1. 1 What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition Dr. Klaus-Heiner Röhl Portoroz/Slovenia, April 23rd 2005

2. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition2 What Do SMEs Need to Play their Role in the Lisbon Process 5 Years after: the Lisbon Agenda in Crisis Growing Competition in a Growing EU Business Financing: Answers to Basel II A View on Regulation Strengthening Qualification and Human Capital Innovation and SMEs Conclusions

3. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition3 5 Years after: the Lisbon Agenda in Crisis the Lisbon goal to make Europe the “most dynamic and competitive knowledge-based economy in the world“ is stalled many European Countries stagnate in spite of high growth in the world economy the Kok report states the deficits that hinder Europe in reaching the Lisbon goals, but could be more outspoken concerning the conclusions

4. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition4 5 Years after: the Lisbon Agenda in Crisis By trying to fulfil all goals at the same time – more competition, less regulation for businesses, more R&D, better education, more social and regional equality, and more environmental regulation – the EU in fact wasn’t able to move at all “more of the same” won’t be enough to bring the Lisbon Agenda back on track the EU and its member countries must concentrate on competitiveness, better regulation, business financing, qualification, and innovation

5. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition5 Growing Competition in a Growing EU the EU enlargement with 10 new member countries in 2004 has led to more competition from eastern Europe in fear of even stronger competition on the labour market, the Commission’s proposal for a directive on services has been rejected by the public in the “old” member states but:  often, alleged “wage dumping” is a scapegoat for national failures  the common market for services can’t be postponed indefinitely

6. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition6 Growing Competition in a Growing EU in Germany, minimum wages as introduced in the construction sector are discussed for other industries minimum wages based on collectively agreed wages could lead to even higher unemployment in east Germany in tradable goods, minimum wages can drive businesses to low wage countries instead of keeping wages up high growth in the new member states in combination with low birth rates since 1990 might ease the migratory pressure in a few years

7. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition7 Business Financing: Answers to Basel II the agreement of the Basel II Committee allows for extensive relief for SMEs the retail sector for loans to smaller businesses with a volume of up to 1 million € provides relief for 90 percent of SMEs the possibility to alleviate SMEs from their risk burden must be implemented fully in EU legislation:  the lower weight of risk by SMEs and securities recognized by banks must be taken into account without restrictions  the proposed capping of the bank equity reduction allowed by Basel II will lead to higher interest rates for SMEs and should be abolished

8. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition8 Portfolio of a Bank with high SME orientation Standard & Poor’s Risk Classes Percentage of Credit Volume Taistra, Krämer-Eis

9. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition9 Business Financing: Answers to Basel II with Basel II, equity capital plays a decisive role in financing businesses as the equity ratio defines the rating of a business without good rating, interest rates for credits are excessively high SMEs must earn profits to build up equity through internal financing in addition, the possibilities for external equity financing must be improved tax and institutional barriers preventing SMEs from access to the capital market must be eliminated

10. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition10 A View on Regulation Business sector surveys reveal the heavy burden bureaucracy and excessive regulation impose on companies Though most burdensome regulation is made by member countries, the EU should avoid additional bureaucratic demands on companies Our recommendations for reducing bureaucracy: 1. more efficient procedures 2.creation of incentives and competition 3. less detailed regulation 4. benchmarking for better regulation

11. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition11 Labour Market Regulation – OECD index of barriers

12. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition12 Lower regulation leads to higher employment

13. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition13 Strengthening Qualification and Human Capital better education and human capital endowment are important to strengthen competitiveness and earning high wages in the OECD countries, adults have spent close to 12 years in formal education on average Countries with highest education levels in the EU are Denmark, the Netherlands and Germany Portugal, Italy and Spain show the lowest education levels the new EU members have already higher formal education levels than some old members, but their qualifications might be depreciated in part as they date from socialism

14. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition14 Strengthening Qualification and Human Capital Years of formal education in OECD countries

15. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition15 Strengthening Qualification and Human Capital Level of education attained by adult population

16. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition16 Innovation and SMEs R&D Expenditures as a percentage of GDP The Lisbon goal stands at 3 percent of GDP, while the EU average is 1,9 percent The US, Japan and Korea show higher R&D expenditures than all but 2 EU Countries Lisbon Goal OECD 2004

17. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition17 Innovation and SMEs the EU recognized the growing importance of R&D and innovation in the Lisbon Agenda and its 6th Framework Program SMEs “officially” play a growing role in European R&D financing but at the same time, surveys show a shrinking ratio of SMEs active in innovation SMEs have problems with conditions for participation in EU projects (number of partners from different countries, complicated applications) the answer: Make it more simple!

18. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition18 Innovation and SMEs million Euros 200320042005FP 6 SME-Funds in total 1) - not specified -2.125 SME-specific Programs 185105 430 Collective Research3035 100 CRAFT15570 330 1) SME-specific Programs plus 15 percent of funds for 7 thematic areas ZENIT, Cordis, European Commission SMEs in the EU’s 6th Framework Program R&D

19. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition19 Innovation and SMEs necessary steps to strengthen the European R&D environment are: adjustment of the EU aid framework to the new circumstances fast introduction of the Community patent less segmentation of R&D areas like basic research, applied research and development within large businesses and SMEs better networking of companies with research institutions and universities, e.g. through research bonuses awarded in a simple procedure

20. What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition20 Conclusions in order to bring the Lisbon Agenda back on track, the EU and its members should focus on the central growth-inducing factors  strengthening competitiveness  reducing barriers to startups and simplifying regulation for businesses  strengthening qualification of the workforce and human capital formation  supporting innovation and R&D through simplified programs  avoiding measures detrimental to the stated goals