Hindering growth from within: Start-up costs

I'm sure you've all heard of it. It's been around the news for so long we do not even pay attention to it any more. It has become the favourite catchphrase of politicians and policymakers when they want to show they are sympathetic towards the perils of the populace. But it is often vague, it appears rather cold and insensitive and it lacks application. The word we are looking for here is growth.

It's all we've been hearing for the past couple of years. First came Ireland during the sub-prime lending crisis, then Greece, with each subsequent Prime Minister promising policies to rejuvenate growth, then Spain, then Italy, then Cyprus and even Germany. But most promises were nothing but thin air. The more we talk about growth, the more "emphasis" placed on the problem of youth unemployment, the more youngsters stayed out of the job market and the more GDP contracted. The latest (seasonally adjusted) data show that the trend is still on the rise:

Who's to blame for this? Some point at the ECB who has done very little  in order for the euro to survive (as they claim). I beg to differ. As already said the ECB's "whatever it takes" declaration was interpreted as a positive sign by the markets (although we usually forget this, markets are nothing but the collective wisdom of many humans). Then who might the reader ask? The EU? It's policies? No, not really. The simple answer is the Member-States themselves.

What follows is graph of the start-up costs per country, as obtained by the EU website, adjusted by the effective exchange rate. Note that the official EU "encourages" countries to allow for a set-up of under 3 days, at a cost of less than 100 euros. 

Of the 5 countries who required assistance or were in trouble during the crisis, Italy has the highest cost at €2046, followed by Greece at €1007, Portugal at €360, Cyprus at €265 and Spain at €120. Ireland is the only country which abides by the EU standards at €56. Things don't fare better when it comes to days of required to set-up a new business: 5 for Greece and Cyprus, 2-5 for Ireland, a surprising 1 for Portugal and Italy and a whooping 17.5 for Spain. Multiply the cost with the days required to set up a business and a rather different setting occurs:

While the multiplication may appear to be rather arbitrarily chosen (although the idea resembles the Misery Index) it shows the relative cost per country better than just the cost of setting up a business. For example, even though it just costs €120 to set up a business in Spain, the 17-day delay will mean that the cost rises; and note that the official amount of days is most likely the best case scenario where the application is perfectly completed with no mistakes at all, from either side. In this new setting, Greece dominates. It takes more than 1000 euros and 5 days  to set-up business there, in the best case scenario, at a total "cost" of €5036. Not that Northern countries would fare better: Germany would get 1445 in the above index, with Sweden at an even worse 2933. From what it appears, most Member-States need more than "encouragement" to do things like they should.

This unwillingness, nevertheless makes things tougher for their citizens. Think about it for second: what do start-ups have in abundance and what do they mostly lack? The answers are willingness and money respectively. Why should one bother with high costs and a mountain of bureaucratic obstacles (such as most periphery countries) and not set up a business elsewhere? That is why there has been a flight of the periphery's brightest to the North. As the Wall Street Journal notes, Ireland is ranked the most entrepreneurial country in the EU (the cost in the above index is a very low €196) followed by Sweden, the UK, Finland and Denmark. Not surprisingly, there were no periphery countries in the top 10 list. In fact, Europe actually lacks start-ups as The Verge points out. 

In order for unemployment to fall, we need new job openings. In order to get more job openings we need more investment. (Don't take my word that start-up costs hinder growth. Nobel laureate Christopher Pissarides and his colleagues showed evidence about this argument more than 10 years ago.) For investment we need two things: sufficient current demand or high potential demand and institutional support. Even if the periphery has the former it certainly lacks the latter. Why does this occur though? In a discussion with an MEP, she noted that there is a built-in resistance to changing these issues; perceived voter pressure is what holds them back. 

The magic word here is perceived. I doubt that any citizen would object to doing things faster than at the moment and I can really find no sane argument against that. If we all want more jobs and more investment in our countries then why should we object to this from within (and blame the EU about it) when we can do something to overcome these issues? It's rather odd to act like a victim when you are the culprit. So please, next time a politician speaks of growth and policies, just point the start-up costs and time needed to form a business.

P.S. There are more than one ways to build a better structure for start-up support. One of these ways has been online by fellow bloggers Horatiu Ferchiu, Alex Ghita and yours truly since 2012. Here are the links:

1. A skeleton-scheme for funding innovation

2. A Detailed Scheme for Funding Innovation in the EU

3. Funding Innovation in the EU – A governance perspective

4. Detailed Scheme for Funding Innovation: Part II

Politics vs Economics: The South Combat

It looks like the Troika has changed their plans for Greece, as now the budget cuts and reforms have to reach €14 billion instead of the €11,9 which was the number about 2-3 weeks ago. (sigh) What will ever happen to those Greeks? It appears that even after chances for a Grexit has been significantly reduced (to the fact that almost no-one is considering this as a possible scenario) the probability of a Greek bankruptcy has not yet been diminished.

Der Spiegel reports that the Troikans are unimpressed by the progress Greece has undergone over the last year. Why would they be impressed need I ask? Except some budget cuts and reduction of wages and pensions, (of peculiar allowances, i.e. a benefit for arriving on time or a benefit for washing your hands!) nothing of importance has taken place in the country. No reforms whatsoever. The only positive is that the public sector is gradually shrinking in numbers, as it has become less attractive to the Greeks (well obviously if you cannot get an allowance for arriving on time why bother be in the public sector?!).

Greece is not the only nation which has similar problems. From what I hear, the leaders of Cyprus are proposing a plan under which they propose an increase in taxation instead of a reduction of public benefits. Really guys? So the solution, according to Cyprus's authorities is: "We are overspending. We know it. Why bother reducing expenses when this will make people turn against us? Why not just increase taxes which will not?" Really? 

I do not know how the Cypriots think about this, but in my opinion, every rational man would prefer to have benefits cut instead of ending up paying more in taxes. What should be done is better control of expenses and a taxation aimed specifically at the richer caste. A general increase in taxes would not benefit the public even if they maintain their benefits. 

Tax evasion is another thing: both countries (especially Greece) see their incomes reduced every year due to several well-off individuals who manage to somehow hide what they are earning. Although many steps have been made so far in this subject, and even more arrests have occurred (especially in Greece, I have not heard anything similar for Cyprus) the hole in public finances still looms. And this is one of the reforms that the South has to deal with.

The same situation more-or-less holds in Italy. Anti-tax evasion measures and reforms have not been implemented as of now, and thus many Italians are still dissatisfied with their government. Although Mario Monti is doing whatever he can to keep Italy from failing, he has not done anything in order to boost the public's confidence to their government, or to reduce tax evasion. 

Spain on the other hand, is worried that Mariano Rajoy's proclamations are merely theory and lack of action. While the government is trying to push through more austerity measures, the general public, fed up with increasing unemployment and no sign of their troubles ending, is protesting (quite rightly at times) for their lack of employment and in more severe cases their lack of money. 

Although the politicians are trying to implement mild budget and benefit cuts, in order not to lose the public's liking (which has been lost during the summer for most governments in the South) no-one has even tried to reduce unemployment in the region. With focus on austerity measures, no politician or policymaker seems to realize that an increase in the number of employed people would mean higher consumption, more taxes and even more savings so that the banks could lend. Yet it seems that the simple equation of how GDP is calculated and the simple logic of what a decrease in unemployment may do eludes the authorities of the South.