In March 2020, the European Commission unveiled a strategy for small and medium-sized enterprises (SMEs). The goals are to reduce red tape, promote cross-border activities, facilitate access to financing, and thereby advance the digital and green transitions. At that time, there was no mention of reforming the SME definition, nor any consideration of mid-caps. That will change in September 2023 with the European Commission’s SME relief package. According to Action 18, a series of measures will review the SME definition and develop a “harmonized definition for small mid-caps.”

But why is such a definition relevant to SME policy? This definition is important for determining which companies are eligible to participate in EU funding programs. It is also important in terms of bureaucratic requirements, such as SME-specific competition rules or reduced reporting obligations.

Reform of the SME Definition

According to the European Commission’s current definition, SMEs are companies with fewer than 250 employees and an annual turnover of up to 50 million euros or a balance sheet total of no more than 43 million euros. These thresholds apply to individual companies. If a company is part of a group, the group’s financial figures must also be taken into account, depending on the level of ownership.

A reform of the SME definition appears necessary for several reasons. First, the financial thresholds have remained unchanged since 2005. As a result, many companies have fallen outside the scope of European SME policy purely due to inflation (such as the dramatic increases in energy and raw material costs since 2022). Second, the definition does not do justice to the unique characteristics of the German “Mittelstand landscape.” The threshold of 249 employees falls short. Particularly in labor-intensive manufacturing, SMEs can quickly exceed this threshold and are thus excluded from support programs or burdened by bureaucracy. Third, from a structural perspective, it is important to break the close link between quantitative criteria and also incorporate qualitative criteria—such as those related to ownership, management, and control.

It is encouraging that the European Commission has announced in its SME relief package that it intends to consider “small mid-caps” as a category and to take them into account in the future among selected EU policymakers. Potential starting points would likely include environmental, climate, or foreign trade policy.