EUROPEAN UNION: Services are key test case for reform

Analysis

The previous Commission launched the Services Directive in 2004, as a key element of its Internal Market Strategy. It was intended to open up the EU's service economy in the way that earlier reforms opened up product markets. Supporters noted that although services account for 70% of economic activity in the EU and 70% of employment, levels of cross-border activity in the services sector were very low, and could benefit from greater integration.

The limited integration of service markets in Europe can be partly attributed to the nature of service activities -- which often require personal contact between providers and consumers -- and cultural and linguistic barriers. However, artificial blocks on trade are the greatest obstacle, in the shape of national regulations and standards that impede service providers from entering neighbouring markets. If these could be overcome, claimed the Prodi Commission, the EU economy and employment would be boosted substantially: a recent report suggested that integration could create 600,000 additional jobs, as well as significantly reduce the costs of services. The Services Directive was drawn up to tackle these obstacles.

Controversial provisions. The key provision is the 'country of origin' principle, according to which an EU-based service provider would be able to operate elsewhere in the Union provided it met the regulatory requirements in its home location. Diversity of national rules and standards would thus no longer be an obstacle to foreign suppliers trading and setting up in other member states. Foreign suppliers would have to respect the national regulations on working hours, minimum wages and welfare provisions, but this would still leave scope for lower-cost provision.

The directive has attracted wide criticism and opposition. While some provisions remain relatively uncontroversial -- such as those calling for 'one stop shops' and on-line facilities to speed service provision -- the 'country of origin' principle and the directive's scope were less welcome:

• Public services. Groups representing particular areas of service provision, especially services provided in the public sector, have been generally hostile to inclusion. They have argued that the directive should not cover 'services of general interest' -- areas such as health and social services. They have called for a separate framework directive for such services, which would reinforce access to public services and protect the rights of those providing them.
• Social dumping. Trade unions and some civil society organisations have been even more opposed. They have been particularly vocal in claiming that the directive would involve 'social dumping' -- the undercutting of working conditions, wage levels and welfare benefits, as foreign suppliers would enter markets on the basis of their low-cost advantages.

In response, legislators (particularly, but not solely, from the left) and some governments have also come out against the directive. A recent meeting of EU socialist parties rejected it, while the French National Assembly called for radical amendment. Substantial opposition was also visible within the European Parliament, and while this is tempered by the Parliament's centre-right majority, major changes to the legislation are likely.

At governmental level French Prime Minister Jean-Pierre Raffarin and President Jacques Chirac called for radical reworking to remove the perceived danger of 'social dumping'. German Chancellor Gerhard Schroeder also came out against the directive. The main support for the document came from the UK government and new member states.

Referendum effect. With so much high profile criticism, the directive became an issue in the campaign for the French referendum on the EU constitutional treaty, due on May 29:

• Although unconnected, many in France saw the directive as symptomatic of a liberal turn in EU economic policy -- something the French left also sees reflected in the constitutional treaty itself.
• The perceived 'liberalism' of the constitutional treaty split the French Socialists in their attitudes towards it -- while the party's official policy was settled in favour of a 'Yes' campaign, many prominent socialists have made no secret of their opposition.
• In a sensitive French environment, which has seen large-scale strikes and demonstrations in support of employment rights in the past two months, the issues highlighted by the Services Directive appear to have shifted public opinion (see FRANCE: Unions fight for 35-hour week and pay rises - February 8, 2005). The two most recently published polls on the constitutional treaty show a majority of 'No' votes.

With this unexpected turn in the traditionally pro-EU country, Chirac was able to convince EU government leaders, at a summit on March 22-23, to have the Services Directive drastically amended. He notably secured an agreement that a re-worked directive would preserve the 'European social model'. Despite this apparent victory, it will be hard for Chirac to demonstrate to the French electorate that the directive has been diluted or overturned in time to make a difference in the referendum campaign, given the time required for the Parliament and Council to propose changes, and the Commission to respond with a redrafted text.

Commission role. While the Barroso Commission has been keen to declare its liberal credentials, it has not been very effective as a champion of the services directive, scarcely mentioning it in its first few months in office (see PROSPECTS 2005: Major tests for European Commission - December 31, 2004). The Commission has shown disarray over the directive; with some Commissioners expressing support for the text, while others claimed it required re-working. The Commission has not been able to overcome worries that the country of origin principle will lead to 'social dumping'. However, it befalls the Commission to produce a revised draft -- which will most likely drop references to services of general interest, and remove the 'country of origin' principle.

While such changes would probably receive backing from a number of member states and the European Parliament, the final shape of the directive is unclear, as supporters of the original proposal may rally to its defence, particularly once the French referendum is out of the way. What is clear is that the outcome of the negotiations could be decisive in determining just how far the Barroso Commission will be able to pursue economic liberalisation. A number of important decisions on reforms are in the pipeline (including the extension of competition in transport and other public services and the toughening of state aid rules), and the way in which the Services Directive is determined will influence subsequent campaigns, member-state stances and Commission responses.