Select Committee on European Union Sixth Report


CHAPTER 2: CONTEXT AND BACKGROUND

9.  The central principles governing the Internal Market, a market without obstacles to the free movement of goods, persons, services and capital, are set out in the EC Treaty. The right of establishment[5] ensures that nationals and companies of one Member State can freely move to another Member State in order to carry out activities as self-employed persons and to set up and manage undertakings. The freedom to provide services[6] ensures that nationals or companies of one Member State can provide their services in another Member State. Employed persons benefit from the provisions on the free movement of workers[7]. These principles of the right of establishment, free movement of services and the free movement of workers, are the three so-called "fundamental freedoms" central to the Internal Market and relevant to the Commission's proposed Directive on Services in the Internal Market[8] with which this report is concerned.

10.  The principles of freedom of establishment and free movement of services have been clarified and developed over the years through the case law of the European Court of Justice. In particular, the Court has made clear that freedom to provide services applies not only where the person providing the services and the recipient are established in different Member States but also where the person providing the services offers those services in a Member State other than that in which he is established, wherever the recipients themselves may be established[9].

11.  In addition, European Union legislation is already in place for an internal market in financial services, gas and electricity supply services, some transport services, telecommunications and broadcasting. Cross-border trade in services was further simplified by an agreement in the Council on 6 June 2005 of a directive on the Recognition of Professional Qualifications which establishes rules for those with certain professional qualifications to work in any other Member State.

12.  However, despite progress in these specific service sectors and despite the basic principles set down in the original Treaty of Rome, the overall Internal Market for services is far from working well.

13.  There are two main reasons why an internal market in services is considered important for the European Union. As services account for 54% of European Union Gross Value Added (GVA)[10], fully opening up the internal market for services is expected to make a considerable contribution the Lisbon goal of more economic growth and jobs in the European Union by 2010. The second reason for prioritising the development of an internal market in services is that the European Union service sector is much larger than the manufacturing sector and reducing the present barriers to an internal market in services will have a considerable positive effect on the cost and quality of services to consumers, whether these consumers are other service providers, manufacturers or private consumers.

14.  However, despite these incentives, experience has shown that reducing barriers to service industries trading in any EU Member State cannot develop at its own pace through existing measures of EU legislation.

15.  The Commission has said that "services are the engine of economic growth". This view is different from many traditional perspectives on services. Traditionally they have frequently been considered little more than low-paid activities such as office cleaning. In fact, services accounted for around 50% of GVA in the UK economy in 2002 (DTI evidence). This dominance of services in generating Gross Value Added is reflected in the EU as a whole where the figure of Gross Value Added is 54% of EU Gross Domestic Product. This is illustrated by Table 1 which shows a breakdown across service activity in the UK as well as in Poland, France and Germany. Although there are obvious broad differences between the economies of these countries—France has more agriculture than Germany or the UK and Germany has a much bigger manufacturing base than the other three countries—the dominance of service activities is evident in all four countries. It is notable that, with the exception of financial activities and real estate, the figures for Poland and the UK are broadly comparable.

TABLE 1

Gross value added at current basic prices, by industry, 2002
UK
France
Germany
Poland
EU25
Industry
Percent
Percent
Percent
Percent
Percent
Agriculture, fishing etc
1.0
2.6
1.1
2.1
Mining, extraction, quarrying etc
2.8
Manufacturing
16.6
19.7
24.3
21.6
Electricity, gas water
1.6
Construction
6.2
4.9
4.5
5.6
Wholesale, retail, hotel and restaurant
16.0
19.0
18.0
22.0
21.7
Transport and communication
8.2
7.8
Financial activities, real estate etc
24.1
30.3
30.4
16.0
26.9
Public administration and defence, education
11.3
12.3
Health and social work
7.0
23.6
21.7
4.0
22.1
Other social and professional services
5.2
4.5
Services subtotal
71.8
72.9
70.1
66.6
70.7
Non-public services plus construction
54.2
Source: UK: Annual Abstract of Statistics, 2004.
EU25, France and Germany: International Statistical Yearbook, 2004:
Polish Source: Provided as evidence on our visit.
For EU25, France and Germany, Mining, Manufacturing and GEW are combined. Financial services is defined rather more broadly. The figure listed opposite health and social work roughly covers the last three categories.
Non-public services plus construction is defined as the sum of construction, wholesale and retail and financial activities, for the purposes of this table.
Note: Categories may not match exactly across countries.

16.   In the UK in 2002 services accounted for 32% of UK global exports and 23% of imports. The problem for the European Union as a whole, however, is that although 54 % of EU Gross Domestic Product derives from services, cross-border trade in services only amounts to 20% of intra-EU trade.

17.  In order to unlock the potential for more intra-EU trade in services, the Commission published in January 2004 its draft Directive on Services in the Internal Market[11]. The proposal aims to provide a legal framework that will eliminate obstacles to:

  • the freedom for service providers to establish their business in any Member State;
  • the free movement of services between Member States.

18.  The second objective, namely the free movement of services between Member States is the subject of our inquiry and Report. On this, the draft Directive provides for:

  • The application of the Country of Origin principle which allows temporary provision of services in a "host" Member State on the basis of "home" Member State regulation;
  • The rights of recipients to use services from businesses established in other Member States;
  • A mechanism to provide assistance to recipients who use a service provided by a business established in another Member State;
  • In the case of posting of workers, an allocation of tasks between the Member State of origin and the Member State of destination.

19.  There was widespread support among our witnesses as to the need for a Services Directive. Evelyne Gebhardt MEP[12], who is critical of the Commission proposal agreed: "it is important to have a Services Directive, because we have a good deal of protectionism in Member States and we do not really have an open market for services." (Q 430)

SERVICES COVERED BY THE DRAFT DIRECTIVE

20.  Article 2 of the Directive states that it shall apply to services supplied by providers established in a Member State. Article 4(1) states that "service" means "any self employed activity, as referred to in Article 50 of the Treaty, consisting in the provision of a service for consideration." The draft Directive says that the definition of "service" is based on the case-law of the European Court of Justice, according to which "services" mean any self-employed economic activity normally performed for remuneration which need not be paid by those for whom the service is performed. "The essential characteristic of remuneration lies in the fact that it constitutes consideration for the service in question, irrespective of how this consideration is financed"[13]. Under this interpretation, "services" includes those for which a fee is charged or which is free to the final recipient. As we discuss below, this definition is contested by some opponents of the draft Directive, especially by those who argue that the proposal poses a threat to the "European Social Model".

21.  In more concrete terms, the Commission had in mind that "service" would cover a wide variety of ever-changing activities including:

  • business services such as management consultancy, facilities management, including office maintenance and security; advertising; recruitment services;
  • services provided both to businesses and to consumers, such as legal or fiscal advice; estate agencies; construction and architectural services; distributive trades; the organisation of trade fairs; car hire; tourist services including travel agencies and tourist guides; audio-visual services; and security services;
  • consumer services, such as leisure services, sports centres and amusement parks; health and health care services; and household support services, such as help for the elderly;
  • services which may require the proximity of provider and recipient;
  • services which require travel by the recipient or the provider; and
  • services which may be provided at a distance, including via the Internet.

22.  The Report of May 2005 by the European Parliament Committee on the Internal Market and Consumer Protection[14] sets out a narrower definition of services saying that the Directive shall apply only to "commercial" services, only to services of a commercial nature [amendment 52 and justification]. This distinction is apparently made by the EP Committee in order to justify their argument that services of general economic interest should not be covered by this directive. We deal with this point below.

DO SERVICES OF GENERAL INTEREST FALL WITHIN THE SCOPE OF THE DRAFT SERVICES DIRECTIVE?

23.  The proposal states that "this Directive establishes general provisions facilitating exercise of the freedom of establishment for service providers and the free movement of services." As explained above, "services" is defined in the broad sense of the European Community Treaty and as consistently reiterated by the European Court of Justice, as those service activities normally provided for remuneration.

24.  This definition therefore includes what are often referred to as services of general economic interest but excludes services of general non-economic interest[15]. The latter cannot be traded easily across Member States. They include activities such as defence services, and those other services provided by the State in pursuit of its social, cultural, educational and legal obligations which do not usually involve remuneration, that is, they are not purchased for consideration from service providers. The extent to which services of general interest are or are not purchased by public authorities from remunerated service suppliers and provided to the final recipient free or substantially free of charge varies between Member States.

25.  When the Commission published a White Paper on Services of General Interest in May 2004[16], Member State governments raised concerns about the distinction between services of general economic interest and services of general non-economic interest and the role that the Commission should have in affecting Member State policies regarding the provision such services. As we concluded in our October 2004 report on this White Paper, [17] there are widely differing views among Member States about the nature of such services and the role they play in creating a specifically European model of society.

26.  Although services of general non-economic interest are exempted from the scope of this draft Directive, there are some public services (services of general economic interest) which have been outsourced to or purchased from businesses by the governments of some Member States and made available to recipients free or at a low cost. These would be affected by this proposed Directive. However, under the Commission proposal certain services of general economic interest are subject to derogations from the country of origin principle "in so far as this is justified by their specific nature", e.g. postal services, gas, electricity and water distribution. Critically, even in the fields covered by the draft Directive, the proposal does not affect the freedom of Member States to define what they consider to be services of general interest and how they should function.

27.  The European Parliament, in its May 2005 draft report on the draft Services Directive[18] considers the position of services of general interest. It proposes the explicit exclusion of all services of general interest from the scope of the Services Directive [e.g. Amendments 7 and 8]. The justification for given for this is that "given their role in promoting social and territorial cohesion, services of general economic interest should not be covered by this Directive but should be addressed by a specific framework directive". There are important issues here but we disagree with such a blanket exclusion. This could be used as a means of circumventing competition. Where governments and public bodies in Member States do engage in services of general economic interest (purchase services from suppliers for remuneration to be made available to recipients for reduced or no charge) then in general we would expect such purchases to be transparent and open to competition. The supply of such services should be a market opportunity for businesses from any Member State unless there are over-riding and justifiable reasons of national interest.

28.  The distinction between services of general non-economic interest and services of general economic interest must rely on the question of whether the service is provided for remuneration. It is important that the draft Services Directive is unambiguous about the exclusion from its scope of services of general interest that are not for remuneration and that it confirms the freedom of Member States to define what they consider to be services of general interest, whether economic or non-economic services, and how they should function. Member States must retain sole competence over how their Governments decide to provide public services. We believe that the draft Directive recognises this and strikes that balance. The Government should seek to ensure that the final version of the Directive maintains that balance while ruling out a blanket derogation for all services of general economic interest.

OTHER EXCLUSIONS FROM THE SCOPE OF THE DIRECTIVE

29.  Stripping out public services, services amounting to a total of around 54% of EU Gross Value Added are amenable to cross-border trade. A number of other services have also been excluded from the scope of the draft Directive.

30.  Financial services, electronic communications services and transport services (with the exception of cash-in-transit and the transport of mortal remains) are excluded from the scope of the draft Directive because they are covered by other EC legislation. Financial services are covered by the 42 legislative measures which make up the Financial Services Action Plan concluded in 2005 and electronic communications are covered by the 2002 EC Telecom Package. Tax is also excluded from the Directive as tax has a different legal base in the Treaties. Gas, electricity and water services are exempted from the application of the Country of Origin Principle, but fall within the scope of all the other provisions of the draft Directive.

A HORIZONTAL DIRECTIVE

31.  The list of services to be included and excluded illustrates the many forms that an internal market in services would cover and the ever-changing nature of the activities involved. To reflect this diversity of activity and the changing nature of services, the Commission's proposal is for a "horizontal directive". This means that the Directive would cover all types of services with the exception of services of general non-economic interest and the specific exclusions listed in paragraph 28 above. The alternative to a horizontal directive is sector by sector or "vertical" harmonisation. We consider this in more detail in chapter 4.

SIMPLIFICATION OF PROCEDURES

32.  The Directive would require Member States to simplify the procedures and formalities relating to establishment of a service industry business. The proposed mechanism is for the establishment by the end of 2008 in each Member State of "single points of contact", where all formalities for offering services in another Member State can be dealt with. These single points of contact are to provide information on requirements on establishment, application materials and assistance among other matters. All forms that are required are to be accessible electronically from remote locations. Any authorisations agreed by the relevant authority should be public, objectively justified, non-discriminatory and non-discretionary. With the aim of enforcing the non-discriminatory nature of the exercise of service activities, a whole range of possible methods for discriminating indirectly are no longer allowed under the draft Directive.

33.  Such simplification is a significant objective in enabling service firms to establish in other Member States more easily than hitherto, and it is clear that the simplification will require considerable effort by all Member States. Simplification is a priority if a functioning internal market in services is to be achieved.

34.  In order to assist the free movement of services, i.e. provision of services on a temporary basis, the Directive seeks to establish mutual trust between Member States through provisions for the development of stronger mutual assistance between national authorities, developing measures of quality assurance such as voluntary certification of service activities and cooperation between the chambers of commerce and encouraging codes of conduct. We welcome these aims, although we note that some witnesses raised concerns about the practicality of such initiatives.

THE FOCUS OF OUR INQUIRY

35.  In drawing up the terms of our inquiry, it appeared to us that there was broad agreement on the aims of simplify process for establishment and for and of better cooperation through mutual assistance between relevant national authorities. We therefore decided to concentrate our attention on those aspects of the proposal where there was a broad range of views.

36.  In particular our inquiry has concentrated on issues concerning the freedom for businesses and the self-employed to provide services in another Member State on a temporary basis (that is, the right to provide services without needing to be established in the Member State).

THE COUNTRY OF ORIGIN PRINCIPLE

37.  The draft Directive allows for temporary service provision on the basis that the service provider complies with "the national provisions of their Member State of origin". In the words of the proposal, under this principle, "a service provider is subject only to the law of the country in which he is established and Member States may not restrict services from a provider established in another Member State." This is the Country of Origin Principle which we consider in detail in Chapter 5. This principle is particularly important for Small and Medium Sized Enterprises (SMEs). The proposal includes provision for a number of derogations which are either general or temporary or which may be applied on a case-by-case basis.

38.  The measures which the Commission wishes to introduce with the draft Directive must be seen in the context of other European Union Directives, particularly the Posting of Workers Directive[19] and the Directive on the Mutual Recognition of Professional Qualifications[20]. The first relates to employment rights of employees working in a Member State other than their own and the second relates to agreed principles of mutual recognition of certain professional qualifications. We consider the relation of these to the draft Directive in more detail later.

EXPECTED BENEFITS OF AN INTERNAL MARKET IN SERVICES

39.  It is difficult to say with any certainty what the full benefits of an internal market in services would be. The Commission cites a report it commissioned by the consultancy company Copenhagen Economics which suggests that the benefits would be substantial and would accrue (in different measure) to all Member States. This report concludes that total consumption in the European Union would increase by around 0.6%, or €37 billion. If trade in services were completely liberalised, an effective internal market for services would lead to prices falling in all service sectors, output rising with total value added increasing by around €33 billion leading to an increase in total employment of up to 600,000 jobs.

40.  These predicted benefits are substantial and would contribute greatly to the Lisbon goal of more economic growth and jobs for the European Union by 2010. It is therefore important that agreement is found between the Council of Ministers and the European Parliament on the Commission's draft and a speedy programme of implementation is begun.

41.  We make this report to the House for debate.


5   Article 43 of the EC Treaty Back

6   in Article 49 of the EC Treaty Back

7   in Article 39 of the EC Treaty Back

8   COM(2004)2 Back

9   Case C-198/89 Commission v Greece [1991] ECR I-727 Back

10   Gross Value Added (GVA) measures the contribution to the economy of each individual producer, industry or sector. Its relationship to Gross Domestic Product can be explained thus: GVA + taxes on products - subsidies on products = GDP. Back

11   COM(2004)2 Back

12   German MEP, member of the European Parliament's Committee on the Internal Market and Consumer Protection and that committee's rapporteur on the draft Services Directive. Back

13   Proposal for a Directive of the European Parliament and of the Council on Services in the Internal Market SEC(2004)21 Back

14   Draft Report of the European Parliament's Internal Market and Consumer Protection Committee on the Proposal for a directive of the European Parliament and of the Council on Services in the Internal Market. Rapporteur: Evelyne Gebhardt (25 May 2005) Back

15   Proposal for a Directive of the European Parliament and of the Council on Services in the Internal Market SEC(2004)21 Back

16   COM(2004)374 Back

17   Services of General Interest, 29th Report of Session 2003-04, HL Paper 178. Back

18   Draft Report of the European Parliament's Internal Market and Consumer Protection Committee on the Proposal for a directive of the European Parliament and of the Council on Services in the Internal Market. Rapporteur: Evelyne Gebhardt (25 May 2005) Back

19   Directive 96/71/EC Back

20   COM (2002) 119 amended by COM (2004) 317 and agreed by Council in June 2005 Back


 
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