Directive on services in the internal market

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The Directive on services in the internal market (commonly referred to as the Bolkestein Directive) is an initiative of the European Commission aimed at creating a single market for services within the European Union (EU), similar to the single market for goods already present. Drafted under the leadership of the former European Commissioner for the Internal Market Frits Bolkestein, it has been popularly referred to by his name. It is seen as an important kick-start to the Lisbon Agenda which, launched in 2000, is an agreed strategy to make the EU “the world's most dynamic and competitive economy" by 2010. With the proposed legislation, the Commission wants to reduce the barriers to cross-border trade, principally by doing away with the service industry regulations of individual EU Member States, unless those regulations are non-discriminatory; objectively justified on the grounds of public interest; and proportionate. The Commission argues that regulations which do not meet this criteria are unnecessary and pose a barrier to service providers wanting to provide services in other Member States in addition to their country of establishment. The Bolkestein directive was harshly criticised by the left wing, who stated that it would lead to competition between workers in different parts of Europe — hence the expression "Polish plumber" — resulting in social dumping. The directive, after being substantially amended, was adopted on 12th December 2006 by the European Parliament and Council, as the Directive 2006/123/EC.

Contents

[edit] Three pillars

The Services Directive proposes several important changes in the EU services market. These can be grouped into three interrelated pillars: "freedom of establishment", "country of origin principle" and "mutual assistance".

[edit] Freedom of establishment

The "freedom of establishment" pillar means that if a company or individual is able to provide a service in one EU country, should they wish to provide the same service in another Member State, there should be little, if any, legal or administrative restrictions on them doing so i.e. they should be free to set up shop in any other Member States in the same way as a company or individual is able to in his/her Member State of origin.

[edit] Country of origin

The "country of origin principle" is a rule that would facilitate the free movement of service providers on a temporary basis to encourage cross-border competition or, more specifically, to encourage individuals or companies to test other markets without first having to establish. What makes this different from the "freedom of establishment" is that the company or individual may provide services to consumers in another Member State on the basis of the laws of its country of establishment/ origin and without registering with the regulators in the host Member State. In practice, this would mean that a company providing services in France (established there), for example, would be free, for a limited period, to provide services in the UK under French laws; or, as discussed at length in France, a Polish Plumber could work in France under Polish labour laws.

[edit] Mutual assistance

The third component is designed, in part, to support the first two pillars; particularly the country of origin principle. Proposals include measures to promote "mutual assistance" between Member States for enforcement purposes; harmonisation measures with respect to consumer protection; and other measures to promote and up-hold the quality of services.

Both proponents and opponents alike agree that the Directive, if enacted, could have a far-reaching impact in the services sector across the EU, which represents 70% of EU economic activity (europa website, 2006).

[edit] Criticisms on the early version of the Directive

The Bolkestein Directive has provoked intense debate and mass protests various EU countries, including France, Belgium, Sweden and Denmark. On 21 March 2005 nearly one hundred thousand marched in Brussels to protest the Directive. The crowd consisted primarily of working people and trade unionists from Belgium, France, Germany, Italy and the Netherlands according to a contributor to Spectrezine weblog. 1

Critics argue that the Directive will erode many of the member state regulations governing industry and the environment, and lead to competition between workers in different parts of Europe, resulting in a downward spiral in income levels. The expression "Polish Plumber" became famous during the French debate about the directive, meaning that under this new legislation, a Polish plumber could work in France under Polish labour laws. Critics also charge that the Directive is a sign that “Anglo-Saxon” style economics are running rampant over the EU, and they warn that the directive will lead inevitably to "social dumping" -- companies and jobs relocating to the low-cost and less regulated economies of eastern Europe.2

The process of "accelerated liberalisation" will shift the burden of proof from the liberalisers to regulators, they argue. Assuming every piece of regulation to be burdensome by default, the Directive requires member states to justify all existing legislation on the grounds that it is non-discriminatory, necessary and proportional.3

Writing in The Guardian of 20 January, David Rowland argued that the Directive posed a threat to the British health care system:

The directive is controversial because it applies the same rules to healthcare and social services as it does to estate agents, fairground providers, advertising companies and private security firms. The commission no longer sees the services provided by doctors to patients as a special public good to be enjoyed by all citizens, but as an "economic activity", a commodity to be traded across the EU much like any other.

He also pointed out the implications for the building trade and environmental protection:

The trade union movement is worried that construction companies will no longer have to abide by UK health and safety laws on building sites, and environmental campaigners fear that local planning rules, which govern where supermarkets can open, will be judged to be an illegal barrier to market entry. Attempts to stem the growth in the number of bars and nightclubs in city centres will also be thwarted by a number of clauses.4

Another critic of the Directive, Graham Copp, commented in Red Pepper:

any company in any services industry (be it health, building, advertising or whatever) that was set up in one of the EU’s less regulated economies -– perhaps in one of the new eastern European member states -– could also set up in the UK; and the laws that would govern wages, standards, contracts, etc, for that business in Britain would be those of the eastern European country, for example, not the UK.5

The European Trade Union Council argued that the Directive

could speed up deregulation, seriously erode workers’ rights and protection, and damage the supply of essential services to European citizens.3

Derek Simpson, general secretary of Amicus, has said:

UK health and safety standards are hard won, and this directive threatens to dilute those high standards and compromise British workers and public safety without any redress to UK law or regulatory bodies.3

[edit] State of the Directive in 2005

On 22 March 2005, EU leaders, led by France, agreed on a "far reaching" revision of the Services Directive to preserve the European social model. French President Jacques Chirac told an EU summit in Brussels that the changes planned by the Directive were "unacceptable". 6 However, modifications to the Directive will be introduced within the normal course of the EU legislative process, at a later stage. The Directive will not disappear from the pipeline because the leaders agreed on the need to "open up" the EU services sector.

"If France wishes to eliminate the risk of social dumping, this will be addressed in the framework of the legislative procedure and of co-decision, which has been initiated," declared Jean-Claude Juncker of Luxembourg.7

On 1 July 2005 the UK, which is pro-liberalisation and thus in favour of the Services Directive, took up the chair of the EU Presidency. Among other things, under the UK Presidency the Services Directive looked likely to raise temperatures in the EU, particularly among those in favour of a more social Europe, such as France, Belgium and Germany. In Tony Blair's speech to the European Parliament on 23 June, he committed the UK Presidency to try to "resolve some of the hard dossiers", of which the Services Directive was one. 8 However, UK was unable to retain the key liberalising aspects of the Directive and agreement in Council was not achieved during its Presidency.

The European Parliament considered the Directive again in October 2005, adding a few superficial changes to the original text. The "country of origin principle" has been maintained, thus fueling renewed criticism against this levelling by the down of European labour laws.

[edit] Parliamentary amendments to the draft

On February 14-16, 2006, a plenary session of the European parliament carried out its first reading of the Directive in Strasbourg. [1] [2]

On February 16, 2006, MEPs (Members of European Parliament) voted 391-213 in favour of a proposed revision to the Directive, although it has been 'watered down' from the original directive read to the European Parliament on February 14, so much so that Socialist MEP Evelyne Gebhardt said the directive had been 'turned upside-down', a claim contested by labour organisations. 12

Meanwhile, about 50 000 people demonstrated against the "country of origin principle" in Strasbourg, according to the left wing L'Humanité newspaper.

The majority of members of the two largest groupings in the parliament, the conservative European People's Party (EPP) and the centre left Party of European Socialists (PES) voted in favour of the revised bill.

The Party of the European Left (communist), the European Green Party as well as the French Socialist Party voted against against the new proposal.

[edit] Proposed inclusions

The proposed directive would now cover [3]:

  • Services of "general public interest" (aka public services in ordinary language), including, but not limited to, water, sewage and waste management.
  • Services provided to businesses such as management consultancy, certification and testing, facilities management and advertising,
  • Services provided both to businesses and to consumers, such as real estate agencies, construction services, architects, distribution services, car rental and travel agencies.
  • Consumer leisure services such as tourism, sports centres and amusement parks.

[edit] Proposed exclusions

The following however would be excluded:

The controversial "country of origin principle" was explicitly left over, but there was no "country of destination principle" to replace it either. The European Court of Justice would therefore be charged of deciding, through jurisprudence, which country's labour laws apply themselves in each case.

[edit] Comments on the revised proposals

[edit] Proponents of liberalisation

Business groups stated that the new directive will limit the benefits that the early version of the Directive would have provided.

The European Commission estimated that this early version would have created an additional 600,000 jobs in the EU, would have boosted economic growth and would have increased quality and choice for consumers. 13

The Wall Street Journal estimated that the revised directive would fail in its objective: the liberalisation of services at the heart of the EU.

D. Godefridi (Hayek Institute) wrote in le Figaro : "Services represent 70% of the European economy. In not liberalising these the EU remains below the objective of the founding treaties of 1957: there is no common European market. For ten years European economic project has moved backwards. On 30 May 2006, the European political elite buried the very essence of the European project".[4]

[edit] Opponents of liberalisation

Left-wing and labour organisations underlined that the new version is not as favorable to workers as it pretends to be, and that the "country of origin principle" would probably be applied by the European Court of Justice, as a record of its preceding decisions led believe. They especially pointed out that member states were prohibited from demanding any type of administrative authorisation to companies, thus making control of labour laws close to impossible 10 .

Green MP Gérard Onesta declared: "the Bolkestein directive had became a monster... It is now a monster missing a few teeth, but it is still a monster" 11 .

MEP Francis Wurtz (European United Left - Nordic Green Left) declared to L'Humanité that, as European Commissioner Charlie McCreevy (who had succeeded Bolkestein) had pointed out, the European Court of Justice jurisprudence systematically favorised the "country of origin principle".

Conservative MEP Philippe de Villiers also declared to Le Figaro: "The new Bolkestein directive is a lie"; "In its original form, the directive threatened social dumping for 5,000 professions, the current version still targets 4,000" 14 . Henceforth, in the absence of a defined "country of destination principle", the "country of origin principle" would still apply itself. 15 .

[edit] Revised proposals of the European Commission

On 5 April 2006 the commission presented a new version of the directive to the Council of Ministers including most of the modifications voted by the MEPs, in accordance to the codecision procedure.

On 29 May 2006 the Council approved the revised text, which will now be resubmitted to the parliament for its second reading.

[edit] Economic analyses

These analyses make use of simple theories of International trade to explain distributive and welfare effects of the service directive by changes in relative prices and terms of trade.

We assume that 2 kinds of goods exist which differ in their factor intensity. ‘Sophisticated’ industrial goods, which are expected to be intensive in skilled labour and which are traded before the reform (and afterwards) and ‘unsophisticated’ goods, these are services, which are expected to be intensive in unskilled labour and are not traded before the reform. The high-skilled labour abundant West (richer countries) is expected to have an advantage in the production of industrial goods on account of its higher relative endowments, whereas the low-skilled abundant East (poorer countries) is expected to have an advantage in the production of services. We assume that technology differences in producing services between the trading partners don’t exist.

The effects of trade under these circumstances are captured by the Heckscher-Ohlin model. It says that competition due to economic integration will lead to factor price equalisation, which means that in an open economy relative factor prices (unskilled labour to skilled labour) will converge. Countries (West) will export goods that are intensive in the factors, with which they are abundantly supplied and in doing so they export indirectly their abundant production factor (skilled labour) itself. On account of factor price equalisation the return to the scarce factor (unskilled labour) in an economy will fall, whereas the return to the abundant factor will increase.

In the West owners of ‘unskilled labour’, the service providers will suffer from real wage losses after trade, if compensatory transfers are not feasible. The loss in real wages is large, if labour mobility is more restricted, because then workers can not relocate to other occupations. The real wage loss however may be softened by complete liberalisation, which leads to smaller prices for other imported services and has therefore positive income effects for skilled and unskilled workers. In theory, the loss of real wages for the unskilled would be more than compensated according to the Standard trade model – under the assumption of free and costless labour mobility within a country - by more efficient factor allocation. As a consequence total welfare of the West would increase, further forced by beneficial effects of increasing returns to scale, which are not captured by the Standard Trade Model.

However Terms of trade effects favour the East and therefore increases its welfare, because the newly traded goods (services) can be exported at higher relative prices. After factor price equalisation in the East service providers will profit from trade on account of higher relative factor prices in form of higher real wages whereas producers of industrial goods have to face a loss in real wages. The service directive (especially the ‘Freedom of establishment principle’) can be interpreted as an instrument to widen the range of goods that are tradable in a country, such as plumbing services rather than an instrument to reduce tariffs. This will lead to more competition in production of the same good, which is assumed to force a more efficient allocation of factor endowments. However under the context of the fact that labour markets in the West are more regulated than the labour markets in the East and on account of negative terms of trade effects for the West, it could be that wage losses of the unskilled in the West can not be compensated by higher efficiency, whereas welfare of the East should benefit from an integrated service market, especially when it’s assumed that its labour market is less regulated.

The results of the theoretical analyses give us some explanations for the negative reaction of Western Europe countries like France and Netherlands towards the reform, fearing social dumping opposed to Eastern Europe, where even Hungary’s socialist minister of European affairs, Etele Baráth claims that the “freezing of the service directive is unfair.” Most economists support the new Directive, pointing to the benefits of more efficiency in factor allocation, which could be used to help ‘losers’ from trade on account of negative distributive effects afterwards. According to them, too strict regulations which aim at softening the speed of such changes would slow down economic progress.

[edit] References

1. "Huge protest against Bolkestein Directive", SpectreZine, 21 March 2005. (retrieved 27 March 2005)
2. "Bolkestein blasts French protest against his services directive", EUbusiness, 20 March 2005. (retrieved 27 March 2005)
3. "Briefing: Commission Framework Directive on Services", Centre for a Social Europe, November 2004. (retrieved 27 March 2005)
4. "In the health trade", The Guardian, January 20, 2005. (retrieved 27 March 2005)
5. "The Bluffer’s Guide to the Bolkestein directive on services", Red Pepper, April 2005. (retrieved 27 March 2005)
6. "EU agrees to reform services plan", BBC, 23 March 2005. (retrieved 27 March 2005)
7. "'Bolkestein directive' to stay, but will be watered down", EurActiv, November 21 2005. (retrieved 27 March 2005)
8. "http://www.number-10.gov.uk/output/Page7714.asp", Prime Minister's speech to the European Parliament on 23 June 2005.
9. http://www.monbiot.com/archives/2005/03/08/the-real-straight-banana/ A Guardian article by George Monbiot, an attempted 'coup against social Europe'? (8 March 2005)
10. (French)"Ce que contient vraiment le compromis annoncé", L'Humanité, February 15, 2006. (accessible in English on www.humaniteinenglish.com)
11. (French)"Les eurodéputés renvoient à Bruxelles une directive Bolkestein adoucie", Agence France Presse, February 16, 2006 (14h54).
12. "EU service law approved by MEPs", BBC, 16 February 2006.
13. "Q&A: Services Directive", BBC, 16 February 2006.
14. (French)"Villiers: "la nouvelle directive Bolkestein est un mensonge" (Villiers: 'the new Bolkestein directive is a lie'", Le Figaro, February 16, 2006.
15 (French)"« La règle absolue demeure la mise en concurrence »", L'Humanité, February 18, 2006. (English transl. availables on www.humaniteinenglish.com).


[edit] See also

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