February 3, 2011

Europe's 500

European Growth Summit

“The European large banks avoid credit risk – a

paradigm change?”

Vincent Van Quickenborne, minister for Economy and

Reform

!Check against delivery!

Ladies and gentlemen,

I spent last week in a small mountainous resort in Switzerland

and I can best describe the mood of global leaders and
entrepreneurs there as one of “cautious optimism” for the year
ahead. Even professor Roubini, better known as Dr. Doom, saw
the glass as half full rather than half empty.

And yet, as we are emerging from the worst crisis since the
Great Depression, we can still see the damage that was
wrought. The financial crisis and the ensuing economic
recession have led to an increase in unemployment in Europe,
an increase in levels of public debt and, in certain countries,
severe declines in house prices. On the economic front, Europe
is witnessing a cautious recovery, with renewed strong growth
in Germany, but lacklustre performance in many other
countries, not to mention the problematic state of Greece and
Ireland.
The growth companies assembled in Europe’s 500
Entrepreneurs for Growth are right to continue to be worried
about the state of the affairs. Although the stock exchanges
have recovered and overall consumer confidence is on the rise,
there remain important issues to be tackled.

Banks have over the last century grown their balance sheet
exponentially. In several countries, the assets of the banks are
larger than the GDP of the country. At the same time, the
capital ratio and the reserves in the form of cash deposits have
continued to decrease. This has led to ballooning profits for the
financial sector, but also to increased vulnerability in case of an
unexpected downturn as we have witnessed recently.

The new capital ratio’s under Basel III are therefore a necessary
step to return to a more balanced and healthy banking system.
It is only one step though. Barely a year after the crisis, we see
signs of the bonus and greed culture returning. And we witness
the banks taking excessive risks again in trading on their own
book, including by taking speculative positions against the
same government debt that was used to bail them out. In
Davos, the banking sector stated that they were concerned by
the negative impact of over-regulation. Most of the rest of us
however, fear the impact of a repeat of past performance by
the banking industry.

Whilst there is large consensus that banks must de-leverage,

there is also justified concern regarding the impact thereof on
the real economy. Especially in Europe, where growth and
venture financing is still mostly the preserve of the banking
industry, as the VC sector in Europe is much smaller here than
in the US and Asia. And I must say, this is something we have
been vigilant about from the outset.

If banks were to be bailed out by public money, it was so that

they could resume their essential service to the economy. By
granting loans to consumers that had saved a sufficient starting
amount to afford a home of their own. And by financing new
economic ventures and investments. In Belgium specifically, I
have set up a credit monitoring unit to be able to verify whether
there really was a “credit crunch” that impacted the real
economy. The result of our research was that overall credit
development remained largely on par with the pre-crisis years.
Only during the third quarter and the fourth quarter of 2009 a
net year-to-year decrease in outstanding corporate credit was
measured. Nevertheless credit conditions seemed to have
gotten tighter. Several national governments have therefore
intervened by filling the gaps left by the banking sector.
Belgium has for example extended the guarantees for certain
types of loans to SMEs and has appointed a Credit Mediator to
negotiate with banks on behalf of the SMEs. This last measure
appeared very successful and was cited by the OECD as one of
the best responses to the crisis. In line with France, Belgium
introduced a government funded insurance against non-
payment by suppliers, called Belgacap. Companies cannot be
obliged to take over the role of banks.

But more needs to be done. Especially in the area of

developing alternative sources of finance.
Eurozone household savings rate in December 2009 was 15.1%
compared with the US at 3.6% and Japan just above 2.0%.
Nevertheless, only a small fraction of this capital is invested
directly in emerging or developing companies. Governments
should reflect on ways to make this capital –at least partly-
available for direct investments in corporate capital.
Why not expand the existing tax benefits for long term pension
saving to long term investments in corporate capital? Can the
EU through standardized and simple information sheets for
financial investments boost investors confidence, thus making
more capital available?

Ladies and gentlemen,

it is clear that we need to do more than provide capital to

stimulate innovation and to allow growth companies to flourish.
The sad fact is that not one European company appears in the
list of the 10 most innovative companies of 2010: 8 are
American, 1 Chinese and 1 Swiss, but none are from within the
European Union. Various organisations have therefore called
for action from European governments and this call has not
gone unheeded.
During the latter half of 2010 I have chaired the EU
Competitiveness Council as rotating president. And my 26
colleagues and I shared a sense of urgency to take the
necessary measures to unleash Europe’s true growth potential.

As such, one of the main areas we discussed was the deepening

of the Internal Market. The Internal Market is the most
successful result of the European project, but it remains very
much a work-in-progress. Various studies, such as the Monti-
report, have shown that companies in many areas continue to
face 27 fragmented national markets. This matters, because it
limits the growth potential of our companies. US firms that
have an immediate outlet for their product of 300 million
consumers are better placed than for instance a Dutch
company that can only access its national market of 16 million.
Recent research by the Bruegel Institute also suggests that
large European businesses are “enjoying easy profits in
imperfectly competitive European markets that help them build
stronger positions on global markets.” It is often incumbent
firms – national champions – that hinder the removal of the
impediments to seamless cross-border trade. The Single
Market Act spearheaded by Commissioner Barnier is set to
tackle some of these issues.

Another area where Europe continues to shoot itself in the foot,

is its complicated patent system. For over 30 years now we
have been discussing the introduction of a single EU patent. For
patent protection across the whole European Union, a company
pays approximately 24.000 EUR on translations and validations.
By way of comparison, in the US you get a patent for the whole
territory for 1.850 EUR! That’s more than 12 times cheaper! For
some experts like Mike Sax, a Belgian software developer who
moved to the US a couple of years ago, this partly causes why
most successful recent innovations like Google, Twitter or
tablets are US-originated. European entrepreneurs fear to share
their knowledge, because the protection of this knowledge is
complex and poor.
Therefore the December 10th decision of 11 member states –
quickly followed by others- to ask the European Commission to
start a procedure of enhanced collaboration on a pan-European
patent cannot be underestimated. It guarantees that an
affordable EU patent will become reality. Thus motivating
companies to invest in R & D and strengthening our competitive
position towards China and other emerging economies.

Apart from the indirect impact of governments through

improving the economic framework, the direct impact through
public spending cannot be underestimated. To strengthen the
position of our growing or emerging European companies,
public tendering should focus on new technologies, innovation
and growth. Yes, budgets must be balanced, but not at the
expense of innovation and growth. In constructing deficit
reduction programs, governments should avoid the easy way
out, such as blind percentage based across-the-board
reductions. Savings should be “smart”: they should cut in the
fat and not in the muscle of the economic tissue. And leave
room for investments in infrastructure and support for
education and research and development.
Ladies and gentlemen,

Benjamin Franklin said: “Without continual growth and progress,

such words as improvement, achievement, and success have no
meaning.”

If we look around us, beyond the boundaries of Europe, we can

only note that we are challenged in the global race for
innovation and growth. It is time to pick up our stride.
Companies like yours will be the building blocks of our future
success and prosperity. It is our task as governments to create
the environment suited to help you reach that goal.

Thank you.