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A single market in services: The Services Directive

Background

Freedom to provide services is one of the basic freedoms that comprise the Single Market (Article 3 of the Treaty of Rome). It is thus not part of some ultra-liberal agenda being foisted on the EU but a basic principle to which all Member States are already committed. Decisions are taken by Qualified Majority Voting.

One of the ways to stimulate economic growth suggested by the Lisbon European Council in 2000 was to develop a proper single market in services. The service sector generates almost 70 per cent of both GNP and employment in the EU.[1] A study for the European Commission found that the potential for greater growth as a result of simplifying the regulatory regime for services, thus allowing the market to expand, could create 600,000 new jobs across Europe and add €37 billion to the EU economy.[2] The prize is therefore a big one but the task of creating a single market in services is complex. A 2002 study by the Commission found 91 barriers that service providers had faced in providing services across borders.

The Directive

The Commission produced in 2004 a draft directive, under the auspices of the then Commissioner, Frits Bolkestein, designed to liberalise the market in services in the EU. This draft directive provoked considerable controversy, particularly in France and Germany. The March 2005 European Council agreed that the draft should be revised to take account of the concerns of some Member States. The final version was agreed by Ministers at the December 2006 European Council; it will come into force in 2009.

The services directive does two things:

· makes it easier for a service company based in one EU Member State to establish itself and operate in another;

· eliminates obstacles to the free movement of services, such as States placing restrictions on companies based in other States from operating there or requiring someone who has professional qualifications in another State to take further qualifications before being allowed to trade.

In order to achieve these goals, the directive provides a series of measures, including:

· creating a freedom to provide – a service provider will be able to sell their services directly in another Member State and Member States will have a duty to ensure free access to services and the free exercise of a service activity within its territory;

· simplifying administrative procedures for establishing a business and making them available by electronic means through a single point of contact;

· prohibiting the restrictive measures some Member States use to protect their service sectors from competition;

· a right for consumers to use services from other Member States and a policy of non-discrimination which will mean that service companies can no longer charge different prices just because customers are in a different Member State.

Article 116 of the directive sums up its purpose as facilitating the freedom of establishment of service providers and the free movement of services between Member States:

"the elimination of barriers to the freedom of establishment for providers in the Member States and … the free provision of services between Member States".

It is important to be clear about what the directive does not do:

· it does not lay down detailed rules, nor does it require the harmonisation of all the rules in Member States concerning services;

· it does not cover electronic communications services, postal services, electricity, gas, water distribution, public security, healthcare and a number of other services;

· financial services are excluded because they are the subject of separate regulation by the EU;

· it does not force countries to privatise publicly owned utilities as some critics have claimed;

· it does not affect terms and conditions of employment, issues such as collective bargaining, the right to strike or social security claims.

Country of origin: a missed opportunity

The big disappointment in the directive as finally agreed was the removal of the so-called "country of origin" principle. The first draft of the directive included such a principle – a right of companies to provide services in any Member States but to be regulated only by the Member State where they were headquartered. This was seen by critics as likely to result in Western European companies relocating to EU countries with fewer regulatory requirements. Some critics claimed that would threaten health and safety, environmental standards and quality of service. For others, it was a threat to wage levels in Western Europe. Trade unions in particular argued that the directive could lead to companies moving their headquarters to an EU Member State with the least social protection; a phenomenon often referred to as "social dumping".

Despite the fact that the concept of establishing cross-border markets in services had already been tested within the EU both in the financial services and e-commerce regulations of the EU - regulations which had been in force successfully for several years - it proved impossible to get the country of origin principle agreed to at the plenary session of the European Parliament in February 2006. As a result of the negotiations that followed, the country of origin principle was dropped and replaced by an explicit endorsement of the freedom to provide a service under the Treaty of Rome.

Despite the fact that the final directive does not go as far as the UK originally wanted, Britain, as a country increasingly dependent on trade in services, has much to gain from the directive. Although the removal of the country of origin principle was a disappointment, the directive will still open up the market in services across Europe giving Britain’s successful services sector new opportunities to exploit.

June 2007

 

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[1] Proposal for a Directive of the European Parliament and of the Council on services in the internal market, COM (2004) 2 final/3, p.5.

[2] Study by Copenhagen Economics for the European Commission, February 2005.

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