Tag Archives: Pentti Mäkinen

Also in public media in Finland: the purifying influence of economic crises

Below follows a translation and commentated version of an article that was issued today on the Finnish YLE News -website. I think it is relevant, because (albeit through anecdotal evidence) it highlights some of the commonly held opinions on the Eurocrisis and the tightness of financing for SMEs, which I reported on last week as well. The comments by the persons interviewed are to be taken seriously, especially in the Finnish context, because Vesa Puttonen is a Professor of Finance in the Aalto-University and Pentti Mäkinen is the SME Affairs Director of the Confederation of Finnish Industries. Both have distinguished careers, and through their position have influence on the Finnish public debate.


“Creative destruction” eliminates small businesses – high interest rates crush dreams of growth.

by Jaakko Mannermaa

The waning of purchasing power and the tightening of loan conditions worsens the distress in Southern Europe, which also affects the outlook of Finnish SMEs. The near future remains bumpy, forecast experts.

The European growth motor doesn’t start because of financing troubles of small and medium-sized enterprises. Enterprises are divided into two classes on the credit markets, also geographically within Europe, says Professor of Finance Vesa Puttonen of the Aalto-University in Helsinki.

– Generally speaking, SMEs complain about a lack of demand, according to reports of the ECB. The situation in Germany, Austria and also Finland is clearly better than in the Souther countries, where besides the issue of demand, companies also complain about the level of costs and the weak availability of financing.

According to this news however, also Finnish SMEs experience rather tight financing.

According to Puttonen, the situation is especially bad in Greece, Ireland, Spain and Portugal, where banks don’t have the capability and/or will to finance SMEs.

For instance, in Spain large enterprises pay around 4% interest on their 10-year loans, but SMEs pay twice as much. Nonetheless, SMEs create most of the new jobs.

In Italy, on the other hand, where about 80% of the workforce is employed by SMEs, the wave of bankrupcies has decreased confidence even more. Banks demand, besides high interest rates, such large collateral that many firms don’t have the preconditions for a loan of more than a few thousand euros.

Puttonen: borrowed money doesn’t belong to everybody

Money is expensive for small and medium-sized enterprises, even though the European Central Bank has kept the key interest rates low for a long time. This is due to the fact that each bank will assess the risks and benefits of the relationship in their own way, says the Director of SME Affairs of the Confederation of Finnish Industries (EK) Pentti Mäkinen.

– Banks have to take into account the price of financing they pay themselves, when making loan decisions. That is not only dependent on the ECB.

They also have to worry about their own capitalization levels; hence they are less eager to borrow money to firms unless the risk is perhaps minimal.

SMEs have traditionally relied on bank loans for financing, because other than large firms they don’t have much possibility to scrape capital from the markets. If the money supply from banks dries up, the only way left is to pump own money into the firm – if there is any.

Vesa Puttonen points out that financing is not a commodity that should be given to everyone. According to him, business should not get a loan, if the situation becomes unsustainable.

– If the company doesn’t have demand (for its products), then it is not going to grow by giving it a loan. Financing may enable the company to continue, but creative destruction should be allowed to eliminate businesses that are not sustainable.

Schumpeter is alive and he lives in Finland! I would say first of all, what about banks in Germany, the Netherlands, France…shouldn’t they have been allowed to disappear when they became unsustainable? Second: Puttonen’s argument implicitly assumes that a company’s position is somehow abstractable from the economic and political context – enough has been written about capital flows and competitiveness in the context of the EMU (with a star role for French and German banks) that I won’t repeat that. But the question here is ‘why isn’t there demand’ for the firm’s product rather than ‘is there demand?’. Once we get to the ‘why’ question, we also have to face all kind of nasty and difficult questions about the nature of EMU and e.g. the role of the ECB, the implicit exchange rate benefit of Germany within the Eurozone etc. In terms of pure financing Puttonen is of course right, but in the context of the Eurocrisis it is a bit more complicated than that.

EK’s Mäkinen points out that Europe is Finland’s most important market: the export of 50-60% goes to other EU countries. How Finland can cope is linked to the rest of the European SMEs.

– The point is that Finland’s export structure is strongly focused on investment goods.  SMEs are important suppliers all over Europe and as such in a very important position as buyers for Finnish goods, says Mäkinen.

It is very good to see that the Confederation of Finnish Industries sees the strong links between the Finnish and European economies. Finland can not on its own be a tough accountant and just mind its own business (no pun intended). Finland’s own business is to a very large extent connected to other European countries, whether through suppliers, subcontractors or clients.

Mäkinen: the will to growth is lacking from Europe

European leaders are pondering how to solve the companies’ loan issue.

The European Commission has prepared loans through the European Investment Bank, which would alleviate the financing troubles of SMEs. The German state’s development bank KfW has negotiated hundreds of millions of euros in loans with its Spanish equivalent ICO.

It is still necessary to use these euros wisely. EK’s Mäkinen is worried that the loans will be used for re-financing rather than investments. He sees that this is a problem in the whole of Europe.

– The role of SMEs in employment creation, as investors and as engines of growth is at risk if companies are not willing to invest. Are there willingness for growth, enthusiasm and business visions in Europe?  They seem to be missing at the moment, Mäkinen sighs.

I find this a bit strange. Of course European businesses are willing to grow. It is just that there is a lack of demand, which also resonates with the large uncertainty over the European economy, availability of financing etc. And beyond that, also the world economy doesn’t look so healthy anymore, so any chance of an export-led growth out of the crisis is at the moment very small. I seriously doubt this is an attitude problem – as Puttonen above stated citing the ECB, the major problem is lack of demand.

Vesa Puttonen states that SMEs exist as part of the European economy. Which again does not appear very bright at the moment.

– All the talk, that the euro crisis would be over, is extremely premature daydreaming. Neither the euro crisis nor the banking crisis are over. The turn for the positive is not visible in the near future.

This I fully agree with. It is not nice to be ‘Dr. Doom’ or ‘A Gloomy European Economist’ but as far as I can see the Eurocrisis is far from over.

In Brussels on 27 and 28 June at the EU summit the focus is on economic policy. One of the most important things is to evaluate the measures to promote competitiveness, create jobs and increase growth.