Breaking the Barriers to Micro-Credit in Europe need for a friendly framework

By Laurent Fabius

In the European Union where 12% of all households live below the threshold of poverty, we a need to step up efforts to promote growth, employment and solidarity. In other words, we need to provide assistance mechanisms designed to enable everyone — particularly those who are excluded — to be the subject, rather than the object of social policies and to participate genuinely in the economic life of their country. Other solutions exist between gallows and pity, those two extreme attitudes towards poverty described by Bronislaw Geremek. Micro-credit is such a solution. Its development helps to stimulate growth, support employment and strengthen social cohesion.

"We are in fact too accustomed to thinking of wage earners as opposed to recipients of welfare benefits. Yet there should be a place between these two, for those who want to carry out a project but they lack the means to qualify for traditional financing. They also refuse dependence or assistance and prefer to help create wealth and work. Traditional craftsmen or local service providers, door-to-door salesmen or scrap collectors, promoters of new technologies or inventors of novel products, whoever they are, their efforts deserve our support. Many people believe incorrectly that those who have been abandoned by the market economy, have no solution other than assistance from the welfare state. It is our duty to encourage the living forces of our country-all forces and to rally its production potential, its entire potential.

The stakes of micro-credit become clear when you realise that very small enterprises account for 93% of all businesses in the European Union and one third of its labour force; that half of all enterprises are individual businesses and that one-fifth of all employees work for a microenterprise. This reality is all too often forgotten. Even fewer people know that the unemployed create one third of all French enterprises. Being jobless does not mean being without ideas. It simply and more prosaically means being without the means to realise one's ideas. We need to deal with this problem if we do not want such people to face a hopeless future.

This can only be achieved by supporting microenterprises, i.e. by identifying their needs and their difficulties. This is hampered by an additional obstacle. Because they are dispersed, unorganised and fragile, micro-entrepreneurs — unemployed people with a project — find it hard to make themselves heard, which is why I wanted their testimonies to kick off this conference. Once, we have listened to them, how can we help them? Associations can be used to mutualise functions, organisations. The Internet and other new technologies can also be used to offset dispersal, to generate cohesion, to link small production units, to build a network of expertise and experience. It is my conviction that the instruments of the new economy can be married with the objectives of sustainable solidarity. Contrary to what is sometimes asserted, entrepreneurship in the Old World is frequently a match for the New World. We merely lack the framework needed to make the most of promotion, mobility and social improvement. The way I see it, the government's role as a partner is precisely to implement an environment designed to bring out and encourage initiatives. In order to meet this challenge, Europe needs to adopt at least six measures to develop microenterprises and micro-credit.

The first, is to improve the link between unemployment insurance, social security and business creation mechanisms. The objective of any form of assistance is not to perpetuate assistance, but to enable the beneficiaries to release themselves from dependence. We can only help people rebound, instead of burying themselves or falling asleep, if we can eliminate "poverty and unemployment traps" and confirm that work is more remunerative than no work. This is one of the objectives of the French tax reduction plan, as part of which the CSG and CRDS social security taxes are eliminated or diminished on wages of up to 1.4 times the guaranteed minimum wage in order to encourage marginalised people to find a job.

The Second plan is to develop an environment in which small enterprises can prosper. The regulatory framework in all European countries reflects the structure of large corporations capable of providing the necessary resources and spreading costs over high turnover. It is essential to remove the dead wood from the system, to simplify overlapping and complex regulations and to eliminate the "time tax" charged by governments, which handicaps small enterprises. I have therefore asked Caisse des Depots et Consignations and BDPME, who may be joined by other institutions and partners, to pool their talent and to devise the means necessary to offer small providers of new services a single portal, making it possible for new entrepreneurs to access an overview of all available forms of public support.

The third plan is to offset shortfalls of the financial market. The size of microenterprises is by definition an additional obstacle to their growth. In France, we intend to remedy this in the amended public procurement code. The low margin on the transactions contemplated by microenterprises currently makes it impossible for banks to cover the cost of micro loans. This said, it is less expensive to finance business creators than to pay welfare benefits to the unemployed. Collaboration between associations and the banking sector needs to be strengthened. While it's role is not to replace the private sector, the central government should nevertheless offer the strategic support, arbitration and incentives needed to offset the shortfalls or lack of fluidity of the financial market. This is why solidarity and microenterprises have been included in the Act on employee savings plan I recently presented to Parliament.

The fourth necessity is to make microfinance an integral part of national banking regulations and European directives. In France, an amendment to the Banking Act allows associations to borrow funds in order to lend them to the unemployed. This provision has been included in the New Economic Regulations Bill. Similarly, the European directives need to factor in microfinance by promoting the creation of an unbroken chain of institutions specialised in services in this area: associations exempt from the general law provisions on banks, credit savings cooperatives, banks and government administrations.

The fifth measure is to implement European instruments to finance micro-credit. The creation of a new mechanism to finance micro-credit, focusing on guarantees was discussed during the Ecofin Council meeting on 7 November and has now been approved by the European Council in Nice financed by the European Commission. This system will be managed by the European Investment Fund and, I hope, co-ordinated with training and support from the European Social Fund. It is expected to become operational next spring. I welcome the first pilot launched by the EIB, French banks and ADIE. The memorandum of agreement will be signed during this conference. Henceforth, the way is open for all micro-credit operations.

The Union's sixth and last project is to support the development of micro-credit in the Central and Eastern European Countries. Mainly financed by the World Bank and US Aid, initiatives in this direction have produced remarkable results. Why should we remain behind? The Phare and Tacis programmes need to contribute to this momentum, as the EBRD and the Reconstruction Agency of Kosovo are already doing in one region. Implemented in countries whose democracies have improved, but tend to suffer from the weaknesses attendant upon economic transformation, these programmes foster the emergence of a new fabric of small enterprises, support denationalisation of a previously centralised economy and stimulate employment. The conclusion is, therefore, that there is no lack of people with entrepreneurial spirit, but the institutional environment, has to become more favourable for entrepreneurship. Indeed, some organisations if the CEECs manage to cover almost all of their costs and have become model microfinance institutions. Throughout Europe, our purpose should be to set up sustainable structures designed to provide all economic players with the capital that they need.

These are the six proposals I have sent to President Prodi and to the Ministers of Finance of the other European member states. I have asked them to study these initiatives in order to discuss them again at future Ecofin meetings and to give each country an opportunity to inform the other member states of its best practices. But I am also submitting them here to you for reflection. The results of your discussions will provide a valuable contribution to help us finalise a number of actions in the months ahead.

Ladies and gentlemen, the French revolution made the world aware of the words: "Liberty Equality, Fraternity", three words that are the motto of our Republic. In its own area, micro-credit embodies these very republican values. The liberty to start a business, equal credit opportunity and a fraternal commitment of associations, banks and the authorities, to give everyone the right to economic initiative. Developing micro-credit means moving towards a civic concept of the economy, based on participation and partnership. It means adding social content to the market and a human face to globalisation. In short, this is one way to meet the challenges of the new century."