Europe needs the single market in services

By Daniel Gros

Financial Times

Published: April 7 2005

The proposal for a new European Union services directive, issued when Frits Bolkestein was single market commissioner, is under attack from all sides. Dubbed the "Frankenstein directive", it has been billed "unacceptable" by Jacques Chirac, the French president, and is playing a big role in the French referendum on the EU's constitutional treaty. Last month's European summit called for it to be revised "to safeguard the European social model".

All this excitement is difficult to understand. Europe's single market was supposed to come into effect on January 1 1993, providing freedom of movement in four areas - goods, capital, people and services. The single market for services does not yet work because numerous sectors still hide behind de facto national barriers. Companies and individuals operating in these sectors are understandably upset that their turf is threatened.

Yet this lack of a single market in services has been known for some time. When EU leaders met in Lisbon in 2000, they agreed to put together by the end of that year "a strategy for the removal of barriers to services". Mr Chirac and Gerhard Schr÷der, his German counterpart, are among the few EU leaders present at the Lisbon summit who are still in office, which makes their opposition to the services directive particularly disingenuous.

What does this monstrous proposal actually contain? No radically new elements. It lays out three ways in which services can be provided across borders: a company can send an employee abroad; an individual can set up shop in another country; or someone can provide a cross-border service from his or her home country.

The legal framework for the first option is already clear under another directive on the posting of workers. European case law on freedom of establishment applies to the second option: a lawyer, say, or a doctor wishing to establish an operation abroad has to fulfil the requirements of the host country, but these requirements cannot be used to discriminate against EU nationals from another member state. It is only in the third case that the legal framework is not entirely clear. But given the presumption that there should be an internal market in services, the European Court has repeatedly struck down national barriers to trade in services. The directive's main contribution is to codify existing case law by explicitly stating the country-of-origin principle - under which home-country rules apply to cross-border service providers - and listing prohibited discriminatory or restrictive measures.

The directive will finally open a market that represents roughly half of EU gross domestic product. The potential gains should be considerable. No other initiative being debated by EU leaders would do as much to improve the continent's competitiveness and employment. A study published in January by Copenhagen Economics, a consultancy, suggests that the directive could create up to 600,000 jobs and raise foreign investment in the services industry by up to 34 per cent*.

But enlargement of the EU last May has fuelled concerns on the part of citizens of existing member states that the directive will lead to "social dumping", if higher standards of social protection in richer member states are eroded by competition from lower-cost countries. The adverse reaction in Germany and France's railing against an EU with a "liberal" bias show how "old" Europe prefers to moan about unfair competition rather than turn enlargement into an opportunity.

As the directive cannot be changed substantially without violating the basic principles of the EU single market, this seems to be a case of an irresistible force meeting an immovable object.

Mr Chirac's repeated suggestions that the Commission should withdraw its proposal are reminiscent of the statement by his predecessor, Franšois Mitterrand, on the eve of the 1992 French referendum on the Maastricht treaty on European monetary union, that "of course, the European Central Bank will not be independent".

Once the treaty was approved, that was soon forgotten. If the French approve the EU's constitutional treaty next month, the same will probably happen to Mr Chirac's statements and the services directive will be approved once the dust has settled. If the French vote No, however, the directive will be only the first victim. Old Europe will have shown that it resists the necessary reforms and will condemn itself to continued economic underperformance.

Economic Assessment of the Barriers to the Internal Market for Services,

The writer is director of the Centre for European Policy Studies