Select Committee on European Union Minutes of Evidence

Examination of Witness (Questions 140-159)

MONDAY 19 MAY 2003


  140. € 50,000 is the base?

  A. It is the ceiling.


€ 50,000 is the ceiling?

  A. I have to check it.

  142. These really are micro loans. They are for shopkeepers?

  A. Yes, shopkeepers and crafts. It is in my document. Would you please take into account, your Lordships, that the average size of small and medium SMEs in Europe is four; the average size of enterprises in Europe is six, six people. So the vast majority of enterprises in our countries is very, very small indeed. Of course, they are little bit-sized, innovative, exporting companies, but the vast majority is very small. 93 per cent of all enterprises in your country have fewer than ten employees and their average firm size is two, which means the entrepreneur and just one employee. So they need the micro loans; they just want to buy a new machine. I do not say that you don't need equity and venture capital for some SMEs also, et cetera.

  Lord Chadlington: No, but it is very important.


  143. Can I just move you on then to the question of the EU itself. In your written answer to question 1, you provide a long list of examples of actions taken by different countries. Our list is of those examples of actions to promote enterprise. Why on earth is the EU getting involved with individual schemes across Europe? What has this to do with the EU level? Is not promoting enterprise and actions to promote enterprise an issue much better done at Member State level?

  A. If I have understood you, you mean why is the European Union—

  144. The European Union actually has some programmes to support.

  A. To support, yes.

  145. What on earth is the possible justification for this being done at EU level when we are soon to have 25 states? Surely, the position in Hungary is totally different from that in Holland, or in Britain, or in France and so on? What justification can you honestly see in the EU doing anything at programme level? I am not talking about encouraging programmes to be implemented.

  A. Yes. I think this is a very essential and interesting question. To be honest, I think that the European Union should not be involved that much in individual programmes to support entrepreneurship or SMEs. The only legitimacy I see for it is to strive after not too much difference between policies in the Member States. I am not in favour of equalising all policies. I think as there are different circumstances in different countries in terms of labour costs, or the costs of settling down, there can also be differences in policy. I do not think there should be too many differences in policy, but a little bit of competition in policy is not that bad, I think. Taking into account the increasing, let us say, internationalisation of enterprises, if you are a medium-sized firm and you want to set up an affiliate in another EU member country, then it is very boring if all kinds of rules and regulations but also policies differ between the countries. Those are additional costs for you to get acquainted to new subsidy schemes and to new regulations. So for those countries and those enterprises—those are not only the huge corporations, many medium-sized enterprises are now working in the international fields either through agents, or through affiliates, or through partners—we do it ourselves, we have 19 partners in the European Union and we know, from experience, how it is to work with these different partners in a business-like way. I think there should be a balance between a reasonable policy competition and the desire from the business sector to have simple and equal rules and regulations. Let all the Member States develop their own polices which is their main, I would say, responsibility, but on the other hand, not too many differences between the policies because that is not good for the internationalisation of enterprises. There is definitely a role to play for the European Union and the European Commission in stimulating, co-ordinating and exchanging of good practices. Can I just give you an example. There is this huge budget of the European Investment Fund. They provide money to banks in all the countries and those banks provide credits to small enterprises. If you look at the average sum of those loans it is

200,000; that is not for the average SMEs, it is for the top SMEs. I really wonder if that should be—I have to be a little bit cautious—a role for the European Union. It is the money of the Member States. It is going to Luxembourg and then, again, it is going back and everybody likes to have a juste retour in French. You need an awful lot of civil servants to check it and to administer it and to see to it that there is no fraud, et cetera. That is one example which personally I have some doubts about.

  Chairman: That is most helpful. Lady Cohen?

Baroness Cohen of Pimlico

  146. Mr van der Horst, I have managed to your read your answers to question 4, which I take it you gave already. I am particularly interested because last week we had the American venture capitalists and our own DTI here and we were asking them about the role of equity and, like you, they were very clear on high-tech companies. There is just no substitute for equity; loan financing does not really work.

  A. No.

  147. Against that background, I am a little bit startled to see how differently people do it. Is it in the Netherlands you really do not have a government system for equity, you introduce people to each other?

  A. As far as I know, we do not have.

  148. In fact, the Austrians seem to do it the same way. They do not say to themselves: "We must have equity," they introduce people to each other.

  A. Yes.

  149. Is that an area where some kind of direction funds of the EU would be useful?

  A. I wonder. The venture capital industry is, I would say, a very stand alone private industry. There are many venture capital funds. They have a very active European association, EVCA, European Venture Capital Association, which is providing excellent information about the venture capital industry every year. If you look at their year book by country, by size class, it is excellent information. I am not an expert on equity and venture capital, I have to say, but I do not have the feeling that this is an area where the European Commission should do much work. The only thing they could do, I think, is make known to governments how it works in other countries. We know that the UK is at the top of the venture capital industry in Europe and I think Holland is in second place, so we know how it works. There are countries where there is hardly any venture capital industry. That could be a role for the European Commission to organise a workshop, or to stimulate people to exchange good practices. I wonder really if a programme should be set in place.

  150. You have told us in your evidence about the German programme, which I am half familiar with. Is there anybody else? If you looked across all the national states of the EU, who do you think does the best by way of providing equity?

  A. I am not sure if it is the best. As in many other cases there are so few evaluations being carried out that sometimes you know this scheme that has been evaluated, and then the results are quite good and another scheme is quite good, but there are dozens of other schemes that have not been evaluated and they may be good as well. If you select good schemes, it is always a very small selection out of the others. That is a major point. So few evaluations are carried out. It is all taxpayers' money, whether it is national or European. My opinion as an economist and taxpayer is you should set very clear, quantitative targets for your policy. You should demonstrate that there are market failures. Why should the government do something? Is there someone else who can do it? It has nothing to do with politics; it is just from the economic point of view. If you implement policy, it should be evaluated after one, two or three years and if it does not work it has to stop.

Lord Chadlington

  151. We ask all these questions of these very eminent people, like your good self, and we say has this particular scheme or that particular scheme worked? There is very little scientific evaluation that says, "Yes, it has produced this number of jobs or done that number of things." David Storey at Warwick has done some work on this. One of the suggestions is that whenever we put money into a particular scheme a portion of it should be allocated for the purpose of the evaluation. Could you talk about that a little because it seems to me to be absolutely central to what we are talking about.

  A. Some people think that is a waste of money but I do not think it is because going on with a scheme which is not effective or efficient is much more expensive. Then you are wasting money. I gave one or two examples of schemes which were implemented in the Netherlands for many years stimulating enterprise to start export. In the end, we did an evaluation and only the financial situation for the enterprises was improved. The scheme had not stimulated them to export. They would have started to export anyway. It is positive that you improve the financial situation but should it be done with money to stimulate export.

  152. What is the hurdle? It seems to me to be so pellucidly logical. I cannot understand why people do not just say, "Absolutely. We should always have a proportion of the budget for evaluation." I heard you say we have wasted a lot of money but what is the hurdle?

  A. That is a good question.

  Baroness Cohen of Pimlico: I do not think the UK does it either.


  153. When I asked an official in the Department for Education and Skills how successful the programme had been, he told me how much money had been spent. He said, "We have spent a lot of money." I do not criticise the individual. That is probably a fairly typical reaction, judging the success of programmes by whether a lot of money has been spent rather than on the outcomes. Is that an experience that you have come across elsewhere in Europe?

  A. Yes. You see it in the reports of the European Commission. If they have a programme or a scheme, they say, "This was the budget and we spent more or less than the budget." We see it also in the budget of the national governments. Sometimes they have a goal to reach 1,000 enterprises or 20,000 enterprises, but what the impact is on the enterprises in terms of employment, production or whatever, in connection to the original target is very rarely seen.

Lord Fearn

  154. You have already touched on this but are there any lessons which emerge from past EU evaluations which would help to, one, design future EU policy; two, to judge which types of policy have been least successful and are there any policy failures that you can identify which we should avoid in the future?

  A. First of all, there should be a legitimacy for policy. From an economic point of view, there should be a market failure. Only if there is a problem which cannot be solved by the market, a policy could be implemented to solve it. The second point is that there should be evaluations. The third point is that we have to take into account this vast majority of very small firms. I am not saying that we should not stimulate innovation, high tech or whatever but in developing enterprise policies we should also take into account the vast majority, 93 per cent, of all enterprises who have fewer than ten employees, the entrepreneur with just one or two co-workers. If those principles are taken into account, we would have a much more effective and efficient policy both at EU and national level.

Lord Chadlington

  155. I did not hear the very first point you made. Was it the market need?

  A. The market failure. The market should have external effects which we do not desire.

Lord Fearn

  156. Which policies have led to failures in the past which could be avoided in the future?

  A. If I remember, in the very beginning of what is now called DG Enterprise, we were talking about EU policies, the so-called DG23. They were looking for ways to stimulate small business and they had two different subjects. They wanted to stimulate international cooperation and provide information. They wanted to provide information through setting up Euro Information Centres, EICs. We have a couple of them here in Britain as well. They provided money to new and already existing organisations with the aim to provide information to any entrepreneur or enterprise that wanted information about the European Union. My idea is, first of all, why set up a new organisation? Maybe you should do that at the Chamber of Commerce. In some countries, we have mandatory membership, as in my country. Link it to an already existing organisation. In Europe, an awful lot of money was spent in setting up these EICs. There were more than 400 across Europe, including the candidate countries, and they have been evaluated. The outcome was rather poor so in terms of money spent they just measured the number of clients but they did not measure what was the impact of the information on the performance of the enterprises in relation to the costs. This was a way for DG23 to pronounce itself, to put itself on the agenda. I think it was a costly way. Many of those have closed now. Baroness Cohen of Pimlico: Perhaps it is not the schemes which gave people money, as opposed to giving them civil servants, that turned out to be better.

Lord Howie of Troon

  157. The Lord Chairman earlier on raised an interesting question about the relationship between the European Union and national countries, especially with regard to programmes. I would like to talk about policies rather than programmes. Do you think that the EU policies are sufficiently well co-ordinated with those of the national Member States?

 (The Committee suspended from 5.31pm to 5.39pm for a division in the House)

  A. Co-ordination of these policies between the EU and Member States is not an easy task, first of all because Member States do not want the EU to interfere too much in their policy-making process. On the other hand, as soon as EU policies have been implemented, Member States want to get a reasonable share of the budget available for their businesses. A lot has improved over the last years with respect to transparency of policies since the European Council endorsed the European Charter for Small Enterprises in June 2000. Implementation reports have been prepared by the European Commission about the implementation of the Charter. Apart from that, quantitative targets about enterprise policy have been published by the European Commission. Nowadays, there is much more transparency at least of policies implemented at national level. Everyone can follow the progress made in relation to the targets set by their own governments, or the lack of progress. That is not yet really co-ordination. Of course there are meetings in Brussels. For instance, there is a programme management committee in DG Enterprise, where representatives of governments discuss the programme of DG Enterprise and the policies to be implemented. In those committees, policies and policy instruments are discussed. I do not participate in those committees so I do not know exactly how they work but there is at least a level playing field where co-ordination should be possible. If we look at the policies implemented at EU level, there may at least still be some overlap between policies. There are all kinds of schemes at EU level and similar schemes at Member State level. It is very important that, before setting up and implementing such a scheme, the European Commission demonstrates that there is really a need for it, a proven market failure, and that Member States agree on setting up such a scheme on behalf of the European Commission. You also have to check whether it is effective setting the scheme at EU level or is it more effective to have it at national or even at regional level. It very much depends on the content of the scheme, on the way you like to approach the enterprises, but there can be a reason to set up European schemes in order to harmonise policy more or less across Europe.

  Lord Howie of Troon: Does subsidiarity come into this at all or is that a myth?


  158. Put another way, you said policies could be justified across the whole of Europe on a European Union basis. That is not subsidiarity. Can you give me a specific example in this area of an actual policy supported by programmes? Can you tell the Committee, in your view, what would be justified to establish and be run through Brussels, given your market failure criteria, perhaps at Europe level, not at Member State level? Can you think of a serious policy that would override subsidiarity?

  A. If you also consider policies that aim at exchanging information and making things transparent, providing information about the markets, about facts and figures, about businesses inside and outside Europe, providing to all players the same level of playing field for information, this could be an important issue. Stimulating trade, trying to harmonise rules and regulations—for instance, stimulating governments to improve the regulations and to facilitate starting a business or taking over a business from someone else. Those kinds of rules and regulations do not need to be the same in all countries but there should not be too many differences; demonstrating to governments how they can cope with measuring administrative burden, which is a terrible hindrance to many enterprises. If one country has done that in a fairly efficient way, why could there not be a role for the European Commission to demonstrate to other countries that here we have a methodology which has proven to be effective and efficient? Why not apply that in other countries, so exchanging of information and experiments could be very important. I do not think the European Commission or the European Union should implement policies for instance to finance enterprises or to support enterprises. That is a role that should be at national, regional or even local level. I think that is more effective and more efficient.

Lord Howie of Troon

  159. Can you think of any examples where a lack of co-ordination between the Union and a Member State has raised difficulties?

  A. If policies differ so much between countries that there is more or less an artificial hindrance for enterprises to trade with other countries or to set up a subsidiary or to start their own business in another country, then I think there is a role for the European Union to coordinate and to make more transparent the different policies in the Member States. I do not think there should be huge differences. I gave one example of setting up a business in the UK in one day and in Italy in 45 days. There the European Union has a role to say to the Italians, "You really have to improve this. Look to the other countries." Maybe we should finance them to travel to the UK to see how they do it. I think the supranational organisations can have a role to play in that.

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