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Crowdfunded Loans Power EU’s Cross-Border Goals

Europe’s No. 1 priority is to create jobs and stimulate growth. SMEs are a key driver of both job creation and innovation, but access to funding prevents SMEs from achieving the EU’s economic goals.

According to a recent green paper from the European Commission, diversifying access to capital with an eye toward creating an integrated pan-European market would attract more investment from abroad, stabilize the financial markets by opening a wider range of funding sources and unlock jobs and economic growth. Alternative finance, already a strong market in the EU, will prove crucial to the Commission’s unifying goals.

Dependence On Bank Finance

European banks, following worldwide trends, became more selective following the financial crisis. Tightened credit standards have deeply impacted small businesses across the Eurozone, where SMEs significantly rely on traditional bank-based funding.

The result of a three-month consultation, the “Building a Capital Markets Union” report found SMEs based in the United States receive five times more equity funding than their European counterparts. If financing were equal on both sides of the Atlantic, €90 billion ($97.6B) in funding would have been available to businesses in the five years following the crisis. That money could have gone a long way to address the continent’s growing funding gap, expected to cross the €2 trillion ($2.17T) mark by 2020.

Filling the void left by banks, alternate funders are experiencing a boom across Europe. SMEs and startups have already begun to turn to alternative funding sources, including crowdfunding and peer-to-peer lending, in growing numbers. Total non-bank lending could cross €7 trillion ($7.6T), by the end of 2015, according to research from the University of Cambridge and EY. Well-established alternative markets are thriving throughout Europe, including the United Kingdom, France, the Netherlands and Spain, among others.

Expanding Beyond Borders

Although alternative financing methods are rising in popularity, the European Commission acknowledges the difficulty of expanding the success of national lenders in a cross-border context. Currently, there is little data detailing cross-border financing, although estimates are low. Findings by the University of Cambridge/EY study show that 50 percent of borrowers received no funds from alternative lenders outside of their home country. For those borrowers who did receive funds from outside their nation’s borders, those funds only represented 10-30 percent of what they received.

These findings echo the similarly low estimates for cross-border payments.

The goal of the European Commission’s shared market is to improve efficiency and efficacy by simplifying the process of connecting of those who need funds with investors, regardless of national borders. The pan-European market would also address the high degree of financing variance across member nations. For example, the U.K.’s alternative finance market is highly developed, while markets in the Czech Republic, Denmark and Slovakia are far less developed. Additional advantages of integrated markets include insulation from market shocks and the ability to attract more foreign investment while limiting exposure to increased indebtedness.

Creating a pan-European capital market is a significant feat. Some doubt the ability to institute systematic reform that can address the diverse needs of the 28 member states.

But the authors of the EC’s report understand the complications of addressing historical, cultural, economic and legal factors that are deeply rooted and difficult to overcome. The European Commission sees the movement of capital across national borders as central to the mission of the European Union: “The free flow of capital was one of the fundamental principles on which the EU was built,” the authors write. “More than fifty years on from the Treaty of Rome, let us seize this opportunity to turn that vision into reality.”

The green paper calls for response from stakeholders and other interested parties in addressing these concerns and hopes to incorporate the feedback into a finalized proposal by 2019.

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