Endangered Species: SMEs in Italy, Spain

Make no mistake: there are giant companies in Italy and Spain. However, many of the specialist products these countries are known for are from small- and medium-sized enterprises (SMEs) which also provide the bulk of employment. Unfortunately for them, the credit crisis has made their existences rather difficult. Especially since they are not very large, they find it hard to raise capital via stock or bond issuances. In other words, their modest size makes them reliant on bank loans for finance.

It's too bad that the European crisis has made many banks doubly wary of lending to these SMEs at a time when their needs for credit are the greatest. Hence the sob stories in these troubled times in troubled Latin economies. Let us begin with Italy, whose leaders haven't been especially keen on lending them a helping hand:

With an estimated 5 million enterprises accounting for 80 percent of Italy's gross domestic product, SMEs have long been the main driver of Italy's export-led economy.The crisis for the SME sector is prompting widespread calls for the government to help small businesses and save the 'Made in Italy' brand from collapse...

Italy's SMEs are also notoriously inefficient. There are approximately 65 SMEs per 1000 inhabitants in Italy, substantially above the European Union average of 40 per 1000 inhabitants, according to data from the European Commission (EC). But while Italy has some 1.7 million more SMEs than Germany, they provide 3 million fewer jobs (12.2 million persons employed as opposed to 15.2 million in Germany) and produce only 56 percent of the total value-added of their German counterparts.

Such inefficiency, the EC noted in its 'Small Business" report on Italy in 2012, is part of the reason why, despite the attraction of the "Made in Italy" brand, Italy's SMEs "trailed their EU peers in recovering from the crisis."

Ah yes, Germany again. This excerpt is interesting in noting that not all SMEs are created equal. For all its monster firms, Germany also has a world-renowned Mittelstand doing what the Italians do by and large--make specialist low-volume products. However, on average, German SMEs provide more jobs and have more remunerative value-added content due to their knowledge-intensive, precision manufacturing orientation. As the Paymasters of Europe, it's Germany's inevitable lot though to find solutions for their miserable European neighbours' largely self-inflicted woes: Yes, the Chinese have wiped out their firms making me-too products alike affordable clothing by making, well, even more affordable clothing.

The cure, as in the case of that other sob story, Spain, may be for the Germans to provide the credit so clearly lacking in the private financial sectors of these troubled economies. Is it "European finance"? Well, no--it's "financial aid":

Germany will provide about 1 billion euros to Spanish small and medium enterprises (SMEs) in a bilateral aid programme, Germany's finance ministry said in a draft outline of the plan obtained by Reuters on Monday. Germany's development bank KfW will provide 800 million euros in global loans and take stakes in funds to boost the expansion and employment potential of Spanish SMEs, the ministry said in a draft to the Bundestag's budget committee.

In other words, it's "We'll sort out the developing world as soon as we're done sorted out these EuroBrokes." Lest you think Germany not favouring SMEs or lending to them is a source of their global advantage, take note that lending to the Mittelstand is not only quite profitable but their business is also very much sought after by major financial services providers.

I get tired of saying this, but Germany's example is so much better than that of the rest. It's a pity then that the rest have a hard time emulating Germany's example--which may not be directly transferable in any case. In the meantime, does anyone really doubt why Missus Merkel literally and figuratively wears the pants in Europe?