1st January 2009
Some optimistic analysts and hopeful forecasts were about to make the world believe that a long-term recovery was coming up, some bad news recently struck Europe again: the IMF cut its estimates for German economic growth for 2014 and 2015.
Some may explain this bad news on events in Ukraine and in the Middle East however, it does not hide the fact that Germany, often described as the power house of best practice within the Eurozone, has also internal problems which are strongly linked to the chronic and typical European difficulty in boosting public and private investment.
Indeed, not only for Germany but also for most of the European countries, these internal problems and difficulties in implementing efficient and dynamic investment policies to foster activity are mostly due to a dangerous paradox which has been exacerbated by the crisis: a lot of states are weighted down by very high levels of public debt whereas, at the same time, SMEs are suffering from a deep lending problem. However, these SMEs are the key generators of employment and income, maybe ones of the most important factors that could prop up growth and bring deep long-term benefits for the Eurozone. Consequently, solving the finance gap for SMEs seems to be a good solution to drive growth. How can we succeed with such a challenge while even the ECB failed to address it, despite its measures of lowering interest rates and announcing a plan to stimulate bank lending to the private sector?
Maybe one can find the answer in a non-institutional and logical obviousness: finding the money where it is in order to place it where it is needed. This is exactly the principle of crowdfunding, and actually one of the first founding principles of banking at the very beginning. Then, is crowdfunding one of the answers to European economic growth?
First of all, it is necessary to define the different actors of an economy: to create value through GDP and to sustain employment, companies need to be financed by investors in order to produce goods or services that are going to be bought by customers or exported. Consequently, based on this definition, crowdfunding seems to constitute a reasonable virtuous circle: as far as lending platforms are concerned, businesses have access to lower rates and investors experience better returns (an average 8% return versus a 1% interest by keeping their money on a CD for example). Similarly, rewards platforms allow start-ups to raise funds quickly and stimulate the consumption disposition of customers and the innovation process, which is a key generator of growth. Finally, the equity crowdfunding model helps financing the long-term growth of SMEs and provide fast liquidity to young companies, and it reduces the bureaucratic processes of traditional investment.
Then yes, crowdfunding can be an answer to European economic growth. But can it succeed alone and can the change take place today? Actually, crowdfunding platforms may not be competing with traditional investors (VCs, angels and even high-street banks) but they are completing and improving them. Indeed, when the traditional system fails to create growth, the new one comes and offers something else, in order to overcome the errors of the past and encourage the current actors to change their behaviors: the answer to the European economic growth will probably be a cooperative one (the partnership between Funding Circle and Santander is a good example of it). Moreover, to succeed, crowdfunding needs the support of governments, which will have to introduce legislation to develop alternative sources of finance, and the adherence of SMEs themselves, whose lack of awareness for P2P systems is currently a real obstacle for existing platforms.
To conclude, there is no doubt that crowdfunding is a fundamental solution to European economic growth: by offering an answer for the credit gap, it allows SMEs to raise fund quickly and be a key generator of innovation, that sometimes misses to European countries; by offering to investors a new way of placing their money, it creates better returns and then provides more capital that can be reinvested in the economy; by making customers participate in the consumption process, it sets down the bases of a new society, fairer but realistic and aware of itself. But, even if it is a key element of the answer to European economic growth, it needs other actors (governments, banks, SMEs, people) to completely succeed.
Author : Audrey Destang - audrey@crowd2fund.com
