Mid-February the Basque employer’s organization Confebask alarmed society and press on the fact that the number of enterprise closures –after already suffering since the outbreak of the financial crisis in 2008- had accelerated sharply over 2012 and that in the first month of the new year the number of bankruptcies had been of an unprecedented monthly height.

Until now, the economy in the Basque Country has resisted significantly better than the rest of Spain, with unemployment at around half the level of country-wide 26%. Among others as it counts with a manufacturing base that is strongly oriented on foreign markets, an important backbone of cooperative companies where cutbacks on wages are regularly applied as an alternative to lay-offs, and a well-endowed regional system of (technological) research centres and other kinds of knowledge infrastructure (an innovation support system that was recently hailed by Commissioner Maire Quinn in the European Parliament). Still, with a real recovery of the European (and Spanish) economy still not in sight, and with only the more prepared Basque firms being able to reach out to further away (Asian) markets, the call of Confebask voices that more and more Basque may be running on empty.

In fact, whereas the weakening of Spanish and European demand may have functioned at first as a kind of shake-out of the less competitive and innovative firms, the on-going exposure to weak demand is now starting to erode also the healthier parts of the Basque business system.

As for the reasons behind the increasing number of enterprises that close down, Basque businesses and economic analysts point notably at the holding off of a demand re-launch, increasing fiscal pressure on corporations, and a lack of credit made available to enterprises.

Whereas the tying onto a new growth cycle is not just a question of restoring demand and of economic policy interventions, but also of the diversification of firms into (geographic) market and product segments and business models with momentum, the curbing of fiscal pressure is an area where (regional) policy makers should make a mark.

As for the issue of corporate finance, it is indeed palpable in the Basque Country that private companies are increasingly struggling to get credits and loans. On the one hand, this is because also Basque banks are gravitating towards safe bets since the start of the financial crisis and the burst of Spain’s real estate bubble in 2008. See for instance the fact that while in the Basque Country the volume of credits to the private sector had shrunk with more than 10% between 2008 and 2012; the volume of credits to public institutions had multiplied by more than 3 in the same period. Moreover, on behalf of banks in the Basque Country it is not unusual to hear that firms themselves hold back in presenting investment projects and that the number of creditworthy projects is decreasing (which could also be the flip side to the situation prior to 2008 when the banks were less risk-aversive). The deadlock between firms and credits may in the Basque Country, as in more places in Europe, also be a matter of limited diversification of credit sources and of lack of financial innovations. As long as there is a bias to look for debt financing via traditional banks, it is difficult to break out of this strait-jacket.

Multiple attempts are being made to give crowd funding, business angels and venture capital firms a more systematic foothold in the Basque Country, but as in most areas in Europe they have yet to achieve a substantial uptake among firms. At present, what comes out of their pockets only represents a fraction of what firms lend from conventional banks. However, especially for young and innovative firms these alternative sources may have a lot to offer since they form the typical target audience of crowd funding, and seed and venture capital providers.

With the strong pride that Basque business men take in the sovereignty and identity of their businesses, there is a certain weariness against being taken over by foreign multinationals and against equity financing by third parties. Also since this would increase the risk of foot looseness of business assets in the Basque Country. Therefore, a further measure to remediate the credit drought could be that governments issue incentives that can well up cash from firms, individuals, etc. with resources they are willing to deploy in a constructive manner via godfathering, business angel or risk capital constructions or incubator mechanisms, and thus enable a broader re-investing profits and slack capital in entrepreneurial activities.

Furthermore, and in addition to the widely extended model of cooperatives in the Basque Country, it may also be opportune to make the (fiscal) context more conducive to the introduction of Employee Stock Ownership Plan-constructions. . I.e., in order to allow board members and/or employees to «buy themselves into» the ownership of firms and thus align shareholders and workers commitment to the firm and its future. Especially for part of the sizeable segment of mid-size family firms that are led by 2nd or higher generation of ascendants of their founders, this may imply a spirited rejuvenation and can keep them on track for contemporary formulas to competitiveness and innovativeness.

Together, this may lay a basis for a more solid re-launch of the Basque economy and lead to a broadening of its line-up of global high-flyers, like: Mondragon, Iberdrola and CAF

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