Select Committee on European Union Sixth Report


76.  The most controversial part of the Services Directive is the Country of Origin Principle. The Country of Origin Principle in the draft Directive relates only to operators providing cross border services on a temporary basis. Once a service provider becomes established in a Member State, the company must comply with all the rules of that country. Under the Country of Origin Principle a company which provides services in one country is automatically qualified to provide services in any other Member State on the basis of home-country regulation. Under Article 16 (1) of the draft Directive "Member States shall ensure that providers are subject only to the national provisions of their Member State of origin which fall within the coordinated field".

77.  Article 16 (2) elaborates on the coordinated field. This shall cover "national provisions relating to access to and the exercise of a service activity, in particular those requirements governing the behaviour of the provider, the quality or content of the service, advertising, contracts and the provider's liability". Article 16 (4) says that Member States may not, for reasons falling in the coordinated field, restrict the freedom to provide services in the case of a provider established in another Member State, in particular by imposing a number of specified requirements. Articles 17, 18 and 19 provide for a large number of derogations from this general rule, derogations aimed at meeting many of the concerns that might arise. The controversy around the proposal appears to show that this has not assuaged its critics.

78.  In EC law the fundamental freedoms of movement of goods and services have been given effect by the European Court of Justice striking down discriminatory provisions and other restrictions in national laws on the movement of goods and services, introducing the idea of mutual acceptance. This has caused the Commission to shift its focus away from the harmonisation of Member States' laws. The rationale for this shift was most clearly stated by the Commission in 1980: "Any product imported from another Member State must in principle be admitted to the territory of the importing Member State if it has been lawfully produced, that is, conforms to the rules and processes of manufacture that are customarily and traditionally accepted in the exporting country, and marketed in the territory of the latter"[31]. The Court has similarly taken an active role in striking down obstacles to the free movement of services. Only under very strict conditions will the Court accept exceptions to the rule of mutual acceptance. That is where the Treaty provides an express exception or where there are overriding reasons relating to the public interest.

79.  The Commission argued in its submission to us that the Country of Origin Principle is not new. It was originally developed by the European Court of Justice to give effect to the free movement of goods in 1978. More recently it has been used in other legislation such as the TV without frontiers Directive[32] and the E-Commerce Directive[33], but the provision of it in the draft Services Directive to facilitate the free movement of services on a temporary basis is the most ambitious use of the principle by the Commission to date.

80.  Many of the concerns regarding the application of this principle for service provision in a host Member State on a temporary basis appear to be a suspicion of what "the coordinated field" might mean in practice. Some of the concerns are explicit, while others appear to be engendered by a general mistrust in the standards of regulation or of business performance in other Member States. On this latter point, the Commission told us " ...the starting point should be that Member States accept that, give or take a couple of exceptions, their legislative regimes are basically comparable and do not subject their citizens to unreasonable risks." We agree with them.

81.  The most significant explicit concerns relate to the effect which applying the Country of Origin Principle will have on the following:

  • Health and safety and environmental standards;
  • Employee rights;
  • Consumer Protection;
  • Problems arising from a web of contracts; and
  • How the government of a service provider's home country can or will supervise the operation of a supplier operating under Country of Origin Principle in another Member State.

82.  These issues have been raised by some to allege that the operation of the Country of Origin Principle will encourage a "race to the bottom". By this it is meant that it will precipitate a serious and unacceptable drop in standards in some Member States.


83.  The German Socialist MEP Evelyne Gebhardt represented the view of many MEPs by telling us that although legislation is needed in the area of services the Country of Origin Principle is not a common EU principle and that "the present draft threatened employment rights, public healthcare and consumer rights (QQ 430-437). Ms Gebhardt has proposed that an amended services directive should be based on harmonisation and "mutual recognition" (Q 441). Ms Gebhardt's use of the term "mutual recognition" must be distinguished from "mutual acceptance" as she is effectively advocating an internal market in services achieved by means of sector specific legislation (Q 430).


84.  It is also proving difficult to find a consensus in the Council of Ministers on the Country of Origin Principle. The optimism expressed by the Competitiveness Council in March 2004 that "in the services sector, which remains highly fragmented, more competition is required to improve efficiency, increase output and employment and benefit consumers"[34], was diluted by the Council of Ministers a year later in March 2005: "In order to promote growth and employment and to strengthen competitiveness, the internal market in services has to be fully operational while preserving the European social model. In the light of this ongoing debate which shows that the directive as it is currently drafted does not fully meet these requirements, all efforts should be taken in order to secure a broad consensus"[35].

85.  Those in the Council and the European Parliament who are most critical of a horizontal approach, fear abandonment of what is often called the "European Social Model"[36]. This term is used in many ways and has a very broad interpretation. The German SPD in its Parliamentary Group's "Initial Evaluation of the Services Directive" argued that the draft directive overlooks wider aims such as employment rights, social protection, environmental standards and economic and social cohesion, which are anchored in the EC Treaty as basic principles. The document concludes that: "the Directive ignores the social dimension (of trade liberalisation)". It has been reported that a similar view is held by leading political figures in France.

86.  However, the critics such as the SPD in Germany are challenged by those we spoke to on our visit to Poland. Witnesses told us that after the political act of accession in May 2004, full economic accession of the new Member States would have to follow and that the proposed draft Directive would facilitate this. They argued strongly that Polish suppliers must be allowed to compete economically on an equal basis with providers from the 15 Member States. Our Polish witnesses also questioned the suggestion that their systems of health and safety and regulation of service provision are inferior to those in the "15 Member States". For these reasons they also believe that mutual acceptance in service provision is a better principle than harmonisation.

87.  The United Kingdom Government takes the Commission's view that as much of the essential legislation that protects citizens and consumers is already harmonised at European Union level, the Country of Origin Principle is a realistic legal basis for delivering free movement of services on a temporary basis.


88.  The Federation of Small Business (FSB), the Management Consultancies Association, the Association of Building Engineers, the Confederation of British Industry, the Advertising Association, the Royal Institute for Chartered Surveyors and the Institute of Practitioners in Advertising agree with the United Kingdom Government and the Commission that the Country of Origin Principle is a realistic way of increasing trade in services between Member States.

89.  Some of our witnesses went further and argued that the Directive would be of little use without the Country of Origin Principle. The Confederation of British Industry (CBI) saw the Country of Origin Principle as a "core component of the proposal" (CBI written evidence) and believed that "failure to achieve agreement on this element of the text can be seen as nothing less than a lack of confidence by Member States and their agents in the fundamental rationale of the European Union, namely that of trust between Member States fostering economic and social progress, and societal prosperity". The Management Consultancies Association agreed with the Confederation of British Industry telling us that they would be very concerned if this "essential underpinning of the draft Directive were to be weakened" (MCA written evidence).

90.  The Federation of Small Businesses (FSB) were strongly in favour of opening up an internal market in services and in reducing restrictive regulations. They pointed out the difficulties caused by harmonisation and argued that one benefit of a horizontal directive was that those businesses that chose only to operate in their own country were not affected by EC legislation. Harmonisation on the other hand, "would mean a change in every Member State and that means it affects businesses in every Member State" (Q 158).

91.  The example the FSB gave was that of a hairdresser. Hairdressers in Germany receive five years training before they can practice their trade independently. In the United Kingdom for example, hairdressers train for a shorter time. By adopting a system of mutual acceptance, a British hairdressing salon which does not wish to expand abroad is not affected by EU law. If the European Union were to harmonise the necessary qualifications of hairdressers across the EU, every hairdressing business would be affected by this decision, whether relevant to their particular situation or not. A path of harmonisation in services, therefore could lead to cross-border European Union trade becoming too burdensome for business. A system based on the Country of Origin Principle would give business more choice and the FSB therefore believes that for the small business community, mutual acceptance would be better.

92.  Some rules for mutual recognition are already in place in the area of services through sector-specific directives. For example, seven professions have agreed training requirements across the EU. This means that as long as they are qualified to work in their own country, doctors, dentists, nurses, midwives, pharmacists, vets and architects have the right to work in any foreign European Union Member State. These sectoral directives have now been superseded by a directive on the mutual recognition of professional qualifications which creates a single, consistent legal framework and extends the scope to all regulated professions[37].


93.  Others, such as the UK Trades Union Congress (TUC), other unions including Amicus and TGWU and also the RIBA were strongly opposed to the Country of Origin Principle.

94.  The fear expressed by the German Socialists in Berlin and Evelyne Gebhardt in the European Parliament is shared by the UK Trades Union Congress (TUC). The TUC told us that they recognise an internal market in services is an integral part of the European Union common market, but for it to work well markets need to be based on clear rules that promote high standards of trading conduct and acceptable minimum quality standards (Q 89). European Union minimum standards for health and safety, consumer protection and the role of regulators in particular would have to be established before the Country of Origin Principle can be effective as the fundamental principle underpinning the cross-border trade of services on a temporary basis (Q 103). As long as minimum standards of harmonisation for these issues had not been established, they should remain subject to individual national standards (TUC, written evidence).

95.  Amicus[38] went further, describing the draft directive as impractical and unworkable and even contended that if implemented it would threaten employment and social rights (Amicus written evidence).

96.  The RIBA told us the Country of Origin Principle was unrealistic, discriminatory and confusing: "Unrealistic and inoperable—because of the difficulties that would arise in verifying qualifications and other credentials of service providers; discriminatory—because a recipient would, in the case of a problem with a provider, have to seek redress under the laws and in the language of a country that is not their own; and confusing—for consumers. RIBA was also concerned about a large team of workers on a construction project where members could come from more than one country." (Q 275)

97.  The TUC told us the Country of Origin Rule should only be applied on a sectoral basis "on a time scale that allows proper discussion and agreement on harmonisation measures and appropriate derogations." It viewed the proposed timetable as very ambitious. (Q 130)

98.  The Construction Confederation and others argued that particular activities need to be excluded (derogated) from the Country of Origin Principle. The Commission's draft excludes only electricity, gas and water distribution services and a number of very specific services such as postal services from the Country of Origin Principle.[39] In its written evidence, the Government notes, "there is widespread recognition that the derogations from the principle need further negotiation and the UK has stated its intention to seek changes to the Directive in its response to the (UK) public consultation".

99.  The draft Directive also excludes the provisions of the Posted Workers Directive[40] from the Country of Origin Principle. This Directive stipulates that workers that are posted to a Member State other than their own, will be subject to the labour law of the country in which they are employed. Labour law concerning maximum work periods and minimum rest periods; minimum paid annual holidays; minimum rates of pay; the conditions of hiring-out of workers and health, safety and hygiene at work will be governed by the Member State in which they are employed.


100.  The most common call from our witnesses for a derogation was health and safety. The Construction Confederation, the Construction Industry Council, the FSB, the General Dental Council, the General Osteopathic Council, the Health and Safety Commission, and the TGWU call for health and safety to be the responsibility of the host Member State.

101.  At present EC law sets minimum standards for health and safety. As the Minister told us: "there is a EU framework directive on health and safety standards, plus a range of sectoral directives that impact on the issue of health and safety"(Q 486). This allows Member States to legislate at the EU level or higher if they wish to do so. It should be noted that the transitional arrangements granted in the field of health and safety to a number of the newly-acceded Member States expire on or before 1 January 2006. Therefore, by the time the Services Directive is likely to be in operation all Member States will have to enforce agreed European Union-wide minimum standards of health and safety.

102.  A number of our witnesses argued that despite the European Union-wide application of these minimum European Union standards, health and safety matters should be excluded from the application of the Country of Origin Principle. They argue that because the United Kingdom has well developed health and safety regulation that goes further than the required European Union minimum, temporary service providers may not be as rigorous in the application of health and safety standards as domestic United Kingdom legislation requires. The UK Trades Union Congress (TUC) argues that "a full derogation for all health and safety requirements must be made absolutely explicit in the Directive itself."

103.  If health and safety is to come under the Country of Origin Principle, the Trades Union Congress (TUC) argues that other sector-specific derogations are necessary on health and safety grounds. The TUC argued for derogations in the areas of "healthcare, care and social services, transport services, construction and environmental regulation".

104.  The Trades Union Congress is not alone in calling for the construction sector to be excluded from the Country of Origin Principle on health and safety grounds. RIBA and the TGWU agree. It appears that they believe that the European Union acquis standards on health and safety are not high enough.

105.  AURE (Alliance of UK Health Regulators on Europe), the General Dental Council and the General Osteopathic Council wish all healthcare professions to be exempted from the Country of Origin Principle, on the grounds that healthcare providers from outside the UK constitute a potential risk to patients.

106.  We believe that the Country of Origin Principle is a realistic legal base for temporary service provision in any Member State.

107.  We are not convinced that health and safety should be exempted from the Country of Origin Principle. We agree with the Government "that concerns in this area are not as justified as some of the commentary would suggest" (Q 495). EC legislation sets minimum standards acceptable to all 25 Member States, with which temporary service providers from all Member States must comply.

108.  We are also not convinced by those in the European Parliament, the European Council or the Trade Unions who argue that the draft Directive threatens employment rights, public healthcare, consumer rights and health and safety. There are specific derogations included in the draft Directive which address these concerns (see chapter 7). We find the argument that the new Member States should be able to compete freely with the "the 15 Member States" a powerful one.

109.  A horizontal Directive based on the Country of Origin Principle combines ease of access for service providers, without imposing over-complex rules. We accordingly wholly endorse this approach.

110.  We acknowledge that UK legislation on health and safety sets a higher standard than that required by EC legislation, but we do not see many instances in which this could cause serious concern. We conclude this because all employees of service providers established in the UK are bound by UK legislation on health and safety. Those employees who have been posted to the UK from another Member State to provide services on a temporary basis also are subject to UK standards of Health and Safety as a result of the derogation of the Posted Workers Directive from the Country of Origin Principle.

111.  For the same reason, we urge the Government to resist any attempt to exclude specific service sectors from the Country of Origin Principle.

112.  We believe that the economic benefits from applying the Country of Origin Principle temporary service provision as set out in the Commission's draft Directive are greater than the threat to UK health and safety standards. In particular SMEs will benefit from the application of the Country of Origin Principle which will enable them to effectively test the water in another Member State on a temporary basis, without having to fully commit to permanent establishment. We agree with the Government that this could make a vital contribution to opening up fully the European market in this area.

31   Communication from the Commission concerning the consequences of the judgment given by the Court of Justice on 20 February 1989 in case 120/78 ("Cassis de Dijon"). OJ C256  Back

32   89/552/CEE Back

33   2000/31/CE Back

34   Presidency Conclusions, Brussels European Council 25 and 26 March 2004. Back

35   Presidency Conclusions, Brussels Council, 22 and 23 March 2005. Back

36   This concept is further explained and dealt with in Chapter 7: Will there be a race to the bottom? Back

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

38   The UK's largest manufacturing, technical and skilled persons' trade union . Back

39   Art 17 of the draft Directive on Services in the Internal Market Back

40   Directive 96/71/EC Back

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