Small-to-medium sized enterprises (SMEs) are businesses with 250 employees or less. That definition encloses everything from family-run corner shops to technology startups working on the latest blockchain innovation.

These businesses are the backbone of the EU economy – they make up 99% of all enterprises in the bloc. They are also essential for creating new jobs – a 2019 report found that around 85% of all new positions in the past five years were in SMEs. The majority of these were in companies five years old or younger.

Thanks to their nimble size and flexibility, SMEs are also major drivers of innovation. That’s why the EU has worked to shape policies to try and help them maximise their potential. A wide variety of EU funds are available, for example, to support different types of SMEs at different stages of growth. These have become even more crucial this year as many businesses deal with the consequences of the COVID-19 pandemic. The European Commission has been ensuring that government rescue packages do not break competition rules, and has made €8 billion available for hard-hit SMEs through banks and lenders.

Defining SMEs

SMEs’ job creation potential began to be better understood in the 1980s and the first ever European action programme for SMEs, focusing on health and safety at work, was launched in 1989. It followed the Single European Act of 1987, which gave provisions for harmonising work conditions across Europe. In 1993 the Maastricht Treaty gave a more specific legal base for enterprise policy, and EU SME policy has been improving and expanding ever since then.

In 2003, the European Commission put together set definitions of what constitutes an SME, breaking the term down into three further categories: micro, small and medium-sized. A medium-sized business has a maximum turnover of €50 million a year and 250 or less staff members; a small enterprise has up to €10 million in turnover and 50 or less staff members, while a micro business has a turnover no greater than €2 million and employs 10 people or less.

The Commission also made distinctions between “autonomous” and “partner” enterprises. The interconnected nature of many companies can make it difficult for some SMEs to accurately define themselves. These guidelines help entrepreneurs to categorise their business properly and to apply for the right type of support. The definitions are monitored regularly to see whether they need to be revised.

Introducing a policy framework

To encourage a spirit of entrepreneurship throughout the bloc and make clear how important SMEs are for the European economy, the European Commission launched The Small Business Act for Europe in 2008. This created a policy framework for SMEs, to be carried out at both EU and member-state level.

One of its core principles is that governments “think small first” when creating policies. It also aims to tackle the hurdles - such as red tape and barriers to trade - faced by SMEs, improve competition, and help SMEs make the most of the cross-border opportunities created by the single market.

To make financing available to SMEs at all different stages of business growth, the European Commission launched the Competitiveness of Enterprises and SMEs (COSME) programme in 2014. It was complemented by another European Commission project, the Structural Reform Support Programme (SRSP), which tailor-makes solutions depending on individual member states’ needs. For example, in June this year, an SME listing support instrument was launched in Lithuania to strengthen the country’s financial markets and improve SMEs’ access to capital market financing.

A strategy for a new era

SMEs need to not only be strengthened, but to also adapt to future challenges such as climate change and digitalisation. To offer support, the European Commission unveiled a brand new strategy in the spring of 2020: The SME Strategy for a Sustainable and Digital Europe aims to help them achieve climate neutrality, make the most of digitalisation and tackle the remaining hurdles they face. At the start of the year only 17% of EU businesses were online, and the pandemic has made it clear that digitalisation can help companies adapt to sudden changes.

New measures include a network of sustainability advisors to help SMEs lower their environmental impact and an expansion of digital innovation hubs to help businesses test new technologies and gain better market insights. Digital crash courses on subjects such as AI, cybersecurity and blockchain will aid SMEs in the preparation for the digital challenges of the future. A new EU Startup Nations Standard will help member states share best practices for accelerating high-tech SME growth. The overall goal is to make Europe the most attractive place in the world to found and grow a technology SME.

To make sure that SMEs‘ perspectives are continually heard, a dedicated EU Envoy will work with SME stakeholders to identify hurdles and solutions, and report these back to the commission.

Powering SMEs to face our changing world

The economic impact of COVID-19, the climate crisis and the digitalisation of society all require updated rules to help our industries adapt. Given their huge contribution to the European economy, SMEs have a major role to play in both driving innovation and supporting recovery.

Therefore, a priority of Germany’s Presidency is to strengthen European SMEs, helping them stand up to increasing global competition. Issues such as low rates of digitalisation show there is more to be done to make businesses as resilient to changing markets as possible. And as the continuing COVID-19 pandemic leads more businesses to seek out state support, the German Presidency of the Council of the EU works to ensure the corresponding aid packages promote fair competition, safeguard good working conditions, promote the creation of key infrastructure and tackle environmental challenges.

The support and growth of SMEs will be key to helping our economies recover from the financial impact of the ongoing pandemic. Germany supports the Commission’s most recent strategy and uses its Presidency of the Council of the EU to help ensure SMEs don’t just survive, but continue to thrive in our changing world.