By Henri Erti. Originally published on 2012/09/17

While the crevice of the EU credit crisis is disseminating, the core issues, which are painfully veritable, have remained remarkably tacit. As a result, the troublesome reluctance to address the fundamental issues of the crisis has raised questions on what must be done to regain the economic growth of the EU.

As the Eurozone is recuperating from a rather moribund experience, there is one major problem that appears to not have ben sufficiently and effectively resolved by European political leaders. Indeed, despite the caterwauling on liquidity, leveraging and budget-balancing issues, a more basic deficit needs to be added to the EU’s economic predicament: a preponderant failure to encourage entrepreneurship in Europe, possibly explained by the abhorrent memories from the World Wars which have, according to the Economist article on the European business dilemma (July 28, 2012) [1], instilled a chronic risk-averse mindset to the European continent.

Let’s be blunt here . The European entrepreneurial spirit has been suffocated due to the hostile atmosphere felt by small businesses and start-up companies. Unlike the American Dream, which encourages the spirit of entrepreneurship in the sense that failing while trying is understood as one of the different paths towards success and not an obstacle. Such inhospitable environment ensures that the failed entrepreneurs will not be granted a second chance to redeem themselves. It also discourages European youth to engage in business development, which is vital for the sustainability of the economic growth through exports and to create the much needed jobs for the expanding pool of qualified young people.

According to an analysis conducted by the Bruegel think-tank in 2007, out of the 500 largest companies established between 1950-2007, only 12 are European, compared to 52 from the US. Furthermore, most of the largest companies in Europe were created during the last century. While strolling in any European major city today, one can spot an abundance of coffee-shops and hairdressers, which hopefully supply the demand. However, these services are impossible to export and such companies will employ 2 to 6 people at the most, hence growth is merely marginal. What Europe desperately needs is not coffee-shops or hipster bar-lounges, but businesses which would over time evolve, following the paths of L’Oreal, BMW or Nokia. Without courage, proper incentives and encouragement, such companies will be established either in Silicon Valley or Mumbai, not in Europe.

World Bank data (2008) cited in a report by Ernst&Young produced for the 2011 G20 Young Entrepreneur Summit showed that, on average, the Italian, German and French entrepreneurs were significantly less confident on starting businesses than their counterparts in the US, Canada and even Brazil.[2] Perhaps such pernicious chronic fear for entrepreneurship is the underlying consequence of the extinction of start-up entrepreneurs in Europe. Furthermore, a report by the Global Entrepreneurship Monitor (2011) suggested that the part of entrepreneurs in Europe constituted a much smaller percentage of the overall population than in the US, Canada, Brazil and China.[3] Perhaps the current crisis in Europe would alter the thinking of the current generation, since during severe depression or recession people may not have much to lose, thus giving them incentives to take high risks that might later transform itself into high opportunities.

Currently, Europe is stuck searching for a panacea for the nadir situation. However, the solutions are not as far-fetched and opaque as the political environment may proclaim: First, the capital reserved for start-up businesses has to be increased in order to incentivize European entrepreneurs. Second, governments need to loosen their labor laws, which currently make it extremely problematic to hire or fire employees. Due to such tight bureaucratic labor laws, American venture capitalists have been increasingly careful to invest into European businesses because the transaction costs are high and labor laws make it difficult to establish flexible recruitment strategies. Lastly, Europe has to change its perceptions towards entrepreneurship and risk-taking. Admittedly, easier said than done.

Failing as an independent business person epitomizes the desire for passion and trying. Europe cannot afford to stigmatize its people as failing entrepreneurs, because only optimism deriving from small business owners can push us forward during times of austerity and economic turmoil. Perhaps, once again, Europe should learn something valuable from the USA: if you haven’t failed as an entrepreneur once or twice, you probably did not even try enough in the first place.