In the 1990s and 2000s, protected by the predominance of neoliberal thinking, the financial industry inflated beyond recognition. Mindless deregulation put financial markets on steroids; they ran amok. When the bubble inevitably burst in 2008, the resultant shock plunged the world into a crisis. Europe was hit especially hard. With the Green New Deal, we Greens have been at the forefront of calls for the re-regulation of the financial industry. With our ideas and proposals we have been able to successfully curb bankers’ bonuses, tighten regulation on derivatives trading, limit speculation and increase transparency.
Unleashing finance into the real economy
Undoubtedly, much work still lies ahead of us in order to strengthen Europe’s financial architecture. The establishment of a robust banking union is one critical example. But during the crucial challenge of putting speculative finance on a leash, we mustn’t neglect to simultaneously unleash finance into the real economy. The transformation to a sustainable, efficient, hi-tech economy will cost money and will need investments in our energy system, in mobility, in the building sector, and in many other areas. We need to be able to finance an industrial turnaround.
In the aftershock of the financial crisis, however, credit markets have frozen and lending to the real economy has shrivelled up. According to the European Commission, 2013 saw the lowest bank lending yet to the European economy. This trend shows no sign of abating as European banks continue to deleverage and shed assets. This is particularly hurting SMEs and midcaps.
Southern European economies desperately in search of financing
Simultaneously, European finance is retreating behind national borders. Since 2008, cross-border bank lending has dropped by an astonishing $2.2 trillion. Combined with the excessive austerity policies pursued, this has led to further distortions in financing conditions. This is particularly the case for Europe’s South. In 2012 almost 40 per cent of all lending requests were denied in Greece. In Portugal, a quarter of all requests where denied while in Spain the rejection rate was 20 per cent. For the companies fortunate enough to receive loans, their financing conditions were also markedly different from, for example, companies in Germany. While in March 2013, small- and medium-sized companies in Germany paid an interest rate of 3 per cent for their loans; SMEs in Italy, Portugal and Spain had to pay double that. Since then, the situation has arguably improved. In August, the borrowing cost differential between German and Spanish companies was close to 1.5 percentage points. Nevertheless, this is a marked difference when considering that two years ago the gap was only a few basis points. The situation remains volatile and could easily change again.
Last but not least, the banking sector is consolidating with an increasing number of local and small- and medium-sized banks – which provide the majority of the credit to local SMEs – being swallowed up by larger financial corporations which have smaller SME lending portfolios. In 2009, for example, Spain had around 53 banks and cajas (savings banks) while by the end of 2012 this number had fallen to 12.
The regulators as hostages of the finance industry
The credit crunch hides a further danger. It allows the finance industry to take European regulators hostage by arguing that more regulation will lead to less lending. This situation will make it harder for us to fight for better regulation. Voices calling for a halt to the Basel 3 banking rules are growing louder. Rules and regulations are being watered down as we speak.
On 12 January 2014, for example, global regulators weakened the new Basel 3 rules by easing the requirements for products such as derivatives. One analyst from BNP Paribas went so far as saying that this was “more of a win for the industry than (he) was expecting”. A recent proposal from the European Commission on the structural reform of the EU’s banking sector has also been weakened with no mandatory full separation of retail and investment banking activities envisaged.
If we want to put finance on a leash with smart regulation, we must take the wind out of our opponent’s sails by having policies that simultaneously unleash finance and restore lending into the real economy.
At its summit in June 2013, the European Council put the issue of financing high on its agenda, announcing an “Investment Plan for Europe”. But this plan is a red herring: while the European Heads of State and Government put forth this shiny slogan, they simultaneously cut the EU budget, particularly in those areas that provide financing for innovation, efficiency and competitiveness for SMEs, such as the EU’s ‘COSME’ programme.
During the crucial challenge of putting speculative finance on a leash, we mustn’t neglect to simultaneously unleash finance into the real economy.
The Green response
Few industrialists would think of looking to us Greens when it comes to proposals related to financing. However, precisely because we want to advance an industrial transformation, we have confronted this question and have concrete answers on how to spearhead funding for a green economy.With public coffers running on empty, and bank lending frozen, the focus has to be particularly on policies that leverage private financing. This can be done via three main routes.
First, taxation policy has an important role to play. Those who contributed to the crisis should also help pay for solving it, for instance. In addition, the Emissions Trading Scheme and carbon taxes are of great importance.
Second, we can create new markets and steer finance into them via regulations and incentives. The renewables feed-in tariff is a prime example. With it, Greens in Germany have not only boosted the uptake of renewable energies; we have created an entire new class of entrepreneurs!
Last, but certainly not least, we need to stimulate private financing via new innovative credit models and partnerships. The stark differences in financing between EU and US companies demonstrates the relevance of this topic: contrary to the US, European firms rely heavily on bank credit. Loans from banks account for roughly 80 per cent of European companies’ corporate finance while in the US this represents a meagre 20 per cent with most of the financing coming from private credit markets. As such, European industry is more sensitive to impacts on the banking sector than their counterparts in the US. In this context a number of ideas regarding private financing warrant close attention.
One avenue to allow private financing to flow to small- and medium-sized enterprises would be to establish local bond markets. In Germany, five stock exchanges have carried out over 50 bond issuances for midcaps, with the exchange in Stuttgart leading the way. The individual volumes for these placements have ranged between €30 and €100 million. Local bond markets are also being established now in France and Sweden. One proposal could be to learn from these experiences in setting up local bond markets and allowing successful regions and cities, such as Stuttgart, to team up with their southern counterparts, for example Madrid or Lisbon, to facilitate the establishment of similar exchanges.
Crowdfunding the energy transition
Crowdfunding is another, albeit smaller, example holding great promise. Last year, for instance, the crowdfunding website Kickstarter received nearly $500 million, with 19,911 projects reaching their funding targets. In fact, crowdfunding holds such potential, that the United States promoted it in its JOBS Act allowing small companies to access this kind of financing. It is also a great opportunity to advance financing for the Energiewende. The crowdfunding platform Mosaic, for example, has financed numerous solar power plants. In Germany, the first steps are also being taken in that direction, with the platform Bettervest allowing individuals to contribute to the financing of energy efficiency improvements whilst at the same time reaping an interesting rate of return for their investments, particularly in the current environment of record-low interest rates. The European Commission has been slow to catch on to this trend but should support these efforts while simultaneously ensuring an adequate regulatory framework in order to provide sufficient protection for investors.
Pension funds for sustainability
Other financing channels could also be investigated, such as the private placement system – well established in the US – which allows the pension fund and insurance industries to supply credit to businesses. One particularly useful business model could be private-private partnerships in which a pension fund teams up with a bank to provide a mixture of long-term and short-term financing. This would be of interest to both stakeholders since pension funds need long-term assets to match their liabilities while banks are currently extremely loath to provide long-term loans.
There are also a number of other ways that could stimulate European banks to provide greater financing to SMEs. For example, a careful revival of the securitisation market could be undertaken. In this context, collateralised bonds for SMEs could be sold to national investment banks that would link the purchase to further SME lending targets for banks. The European Commission, for example, has calculated that an investment of €10 billion together with limited funds from the Commission could, via a joint securitisation and risk pooling instrument, leverage up to €100 billion in SME lending, benefiting roughly one million SMEs. Such an ambitious policy, however, would undoubtedly need careful scrutiny before receiving the green light.
We need to create a sustainable, long-term financing architecture for Europe and promote policies that will alleviate the credit crunch. With bank lending freezing up, an increasing number of stakeholders are calling for a halt or a “breather” in regulating the financial industry in order to ease financial flows. We must not let them play off the credit crunch against a safe financial architecture, but must go on the offensive ourselves and show them how to finance the real economy.