Unshackling services is the key to Europe's economic future

Unshackling services is the key to Europe's economic future

Bulletin article
Digby Jones
03 June 2005

In the last edition of the CER Bulletin, John Monks, secretary-general of the European Trade Union Confederation (ETUC), wrote an interesting and engaging - but in my view incorrect - article on the Commission's draft directive for opening up EU services markets. The moment someone writes "it may be too early…", you sense deep down that they are hoping the proposal is destined for the long grass. But in common with businesses across the EU, I believe that the ETUC campaign against this proposed directive is both mis-placed and mis-timed.

The proposal, launched last year, is not the basis for creating a single market in services - that is already guaranteed by the existing EU treaties. It is of course a shame that these treaty obligations are not yet properly implemented, especially for the millions of unemployed across the EU who would benefit from liberalisation. Thus the proposal is designed to tackle the barriers which are preventing the single market in services from functioning effectively. The importance of this goal cannot be overstated: services represent 70 per cent of EU GDP. Reducing the barriers to a single market in services should lead to increased investment and more jobs.

Why then are some member-states and many trade unions against the proposed directive? The directive's opponents most strongly object to the so-called 'country of origin principle'. This principle would allow a company to operate, temporarily, in another member-state on the basis of its own country's legislation - save for a number of prescribed instances where the legal framework of the host country would still apply. This system would make it much easier for companies to offer services across the EU without having to comply with the specific rules and regulations of each and every single member-state. EU businesses also welcome the directive's rules that would make it easier to set up a new business in another country. But the debates about the directive have almost entirely focused on the country of origin principle.

This principle is already an established part of the EU law-book, namely in the EU single market for goods, where it is referred to as the principle of mutual recognition. A company can sell a product in any other member-state as long as it complies with the standards set by its home country (again, there are a number of exceptions where standards have been harmonized across the EU). As John Monks notes, the provision of goods across a single market is a simpler proposition than the provision of services. Goods require neither rights nor protection. The key is to find a degree of uniformity that gives consumers the confidence that the goods manufactured outside their own country are safe and of a certain quality.

Services are not inanimate objects, however. People provide them, administer them, follow-up on them. And this is the reason, the directive's critics say, why the country of origin principle cannot be the solution to the problem of the poor functioning of the single market in services. They argue that the protection of workers should take precedence over the right to provide services freely across borders. This concern is often described by the alarmist - and loosely defined - term of 'social dumping'. The critics fear that service providers from one EU country would be able to undercut rivals in another country because they pay lower wages and/or operate under less restrictive labour market terms and conditions.

But when you ask the critics what this 'exploitation' actually consists of, their argument is exposed as little more than protectionism. At its heart is the notion that the competitive advantage of a company needs to be restricted when it trades cross-border, to protect businesses in other countries from unwelcome and threatening competition.

It is no coincidence that France and Germany - both countries with very high levels of unemployment - are leading the opposition to the directive. They are assisted by Belgium, and backed by unions from the western half of the EU, led by the ETUC. So it becomes clear that opposition to competition, to further European economic integration, and even to enlargement, is fanning the fire. Enlargement brought into the EU new players that are hungry for change and keen to take advantage of their lower costs, their cheaper prices, their quality skills, and their willingness to work. Most of the new member-states, in particular Poland, Hungary and the Czech Republic, are keen supporters of the services directive. They have already gone a long way in restructuring their economies, and they now want to exploit their most valuable assets, their comparatively low costs and their excellent skills-base.

The UK, and some other EU countries, fully support enlargement and all of its consequences, including labour migration and the increased competition that the services directive would bring. Competition should be at the centre of the EU, the catalyst for its progress, the dynamo that makes it work. For me, at the heart of the debate on the Services Directive is the question of what the EU economic lanscape should look like. Do we want a competitive and dynamic EU, able to face the challenges of the 21st century, with European champions thriving on their competitive edge? Or do we want a moribund EU, facing schism from within while being buffeted from outside by the rapidly developing economies of China, India and Latin America?

No piece of draft legislation is without need of refinement, and the services directive is no exception. But at its heart, the country of origin principle, when combined with deregulation and better regulation (the other key elements of the proposal), will give us a service sector that can really boost the EU's economic growth.

Digby Jones is director-general of the Confederation of British Industry.

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