Services Without Borders

Among the few genuinely pro-market initiatives pushed by EU authorities is the European Commission’s proposal for the so-called services directive, which has not surprisingly stirred much controversy of late. The aim of this legislation is to provide a legal framework that would eliminate the obstacles to the free movement of services among EU member states.
According to the proposal, market entry procedures would be simplified significantly to make it easier to establish companies in the EU. Also, companies would be free to provide a number of services in other EU countries without establishing themselves there and operate according to the rules of their home country (the “country of origin” principle). Implementation of this law would promote economic development and individual wealth all across the EU. Moreover, it would considerable improve the business climate in the single market and encourage structural reforms in the EU countries.
Presently, the movement of services within the EU is much more difficult than that of goods. Regulatory restrictions applied by individual EU member states create a significant drag on the huge potential for economic growth. A free movement of services, implemented under the proposed law, would provide conditions for the establishment and operation of new businesses and allow consumers to choose among a wider variety of services available and a bigger number of competing service providers.
The recent report by Copenhagen Economics showed that liberalizing services would yield significant economic gains for all EU member states by boosting jobs and trade in services and by pushing down prices of services of the covered sectors. According to the study, output and added value would rise in all sectors of the economy.
However, this indispensable law – which has been called the EU’s most controversial piece of legislation – is already in danger of being modified beyond recognition. The number and the scope of services to be liberalized might be reduced or the directive might even be abandoned altogether. It has already come under a fierce attack from the French government, whose prime minister told the parliament that the directive is “unacceptable” and that his government would do “everything possible” to oppose it. Germany has also expressed fears over the ambitious plans of this law and is pushing for a number of exemptions.
The most controversial provisions of the proposal include the opening up of EU health care service markets in and the aforementioned “country of origin” principle. They have led to fears that the standard of social protections and wages will be driven down and that service providers will choose to migrate to countries with more flexible regulation.
But it is consumer choice among competing service providers, not administrative requirements and control, that determine the quality of services. So if consumers need the existing quality of services, businesses who want to survive in the competitive battle will not be able to diminish the quality even if obligatory standards were lower. As for the feared migration of service providers, this would be logical and useful. For one thing, it would allow consumers to use a greater number and a wider range of services available. Second, it would help the member states to evaluate and improve their regulatory environment.
In order to realize the goals of the services directive, it is essential to ensure that it is not narrowed by excluding the liberalization of services that are strictly regulated at present (social services, health care services, etc.). There is no space for any reductions as all the covered sectors badly need to be opened up. If discussions revolve around trimming the list of services, it is vital that derogations of the draft directive are only minimal. Furthermore, if the goal of this law is to markedly reduce administrative barriers, it is crucial that the directive does not contain any mandatory requirements for service providers that are either undefined or open to interpretation.
To back up this initiative, the Lithuanian Free Market Institute and 15 EU-based non-government organizations have signed a petition in support of the services directive and submitted it to the European Parliament and the Council of Ministers. In the petition these authorities and each MEP personally have been urged to take necessary steps for the benefit to the future economic freedom and prosperity in the EU and to adopt the services directive as proposed, without limiting the scope of its provisions.