Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Business Formation Is Surging Amid Economic Gloom
Transcript
- Lucas: So you might expect that when the Eurozone economy is growing at barely two percent — with inflation still sticky, rates elevated, and political uncertainty from Paris to Berlin — business formation would be sluggish at best. But that is not what is happening. Luna: You're talking about the surge in new company registrations across the block. I've seen the German data from the first half of 2026 — up nearly twelve percent year-over-year. Lucas: Exactly. And it is not just Germany. France is seeing its highest rate of business creation since 2021. Italy, Spain, even the Netherlands — all reporting double-digit increases in new registrations. This is happening against a backdrop where the ECB has kept rates at four percent, bank lending is still tight, and consumer confidence remains fragile. Luna: So what gives? Are people just ignoring the macro? Or is there something structural at play here? Lucas: I think there are two forces at work. One is a push factor — people losing faith in traditional employment. The labor force participation rate has been falling across Europe, and we are seeing a rise in solo self-employment and freelance registrations. The other is a pull factor — digital platforms have lowered the barrier to entry dramatically. You can start a business now with basically zero capital if you are selling services online. Luna: Right, I read that in Italy, over sixty percent of new registrations are what they call 'partite IVA' — basically sole proprietorships. Many of them are in services, consulting, e-commerce. Lucas: That's the pattern everywhere. In France, nearly half of all new businesses are micro-entrepreneurs under the auto-entrepreneur regime. In Germany, the 'Kleingewerbe' — small trade businesses — are booming. So the headline number looks great, but the quality of those businesses is very different from what we would have called a startup ten years ago. Luna: And the survival rates? I remember seeing a Bundesbank study that said nearly a third of new German businesses fail within three years. Lucas: Right, and that is the critical question. If these are mostly solo operators with thin margins and no access to credit, a downturn could wipe them out quickly. But there is also a genuine innovation story here. Some of the most interesting new registrations are in clean tech, software, and specialized manufacturing — areas where Europe has a real competitive advantage. Luna: Let's talk about the macro context. Real GDP growth just came in at two-point-one percent annualized, which is actually an improvement from the near-zero growth we saw last year. But the trade-weighted dollar is still at 120.7 — that makes Eurozone exports expensive. Lucas: And the euro is at one-fourteen against the dollar. So exporters are squeezed. But here is the counterintuitive part: a strong euro makes it cheaper to import capital goods — machinery, tech equipment, software licenses. For a new business that needs to buy equipment, that is a tailwind. So the exchange rate environment is actually a mixed bag for new firms. Luna: Interesting. So the traditional narrative — weak currency helps startups by boosting exports — might be outdated when so many new businesses are service-based and don't export at all. Lucas: Exactly. Most of these new registrations are serving local markets. They are dog walkers, tutors, web designers, consultants. They don't care about the trade-weighted dollar. What they care about is domestic demand and their own cost of living. And on that front, things are still tough. Rents are up, energy costs are still elevated, and food prices haven't come down. Luna: So the surge in business formation might be more about survival than optimism. People starting a business because they cannot find a regular job, not because they see a huge opportunity. Lucas: That is definitely part of it. Look at the youth unemployment numbers in Spain and Italy — still above 20 percent. When traditional employers aren't hiring, setting up your own shop becomes the only option. And the gig economy platforms make that easy. You can be a delivery rider or a freelance translator within days. Luna: But there is also a genuine entrepreneurial ecosystem emerging in places like Berlin, Paris, and even Milan. Venture capital funding has been picking up again in 2026 after a tough 2024 and 2025. Lucas: Yes, but that is a different universe. vc backed startups are a tiny fraction of the total. We are talking about millions of solo entrepreneurs versus maybe a few thousand funded companies. The narrative about a 'startup boom' is true only if you include the micro-entrepreneurs. Luna: And the ECB? How do their policies affect this? They've cut rates twice this year, but lending to small businesses is still contracting. Lucas: That is the puzzle. Bank lending to non-financial corporations in the Eurozone has been negative for months. Yet business registrations are up. So entrepreneurs are funding themselves — through savings, family loans, or revenue from day one. They are not waiting for bank approval. Luna: That suggests a structural shift away from bank-dependent entrepreneurship toward more self-funded, service-oriented models. Which is fine as long as the economy stays stable. But if we hit a real recession, these businesses have no cushion. Lucas: Exactly. And that is the concern. Some economists worry that we are building a 'disposable' layer of micro-businesses that will vanish in the next downturn. But others argue this is exactly how resilient economies adapt — by allowing rapid experimentation at low cost. Luna: Before we go further — and this ties into what you just said about resilience — a quick honest thing. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these episodes possible. Lucas: Yeah, it's a small group, but it makes a big difference. Keeps the whole thing ad-free and independent. So if walking through the economy with us has made something click, that's the place. Luna: Alright, back to it. So where does that leave the policy debate? Should governments be actively encouraging this wave of business formation, or is it a sign that the labor market is failing? Lucas: I think it is both. And the policy response should be nuanced. On one hand, you want to lower barriers for genuine entrepreneurs — simplify regulation, offer digital tools, reduce tax burdens. Several countries are doing that. France's auto-entrepreneur regime is a good example. On the other hand, you need social safety nets that catch the people who are starting a business out of desperation, not ambition. Luna: Germany is currently debating a reform of the 'Minijob' system, which is closely tied to this. The idea is to make it easier for people to transition from mini-jobs to self-employment without losing benefits. Lucas: Right. And Italy has introduced a 'flat tax' for new sole proprietors, which has definitely boosted registrations. But there is a risk that these policies create a two-tier system — one for the solo operators who barely scrape by, and another for high-growth startups that get VC funding and tax breaks. Luna: We saw something similar in the US during the pandemic, where the number of new business applications surged, but many were what economists call 'necessity entrepreneurship'. Lucas: Exactly. And the US data showed that those necessity startups had much lower survival rates. So the question for Europe is: can we turn this surge into something more durable? That requires not just easy registration, but access to growth capital, mentorship, and a stable macroeconomic environment. Luna: And the current environment is not exactly stable. The ECB is still fighting inflation, and Christine Lagarde has left the door open to an early exit, which would signal more uncertainty. Lucas: And there is the political dimension. The French elections in 2027 are already casting a shadow, and the German coalition government is fragile. Political uncertainty is a known deterrent for long-term business investment. But it seems to have less effect on micro-entrepreneurs, who are more focused on immediate survival. Luna: So in a weird way, the very uncertainty that scares large corporations might be pushing more people into self-employment. Because when you have no security, you create your own. Lucas: That is a very European story right now. And it raises the question: what happens when the economy does pick up and traditional jobs become more available? Will these new businesses stick around, or will people go back to employment? Luna: Some will, some won't. For many, being your own boss is liberating. But the data from past cycles suggests that a large portion of new businesses disappear when the labor market tightens. So we might see a drop-off in registrations in 2027 or 2028 if growth accelerates. Lucas: That is the optimistic scenario — growth picks up, and the weak businesses close while the strong ones scale. The pessimistic scenario is that we have a recession, and the micro-entrepreneur wave becomes a micro-debt wave. Luna: So the key indicator to watch is not just the number of new registrations, but the revenue and profitability of those businesses. Are they generating enough income to cover costs and build savings? Lucas: Exactly. And that data is harder to get in real time. But some surveys suggest that median income for solo self-employed in Germany is below 20,000 euros a year. That is not a thriving business ecosystem. That is a survival strategy. Luna: Yet those same surveys show high satisfaction rates. People value the flexibility, even if the pay is lower. So there is a wellbeing dimension that GDP doesn't capture. Lucas: True. And that is the real challenge for policymakers — how do you support a sector that is economically fragile but socially valuable? The answer probably involves better social protection for the self-employed, access to affordable health insurance, and maybe a portable benefits system. Luna: Some countries are experimenting with that. The Netherlands has a system where self-employed can buy into unemployment insurance. But it's not widely used. Lucas: Because it's expensive. And that is the trade-off. If you make social protection mandatory for the self-employed, you increase their costs and might discourage registration. If you keep it voluntary, only the ones who need it most might sign up, which creates adverse selection. Luna: No easy answers. But the fact that we are having this conversation at all shows how much the European economy has changed. Ten years ago, business formation was not a hot topic. Now it's central to the economic debate. Lucas: Because it reflects a fundamental shift in how people work. The traditional employee-employer relationship is weakening, and the micro-entrepreneur is becoming the new normal. Whether that is a good or bad thing depends on how we adapt our institutions to support it. Luna: And on whether the macro environment cooperates. With the euro at one-fourteen, the dollar index still high, and interest rates at four percent, the headwinds are real. Lucas: But so is the entrepreneurial drive. And that, in the end, might be the most Eurozone story of all — people finding a way to make it work, even when the system isn't designed for it.