eu4journalists

Internal Market

5. Free movement of services

Issues

• Delays in some member states in opening up utility markets
• Pay rates for workers posted to other member states

Services are critical to the European economy, representing some 70% of total turnover in the EU and, therefore, far more jobs than manufacturing industry. It has been estimated that some 96 percent of new jobs are created in the services sector. Unlike goods, which can be manufactured anywhere, many services used by citizens and companies must be provided in a specific location. As such, opening up the services sector to competition from other countries has moved more slowly, and the Commission has worked mainly on a sector-specific basis.

The range of services involved varies from the very local, such as hairdressing, to major outsourced activities, such as transport and IT support for multinational firms. While the average citizen is not going to travel hundreds of kilometres to get their hair cut, many firms are ready to shop around Europe and beyond to get the best price and quality from their transport provider. Most controversial are those services which have traditionally been delivered by the public sector – notably healthcare, but in some member states the private sector is becoming increasingly involved.

In 2002, the Commission published a detailed report on the legal, administrative and practical obstacles to the free movement of services across borders in the European Union. It concluded that ten years after the Single Market coming into effect there was still a huge gap between the vision of an integrated EU economy and the reality as experienced by European citizens and European service providers. Barriers to trade in services were found to have a serious, negative effect on the cost and quality of the final service – to all users, whether they are other service providers, manufacturers or consumers. Small and medium size enterprises were particularly penalized by these barriers. To solve this issue, the outgoing Commission proposed, in 2004, a Directive on services in the Internal Market, shifting from the previous sector-specific approach to a more general one. The intent was to allow companies to operate in any member state, whether they sought to establish a permanent presence, to move temporarily or to offer their services at a distance, by dismantling the administrative and legal barriers hindering cross-border trade.

The proposed “Services Directive” became one focus of the ‘no’ campaign in the 2005 French EU Constitutional Treaty referendum, in which the mythical ‘Polish plumber’ was held up as a direct threat to French workers. Former Internal Market Commissioner, Dutchman Frits Bolkestein, saw his name attached to the proposal – the so-called ‘Bolkestein Directive’ – which was derided across Europe. The heat from the Services Directive proposal caused the Commission to backtrack a bit, stressing that it would not extend the proposal to public services (such as medicine and healthcare) and that in those member states where such services were provided solely by the government, the market would not be opened up to competition.

After intense wrangling, the Services Directive was finally adopted by the European Parliament and the Council in December 2006. It was compromised by negotiation between the European institutions and not as far-reaching as the Commission had originally hoped. It does, however, allow service providers to operate more easily across borders and will affect a wide range of businesses such as hotels and restaurants, car hire, construction, distribution, travel and estate agencies, leisure services and sports centres. Practically all services to businesses are included, as are services provided by professionals such as architects and lawyers.

The Services Directive will have to be transposed by the member states by the end of 2009.

Financial Services

Issues

• Lack of consolidation of financial institutions
• Inflexibility of savings products for citizens moving between member states
• Small scale of European capital markets

The goal of the EU’s policy in the financial services sector is to create an integrated European single market where financial services can operate across borders and achieve free movement of services and capital. The policy addresses the two levels of financial services: the “wholesale” (corporate and capital) markets and the “retail” (consumer) markets, as well as the supporting services such as the integration of payment systems.

At the retail finance level consumers buy insurance, mortgages, pension packages and savings plans. Generally these do not need to be provided locally, yet the EU market remains largely fragmented. For instance, citizens seeking a mortgage to purchase a house are largely limited to institutions established in a given member state (although these may be subsidiaries of banks from another country). Although it is technically possible to obtain a mortgage from a lender in another country, most lenders are reluctant to get involved in cases where they cannot easily liquidate the security they hold over the loan, i.e. the house. Basically, if the bank cannot deal in a single legal jurisdiction, their costs – which will be passed on to the customer – will be higher, and therefore likely to offset the potential gains from shopping around. The same is true of insurance products (i.e. car insurance, home insurance, life insurance) and pensions. The costs and difficulties involved in shopping around lead most citizens not to take advantage of potential gains. In practice, such benefits are only a reality for the richest EU citizens.

Taxation of financial services is also a major barrier to access, with some governments offering more favourable tax rates or allowances with respect to investments in specific types of products. Citizens from one member state wishing to invest in another may find themselves penalised when it comes to their tax return. This situation also imposes a significant barrier on those wishing to move from one member state to another, since they may have to either suffer higher taxation or lose money through early redemption of savings plans.

On the wholesale level of finance, more progress has been made. There has been, for example, some consolidation in European stock markets. Behind the scenes, there have been important moves to harmonise accounting standards, capital requirements for institutions and procedures for raising finance, for example through initial public offerings (IPOs) in firms. In general, financial institutions have few barriers to considering and following up on investment opportunities across the Union, and the arrival of the euro has fostered this.

In 1998, the Commission sought to remove barriers and promote cross-border trade in Financial Services by adopting a financial services action plan (FSAP). By 2005, almost all the initiatives of the FSAP had been completed at EU level, although much of the national transposition still remained to be finalized. Moreover, since many of the measures had not had time to bed down, their impact had been limited. The Commission announced a follow-up plan with the White Paper on Financial Services Policy 2005-2010. Rather than bring in new legislation, its focus is on ensuring the full, consistent and effective implementation of existing measures. In particular, the Commission wants to focus on the retail market, where progress has been slowest.