MICROCAPITAL STORY: European Union (EU) Proposes to Provide €100m in “Micro-credit” for Domestic Small Businesses to Counter Credit Crunch and Unemployment

The European Commission (EC), the executive branch of the European Union (EU), plans to allot EUR 100 million from the EU budget to provide “micro-credit” for people hoping to start a small business. A total of EUR 500 million will be available for microcredits when supplemented by the European Investment Bank (EIB), the “policy-driven lending institution” for the EU. EU leaders will further discuss this plan later in June.

This plan is part of a larger objective and proposal to immediately make available up to EUR 19 billion to combat unemployment in the current recession. The funds will come from the European Social Fund (ESF), an EU program to support employment and reduce differences in standards of living across EU member states and regions. For the period between 2007 and 2013, the EU has committed EUR 77 billion to the ESF, which is about 10 percent of its total budget. Moreover, the EIB announced in 2008 that it would broaden the way it supports small and medium-sized enterprises (SMEs). It plans to have around 30 European microfinance institutions (MFIs) grant and distribute microcredits and provide technical assistance to the small companies. Currently, the information on which MFIs will be participating is unavailable.

As a response to the financial crisis, almost EUR 12 billion of the EU budget in 2009 will go to projects to “boost Europe‘s competitiveness,” 6.2 percent more than in 2008. The 2009 EU budget is at EUR 116.1 billion, whereas the projected 2010 budget for the EU will be EUR 138.6 billion. The EU and euro area are facing an unemployment rate of 8.6 percent and 9.2 percent respectively. The plan is a response to help those struggling to find money, those who are too young, are unemployed, or have faced the credit crunch. Furthermore, the plan is to provide mentoring, training, coaching and the possibility to increase the capacity of their businesses once they are off the ground. As stated by the EC’s President José Manuel Barroso, “This new facility will extend the range of targeted financial support to new entrepreneurs and help them to overcome the squeeze on credit.”

Small businesses, defined as businesses with less than 250 employees, comprise up to 99 percent of the companies in the EU. It is the position of the EC that small businesses, as the main employers and source of new jobs, will help stimulate the European economy. They provide the majority of jobs, 70 percent, in the EU in key industries like textiles, construction and furniture-making.

The fact that the EU uses the term “micro-credit” when describing its own domestic programs is confusing and problematic. As defined by the EU, micro-credits are “tiny loans” of up to EUR 25,000. However, micro-credits are customarily meant for microenterprises, not just SMEs, in much smaller sums. This marks another episode in the evolution of the term “micro-credit” or “microfinance.” The term “microfinance” has been traditionally known as and applicable to microfinance in emerging economies, but has come to apply to the developed world as well. The microfinance model in a developed country vastly differs from the model in a developing country. The two differ because money is inexpensive but labor is expensive in a developed country, which is the opposite in a developing country. Thus, microfinance in a developed country is more of a philanthropic exercise or government mandate or subsidy to provide financial assistance. Microfinance in the developing world, however, requires established institutional players and infrastructure, where MFIs are able to manage their own portfolios viably. Please see these MicroCapital stories for further discussion on the term microfinance and its history here and here.

The European Investment Bank is the long-term lending bank for the European Union, established by the Treaty of Rome in 1958. Its task is to contribute to the integration, balanced development and economic and social cohesion of the EU Member States. EIB supports the EU’s priority objectives, especially European integration and the development of economically weak regions. The EIB raises funds on the capital markets, which it lends to projects furthering EU policy objectives. It has assets totaling about EUR 352 billion. EIB is an international financial institution, a publicly owned bank, and its owners are the Member States of the EU.