Select Committee on European Union Sixth Report


179.  The draft Directive has met with strong expressions of support but also of concern, even opposition. On balance we regard the draft Services Directive as a bold attempt on the part of the Commission to make a reality of a freely accessible single market in services. We believe that many of the concerns and criticisms are not well founded. Some are based on a misunderstanding of the draft directive; some are based on concerns about the impact of change and freer markets upon established interests.

180.  We recognise that the draft Directive has come under discussion at a time when agreement on the benefits of a single market has been overshadowed by relatively high levels of unemployment in some Member States, by the additional pressures for economic restructuring as 10 new Member States joined the European Union and by the discussions on the European Union Constitutional Treaty. These circumstances and associated pressures appear to us to have strengthened voices resisting change and increased market flexibility and competition. We believe that these circumstances make it all the more important for the European Union to be bold and resolute in its embrace of the single market. Creating a competitive, single market in services offers significant benefits of choice, price and innovation for consumers and business users of service industries. Competition and innovation brings change, with winners and losers, but the experience of the single market in goods demonstrates the overall benefits that can be achieved.


181.  We agree with the Commission that these matters should be pursued through a horizontal framework directive based upon the country of origin approach rather than a detailed vertical, service industry by service industry sector approach. The Commission told us in their oral evidence that they could not harmonise across a large number of service sectors, "It would be time consuming and would probably be impossible. Also we believe that it would not be desirable... Notions like subsidiarity, over-regulation and over-harmonisation have become much more important" (Q 443).

182.  We believe the most powerful argument for a horizontal framework directive on an internal market in services is the length of time it took to achieve the legislative basis for an internal market in goods. We see a clear danger in the sector-by-sector harmonisation of regulations route that negotiations will become bogged down for many years.

183.  We believe that EC legislation to facilitate an Internal Market in services must rely on a horizontal approach and cannot be based on stringent, sector-by-sector harmonised rules. Hence we agree with the Commission's approach. If the European Union is to achieve the (revised) Lisbon goal of greater economic growth with more and better jobs by 2010, a horizontal directive will be the only way of reaping the full benefits of an internal market in services.


184.  Commitment to the process can be stalled in more than one way. It can be done by blocking moves such as the draft Directive. But equally, stalling can be effected by agreeing with the principles then hedging them around with so much bureaucracy and red tape that they become unworkable. We believe that if the harmonisation approach were accepted, the whole process would grind to an expensive halt. We also take the view that mutual recognition rather than mutual acceptance should be viewed with suspicion as being not sufficiently flexible.

185.  There is controversy about the concept of freedom for a business to provide services, in effect on a temporary basis, in a Member State other than its own rather than as a business established in a second or more Member States. The Commission and others saw this as an important, indeed vital, element in increasing market opportunity for SME service providers, widening choice for consumers and strengthening the pressures of competition in services industries across the European Union. We agree with them.

186.  The freedom to provide services on a temporary basis throughout the European Union, exists now and has been upheld in rulings by the European Court of Justice. Some proposals, including those within the latest European Parliament[49] Committee Report, appear to us likely to reduce the freedom to provide services on a temporary basis and to increase the complexities involved in such business activities. Nothing should be done through this Directive, as eventually amended and agreed, that diminishes in any way the existing legal freedom to provide services. Rather, the aim should be to simplify and strengthen that freedom.

187.  There is a degree of doubt about the meaning of "temporary" business operations as opposed to those based upon "establishment" within a Member State. Small and Medium-sized Enterprises in particular find the legal uncertainty created by the lack of a positive definition of temporary operation a major barrier to exploring entry to a market.


188.  Some witnesses would prefer a positive definition of "temporary". On the other hand, it is possible that producing a clear definition of "temporary" could itself introduce inflexibilities in the marketplace. At the moment the position appears to place the onus on the relevant authorities to justify the need for a business to become "established" in a Member State. Producing a clear definition of "temporary" could result in a business being required to prove that its operations are "temporary" otherwise the presumption is that it will need to become "established" in the Member State. There is a fine balance to draw here if the objective is to secure maximum market flexibility. If establishing a positive definition of "temporary" remains elusive, we recommend a set of clear guidelines is established in order to ensure that freedom to provide services on a temporary basis is made more predictable and involves fewer obstacles.

189.  The freedom to provide services on a temporary business basis is linked in the draft directive, rightly in our view, with the proposal that such operations should be on the basis of the Country of Origin Principle. Larger companies can often afford to devote substantial resources to exploring new markets and can face the costs of more permanent, established operations in other Member States than simply their local or their national markets. The Country of Origin Principle is, in our view, an essential part of enabling SME service providers to break into the markets of other Member States. We agree that the option of temporary operations is especially important for SMEs that need to be convinced that they can start offering their services on a broader scale.

190.  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.

191.  We believe that the Country of Origin Principle is a realistic legal base for temporary service provision in any Member State. 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. Full harmonisation prior to free movement is therefore not required." (Q 434). We agree with this judgement and believe that some concerns about the country of origin principle are based on a suspicion, often vaguely expressed, of the standards that apply to business operations in other Member States.

192.  Some of those doubts stem, we believe, from a basic opposition to the very notion of business operating on a temporary basis in a Member State other than their own. The most recent report of the European Parliament Committee[50] appears to suggest that service businesses should be able to operate on either a temporary or established basis in other Member States but the practical effect of their proposals comes very near to requiring all business to operate on the equivalent of an established basis.

193.  Some express opposition to the Country of Origin Principle because there is a degree of confusion, as the Commission admitted to us "as to exactly what is the law applicable to certain situations covered by the directive" (Q 442). When do the laws and regulations of the "host" Member State apply and what does that mean for SMEs operating in other Member States and for users of their services in those "host" countries? When do those of the "country of origin" apply and how do SMEs and users of their services know this? What are the practical implications for consumer rights and consumer protection, employee's rights and conditions, and for health and safety at work and in relation to service delivery?

194.  Our enquiry spent some time examining these issues. We found that many concerns can be answered. In other cases there remains doubt.

195.  Many issues that were raised appeared to us to stem from attitudes of protectionism rather than a concern that the market mechanism should work well across Member States. Still other concerns referred to a threat to "the European social model". Interestingly, the first three proposed amendments to the directive proposed by the European Parliament Committee Report of May 2005 all refer to "preserving" or "upholding the European social model" without defining that term or explaining in what ways the draft directive impacts upon it. Discussions on the directive have become caught up in wider political debates to the detriment of the belief in an open, single market in the European Union.


196.  We are not convinced by those in the European Parliament, the Council of Ministers or the Trade Unions who argue that the Directive threatens employment rights, public healthcare, consumer rights and health and safety. There are specific derogations included in the 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 "15 Member States" a powerful one.

197.  Perhaps the concern that gathered most support related to health and safety where businesses are operating under the freedom to provide services. We remain in some doubt on the validity of this concern. Trade unions and the UK Health and Safety Executive expressed concerns on this. Many of these concerns are met by the Posting of Workers Directive. The only outstanding area is the operations of self-employed service businesses under the Country of Origin Principle.

198.  We acknowledge that legislation on health and safety in the United Kingdom and a number of other Member States sets a higher standard than that required by European Union legislation (under the aquis communitaire), but we do not see many instances in which this could cause serious concern. We conclude this because all employees of established service providers in the United Kingdom, for example, are bound by United Kingdom legislation on health and safety. Those employees who have been posted to the United Kingdom from another Member State to provide services on a temporary basis also are subject to United Kingdom standards of Health and Safety as a result of the derogation of the Posted Workers Directive from the Country of Origin Principle.

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

200.  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). European Union legislation sets minimum standards with which temporary service providers from all Member States must comply. If the Government were to seek derogation from the directive for all health and safety issues they should make clear on what basis they do so. Does the Government believe that there are important loopholes in the Directive and that Health and Safety is not adequately covered? We found little evidence of the latter during our inquiry.

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


202.  The Posting of Workers Directive largely deals with the fears expressed either of "social dumping" or of "a race to the bottom". We think there are safeguards built into the draft Directive and the Posting of Workers Directive that significantly reduce these concerns as far as employed workers are concerned. The Services Directive would not change the present situation for posted workers in the UK or any other Member State where statutory minimum employment standards are set. Just as now, under the services directive there would be some workers employed with collective agreements above the statutory minimum and others who were not and were therefore cheaper to employ. The Commission told us that there was a need to make clear that the directive could not lead "to a situation where companies can bring their labour force from a cheaper country and create a sort of unfair competition … for instance on a building site" (Q 447). We do not believe, however, that it is for the directive to get involved in issues of labour-employer collective bargaining relations or in matters such as minimum wage legislation. These are matters for individual Member States and their institutions.

203.  The draft directive safeguards against the possibility of businesses opening a "letterbox", "post-box" or "brass plate" in a Member State where some aspects of the regulatory environment were perceived as advantageous as an "established" base from which then to operate on a temporary basis in other Member States under the directive. In any case, it must be remembered that the country of origin basis of business operations does not apply to more permanent, established operations in a country. The Country of Origin Principle is largely to the benefit of small, self employed businesses looking to explore and break into new markets. Larger businesses will, as before, operate substantially on an established basis. It is the sections of the directive dealing with simplification of establishment and creating a level playing field for all established businesses with a Member States that will benefit them.


204.  In our view, consumer protection for individuals and households is properly covered by derogation from the directive. Consumers will be covered by the law as of their own Member State. Business users of services will be able to choose the legal base for contracts. That appears to us to be satisfactory. Even so, it must be recognised that individual consumers might find it more difficult to enforce their rights, should they seek redress for some reason, if the service business is established in a Member State other than that of the consumer. This is a matter that needs to be considered further by the Commission.

205.  We conclude that although consumers should, as with all purchases, exercise due caution in their choice of supplier, consumers are unlikely to be the victim of suppliers as a particular result of their operating under the Country of Origin Principle.

206.  There was significant concern that there would be no, or inadequate, supervision of enterprises operating in another Member State on a temporary basis, and further that this would have an impact upon high quality suppliers who would be tarred with the brush of "cowboy" operators. The mutual assistance framework proposed in the draft Directive is important in establishing and maintaining trust and confidence in cross border provision of services. We are doubtful that the changes the United Kingdom may need to make in registering or providing information on service businesses that wish to trade in other Member States on a temporary basis has been fully grasped. More generally, it is clear to us that the mechanism of Mutual Assistance at present lacks an incentive structure on Member States that would make it work effectively and swiftly. If the draft Services Directive is to have an impact, it is necessary that greater attention is paid to these important issues of confidence-building.


207.  The European Parliament, in its May 2005 draft report on the Services Directive 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 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. Services of general economic interest are those services purchased from a supplier by governments or public bodies to be made available to recipients for reduced or no charge. Where governments and public bodies engage in such services, then in general we would expect these 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.

208.  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.

49   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

50   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

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