Brussels, 22 April 2024 – The European Union’s economic strength rests on the shoulders of its many millions of small and medium enterprises (SMEs), according to the long-awaited report from former Italian Prime Minister Enrico Letta on the future of the single market. Yet SMEs do not reap the rewards of the single market.
Letta’s report, Much More Than A Market, commissioned by the Belgian Presidency of the European Council with the support of the European Council and European Commission in June 2023 to examine how to make the single market fit for purpose, highlights how SMEs are consistently let down in favour of big business when it comes to navigating cross-border trade.
What insights does Letta have for the future of SMEs in the single market?
European Code of Business Law
One of the most ambitious proposals from the report calls for the establishment of a pan-European Code of Business Law to address the disproportionate amount of red tape faced by SMEs across Europe when it comes to dealing with cross-border trade.
93% of SMEs feel that the single market inadequately supported their company’s operations and competitiveness, according to the European Parliament of Enterprises held in November 2023.
Regulatory compliance, differing legal practices, and administrative burdens disproportionately affect SMEs, limiting their ability to expand beyond national borders.
SMEs rarely have the legal and administrative resources to deal with the large amount of paperwork that comes with doing business across 27 different tax systems.
Existing regulations often force SMEs to incorporate as French, German or Italian to align with the largest markets in Europe, yet these SMEs have predominantly national financing options.
Without large administration departments, consultants and specialists, these obstacles mean that SMEs are effectively excluded from accessing the single market.
Enter the European Code of Business Law. Proposed by Letta, the code would streamline regulations with a standardised framework for operations within the EU, simplifying legal procedures and fostering cross-border trade, directly addressing the current patchwork of national regulations and enhancing competitiveness and attractiveness.
In practice, the European Code of Business Law would allow the option of complying with the EU code or the national code. However, in areas where the EU has exclusive competencies, the Code would replace national laws to address the current overlap in regulations.
Less detail is spent on how establishing a European Code would proceed, other than that it would be a long-term project that Letta acknowledges will take significant political and technical willpower to establish.
In the meantime, improvements can be made to existing systems, such as systemising national legal frameworks and establishing a simplified European company procedure.
The Service and Tax Problem
Services and tax are highlighted as two areas of the single market that need significant improvement.
SMEs in the service sector encounter challenges such as discriminatory practices based on nationality or residency, limitations confining service providers to operate solely within one Member State, the imposition of protectionist economic needs tests, authorisation processes influenced by entrenched competitor involvement, and impediments to the seamless temporary provision of services across borders.
Tax fragmentation further complicates matters, with the co-existence of 27 distinct tax systems presenting a significant hurdle for SMEs. Unified rules governing the tax base of enterprises and differentiated frameworks tailored for both large corporations and SMEs would improve their access to the single market.
Moreover, eliminating tax barriers in cross-border investments harmonising indirect taxation and modernising VAT systems are all steps that can be taken toward harmonising the single market further.
Unlikely Partnerships
More partnerships between public and private entities can boost innovation and help save the planet. Letta deems supporting green transitions to be the most strategic choice for global competitiveness, with European SMEs placed at the forefront of this push for sustainability through innovation in procurement.
Entities such as the European Investment Bank (EIB) can play a pivotal role by providing crucial funding, serving as a vital lever in supporting startups, scale-ups, and SMEs in the development of new products and services to navigate the green and digital transitions.
Letta also suggests new partnerships between SMEs and household savings. A sizeable portion of EU cash is locked up in savings accounts and mutual funds, and Letta floats the idea of directing these underutilised EU household savings into the economy through an EU-wide scheme allowing private savers to invest in alternative funds.
This initiative could then act as much-needed resources to SMEs, especially in traditionally underfunded markets, while also raising awareness about capital markets’ advantages and risks.
Procurement
SMEs across Europe also face challenges in competing for tenders and bids. With current systems favouring awarding contracts to the lowest bids, SMEs are locked out of the procurement process by bigger companies, meaning that contracts lose out on innovation, quality and strategic local supply chains offered by SMEs.
Innovation procurement, particularly in green and digital technologies, holds significant potential to support startups, scale-ups, and SMEs. But with price as the primary concern, SMEs and start-ups continue to be overlooked by cheaper options in public tenders, especially in unfamiliar markets, with larger companies leveraging the Single Market’s benefits to lock SMEs outside of the market.
Contracts must be made more appealing to SMEs by streamlining administrative processes, refining selection criteria, and enhancing administrative capacities. Cross-border contracts can become more attractive through centralised procurement and the use of AI tools to overcome language barriers.
Public Support for the Single Market
SMEs represent 99% of all businesses in the EU, employing 100 million people and accounting for more than half of Europe’s GDP. Yet continued disparities mean that the vast majority of SMEs cannot reap the rewards of the single market.
From large companies swooping in and outbidding on tenders to difficult and complex administration and reduced cross-border interoperability, Letta observes that continued disparities will eventually undermine public and political support for the continuation of the single market.
Accessible administration and increased interoperability should be prioritised by the European Union. Not only will this increase support for the single market, it will drive the creation of new businesses and welcome new entrepreneurs and SMEs into the market.
Prioritising Inclusion
As highlighted in Letta’s report, administrative burdens lock SMEs out of the single market.
Over 7.5 million entrepreneurs are missing from Europe, according to the OECD, due in large part to the difficulties of setting up a business and the inaccessibility of administration for groups underrepresented in entrepreneurship figures.
UNITEE’s European Agenda for Inclusive Entrepreneurship highlights accessible administration as one of the key points of improvement for increasing inclusive entrepreneurship.