The Services Directive: Take It or Leave It

Though highly controversial, the economic benefits of barrier reduction, less administrative burdens, and better access to information cannot be underestimated.

In the framework of the revised Lisbon strategy, the services directive offers an indispensable step to boost competitiveness of European industries.

In 2000, the European Heads of State and Government identified the improved functioning of the Internal Market as one of the top priorities for the next decade. The so-called four freedoms form the legal cornerstone of the EU’s policy towards a well-functioning Single Market where people and businesses are free to move and invest.

Whereas the progress made in the goods market is undeniable, many barriers still impede the realisation of a truly integrated market for services. Yet services account for almost two thirds of jobs and total production in the European Union.

On the other hand, services represent only 20 percent of trade flows in Europe and in most services sectors export is less than 5 percent of total production. Recently, the OECD indicated that, in comparison with non-European countries, the services sector in the euro zone is much more regulated and therefore too restrictive. According to the organisation, with unchanged policy the employment potential in Europe is forecast to decline with 0.7 percent annually by 2020-2030.

To turn the tides, the European Commission proposed in 2004 a draft directive on services, with the aim to free up the movement of services in Europe and to create a legal framework for European trade in services. The directive foresees far-reaching measures to abolish all barriers for the free movement of services and the freedom of establishment.

Welfare Effects

The two main channels through which the economic effects of the services directive are expected to materialise are trade and competition. Econometric studies have estimated the effects of both channels on productivity, investment, and employment.

For example, barrier reductions, less administrative burdens, and better access to vital information are forecast to have a positive impact on trade. Besides, there are statistically significant effects of trade on competition and of competition on productivity, employment, and investment.

In particular, the proposed measures are expected to lead to an increase in employment by 600.000 new jobs across Europe. Besides, total consumption and welfare are forecast to increase by approximately 0.3 to 0.7 percent. Depending on the assumptions made, the trade flow of services in Europe will increase by 19 to 38 percent and economic growth will go up by 0.2 to 0.4 percent.

The next steps

In February this year, the European Parliament approved an amended version of the initial draft, which restricted the field of application and no longer contained the controversial country-of-origin principle. This principle was replaced by the so-called country-of-destination principle, stipulating that service providers would exercise their activities in line with the laws of the host country and no longer the country where they have their headquarters.

The European Commission took up the proposal of the European Parliament and presented a new text that was accepted at the Competition Council on May 29, despite the abstention of Lithuania and Belgium. The EU ministers slightly modified the Commission’s amended proposal in order to clarify the scope of application and the services excluded, and to include an evaluation of national requirements concerning the freedom of establishment.

The Council will now finalize the text and adopt a common position that will be forwarded to the European Parliament for a second reading. The crucial deal is of great symbolic value, exactly one year after the Dutch and French “no” sparked a crisis over the European Constitution.