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European Commission


Brussels, 13 December 2013

Commission publishes Product Market Review 2013: Financing the real economy

What is the Product Market Review?

The Product Market Review (PMR) is published every two years by the Directorate-General for Economic and Financial Affairs of the European Commission. It focuses on the impact of product market reforms on economic performance. This edition's focus is on the interaction between the real economy and the financial sector. It explores the extent to which the crisis in the financial sector casts a shadow on economic activity.

What does it say on access to finance and real economic activity?

The main channel through which the financial sector and the corporate sector are linked is access to finance. Especially small and medium-sized enterprises (SMEs) are typically dependent on bank loans to finance their investments, and have limited access to alternative sources of finance.

Several indicators on the difficulties of access to finance are calculated in the PMR. One such indicator is based on the probability that the loan requested by a firm is rejected by the bank. At one end of the spectrum, SMEs in Greece and Portugal typically have a more than 50% probability that a loan is rejected. At the other end is Finland, where the probability of rejection is commonly below 15%. The report studies the impact of these indicators of financial constraints on economic activity.

Why is the Product Market Review important in the current policy debate?

Priorities for policymakers include, inter alia, restoring normal lending to the economy and promoting growth and competitiveness. The results of the analyses presented in the PMR provide further insight to support ongoing initiatives for a sustainable recovery.

What challenges does the report identify concerning the impact of financing constraints on economic activity?

Overall productivity of a particular sector is dependent on the ability for resources to move from less-productive to more-productive enterprises – and, as such, to the ease with which firms can be created or wound up. In normal times, birth and death rates of firms are positively correlated, but in the recent crisis, a decrease in the entries and an increase in exits have been observed. Such decoupling of entry and exit hampers an efficient reallocation of resources, and thereby the process of economic recovery. Policy efforts to revitalise entrepreneurship and investment are of paramount importance to create new employment opportunities and to absorb capital that has become idle during the crisis.

Enterpreneurial dynamics are very closely connected with the business environment and the quality of public institutions. This is why structural reforms, particularly those affecting the functioning of the market in the non-tradable sector such as services and general framework conditions should continue to be implemented.

A key policy is to make sure that banks resume their role as financers of new business activities and lenders to viable firms, in particular those that rely mostly on bank funding. This would not only improve productivity and export chances, but also help with a re-allocation of productive resources towards sectors involved in international trade.

Various policy initiatives are underway to address financial fragmentation and the health of the banking system. The upcoming stress tests in the financial sector and the on-going repair of the financial architecture in Europe will support the process of economic recovery through the mechanisms mentioned in this report.

Well-developed financial markets are conducive to growth not only by lowering the cost of capital, but also by playing a cushioning role in time of crisis for sectors that are more dependent on external funds. Even if the issuance of corporate bonds remains a privilege of larger firms, it may increase the pool of lending available to SMEs. Therefore, a further development of bond and equity markets as alternative funding channels for the corporate sector would enable industries dependent on external funds in time of crisis to shift away from a temporarily impaired channel (like the credit market) towards other market channels. This would increase the resilience of the corporate sector.

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