Stock market indices
A pedestrian holding her mobile phone looks at an electronic board showing graphs of various countries' stock market indices outside a brokerage in Tokyo July 22, 2014. Reuters

The member states in the European Union are mulling a pan-European market for smaller companies to raise capital and revive the stagnating euro zone economy. This plan has been spelt out in a document prepared ahead of a meeting of the EU finance ministers to be held in Italy, reported Reuters.

Milan Meeting

The two-day meeting of the finance ministers will be held in Milan from Sept. 12. The ministers will discuss measures that can revive growth. The interest rates are down at record lows. Creating a capital-market union that can build upon the euro zone's banking union will be an effective step. Such a measure will also reduce burden of companies in establishing funding on the lines of U.S. corporate bond markets.

The Reuters report also talks about an action plan to be devised at the ministerial meeting for developing a common European framework for raising smaller amounts by unlisted firms. By giving visibility to practices in all EU national markets, it is hoped that a wider liquid market will be created.

The document also envisages a European market for private placements where securities can be sold to a small number of chosen institutional investors. Eventually, it will aid in shaping up forms of intermediation such as debt funds, with assets partially locked in loans and bonds of unlisted companies.

Banks Avoiding Risk

Capital crunch is acute in small and medium enterprises (SMEs) in the aftermath of the euro zone debt crisis. Many small companies are competing for the meagre funding with banks. But banks are avoiding risky lending as they want to build up capital buffers. In Europe banks account for 80 percent of corporate financing unlike the U.S

In the United States, 70 per cent of corporate funding is coming from markets with banks having a reduced share in that.

For EU smaller companies are important. Most of them with less than 10 employees two out of three private-sector jobs, according to the data from European Commission. So, helping this vital sector is crucial in addressing the unemployment issue.

Data on SMEs

The main obstacle for smaller companies to tap capital markets is the administrative costs involved in providing continual information to investors. This is in addition to the legal costs. To mitigate this, the finance ministers will explore the option for a pan-European system in terms of collecting, classifying and analysing data on SMEs for the benefit of investors.