance industry is awash with cash and ready to invest in business. So, too, pension funds which are already putting their money into all kinds of businesses from hotels to IT companies.
Alternative sources of finance, including capital markets, venture capital, crowd funding and the asset management industry, are more widely used in the US and Asia and should play a bigger role here in providing financing to companies that struggle to get funding, especially SMEs and start-ups.
Hopefully, this plan will allow that to happen and show the banks that they are not the only show in town.
Encouraging more equity investment in small and mid sized businesses is the way of the future. Just as solar, wind and battery power are already helping to reduce our use of imported fossil fuels, investment of this nature will reduce our reliance on a financial sector that has caused more trouble to us here in Ireland than it’s worth.
Ireland could be well positioned to profit from the CMU as Dublin’s financial services centre is host to dozens of equity markets and financial services companies.
Best of all, the plan will allow us finally to stiff it to the banks — a nice bonus.
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