What Ireland’s SME sector can learn from the German ‘Mittelstand’

Economy, Guest Blog | Thu 23 Apr | Author – Business & Finance

Marc Coleman, economist and founder of Octavian Consulting, discusses what Ireland’s SME sector can learn from the German ‘Mittelstand’

A debate is currently underway about bailing out the indigenous private sector of our economy. A sector that accounts – according to last year’s Oireachtas consultation report on SMEs – for some 99 per cent of business organisations in Ireland, and on which we rely for two third of employees and tax revenues. Some feel we must not ‘burden taxpayers’ with the costs of bailing out SMEs that might not survive the coming recession.

To the tune of at least €30 billion and €2 billion respectively, we have bailed out the banks and university pension funds. The first was an unfortunate necessity. The non-governmental organisation sector also receives approximately €5 billion in funding annually. That figure is approximately the amount that is needed to bail out our SME sector.

For some, the ‘we are all in this together’ solidarity narrative has suddenly turned into one of ‘them and us.’ Policy debates in Ireland are almost completely dominated by those within public sector employment. For instance, at a planned SME funding conference on 30 January, out of 13 speakers only one came from the private sector. With the best of intentions, this can be a case of failing to understand the realities of life outside the state-funded sector where jobs and pensions are secure.

“The non-governmental organisation sector also receives approximately €5 billion in funding annually. That figure is approximately the amount that is needed to bail out our SME sector.”

Eight years ago, I co-authored a book, Ireland and Germany Partners in European Recovery, with the German Irish Chamber, which identified several key differences between business conditions facing Ireland’s SME sector and those facing the German ‘Mittelstand’ (small and medium-sized business enterprises).  These differences would quickly turn that argument strongly in favour of applying the same level of support to SMEs as currently given to our universities and other state-funded institutions.

Firstly, there is the far greater availability of SME bank finance in Germany. The success of the Kredit Anstalt fuer Wiederaufbau (KfW) and Mittelstand system suggests the need to create something similar here. The result a year later was the SBCI. But compared to the KfW the scope of the SBCI remains significantly lower. Now is the time to ramp it up. As Chapter 6 of my new book “An Economic Response to Covid-19” notes the recently passed German “Wirtschaftsstabilisierungsfondsgesetz” expands further the role of the SBCI.

Secondly, the costs of doing business in Germany – utility costs, insurance costs, labour (due in turn to the lower cost of accommodation for workers) – are significantly lower in ways that greatly facilitate small business in small towns. Our housing crisis is a key reason why the ‘non-viable SME’ argument just doesn’t add up. In the last crisis we had the option of achieving more cost efficiencies in current spending and protecting housing investment. Had we done so, our living costs and housing situation would be much better. That we now have a high-cost housing crisis is not the fault of SMEs, and compared to multinationals who have the resources to fund higher salaries, this creates even more adverse conditions for SMEs attempting to recruit staff.

Thirdly, tax treatment. In Germany, small business can write off far more costs than here. Income tax rates are also far more reasonable in that the top rate of tax applies at a far higher rate of income. This means German SME owners are incentivised to work hard and succeed. One might also refer to the residual cultural difference in that small business ownership is far more celebrated and culturally accepted in Germany

“The costs of doing business in Germany – utility costs, insurance costs, labour (due in turn to the lower cost of accommodation for workers) – are significantly lower in ways that greatly facilitate small business in small towns. Our housing crisis is a key reason why the ‘non-viable SME’ argument just doesn’t add up.”

Fourthly, population clustering means that public service provision – public transport, broadband, education – is more tailored towards small business. For instance, the German education system balances university with apprenticeship, so that the needs of multinational and professional employers and small business employers are balanced. Despite over €1 billion in employer levies accumulating in the National Training Fund, we are nowhere close to reaching the balance we need to retrain and re-skill people quickly for the massive changes taking place in our labour market.

Our spatial and transport policies to date also make it very difficult for workers to live in low cost accommodation and commute efficiently to work. Local authorities in the main also cover lower population levels and so find it hard to spread their fixed costs across large numbers of people. Compared to their continental peers, Irish SMEs pay local rates that are far higher. Thanks to lack of spatial and urban planning – another responsibility of government – their rents are far higher too.

Fifthly, population clustering in Germany and other continental countries mean  SMEs have more customers per square kilometre. So lower costs and more potential customers means your average German hairdresser/restaurant/shop owner has a much easier time of it than their Irish counterpart.

So the “non-viability” funding test should be applied very carefully. As it says in scripture: “Judge not, lest ye be judged”.

Marc Coleman is Founder of Octavian Public Affairs Economics and Advisory consultancy. His latest book, “An Economic Response to Covid-19” is available free of charge from www.octavian.ie  A former European Central Bank economist and Irish Times Economics Editor, Marc predicted the last recession in The Irish Times (6th July 2006) authored 4 books narrating the causes of the crisis and accurately predicting recovery, population growth and our current housing need. He more recently worked as Director of Financial Services Ireland with Ibec and holds a scholarship MBA from the Smurfit Business School.