Charlemagne. Not yet free to serve

Europeans, as George Bush might say, misunderestimate services

THIS week is likely to be remembered in Brussels as one in which the European Parliament celebrated the 20th anniversary of the single market by preventing its expansion into the largest segment of Europe's economies. The Single European Act, signed into law on February 17th 1986, paved the way for a common market in goods; it made companies more efficient through increased competition and economies of scale and benefited consumers by putting downward pressure on prices. In its original form, the so-called "Bolkestein directive" was supposed to do the same for services, that is, for economic activities you cannot put on a train (like finance, hairdressing, or retailing). The European Commission estimated that the original plan would have boosted income by 1.8% and created 2.5m extra jobs (other estimates put the welfare and employment gains lower).

In many ways, however, the directive (which the European Parliament was due to vote on as The Economist went to press) is a debilitated creature. It does not apply to banking, telecommunications, transport or health, and its scope may be restricted further. As things are, its merits and drawbacks are balanced.

On one hand, it does ease some of the burden of pointless red tape (Spain has 700 laws governing restaurants; Paris has 12 just for taxis) by making it easier for people wanting to offer services in other countries to know what to expect. The plan might also draw away from the debate on services some of the poisonous anti-globalisation rancour that affected, for example, the French constitutional referendum. And it could begin a gradual process of racheting up liberalisation, which is what happened in goods markets after the passage of the Single European Act.

On the other hand, in its current form, the plan would remove the core of the original proposal, which would have subjected service providers only to the laws and rules of their own country (the so-called "country of origin principle"). And the new plan, assuming it passes, could add to the burden of legislation in the name of "harmonisation"--by increasing red tape in lightly regulated countries such as Britain and the Netherlands.

The arguments will rumble on until the European Commission, parliament and national governments have all had their say. Whatever happens this week will affect only the broad shape of any final deal, rather than the details. But it is not the details that really matter. It is the subject of the dispute, the services economy itself, that merits attention.

"Europeans do not really take services seriously," claims Paul Hofheinz of the Lisbon Council, a reformist think-tank in Brussels. "We tend to think of the economy as manufacturing, and of jobs in terms of industrial jobs, with a big salary, lots of benefits, and security." That view might sound odd. After all, some of the most successful service providers in the world are European--banks in Britain, mobile telephony in Finland, "big-box" retailers in Sweden. Yet these are not typical. In America, Britain and Australia, services account for three-quarters of income and four-fifths of jobs. In France, Germany and Italy, services account for six to ten percentage points less in terms of income and jobs. European service providers are less efficient and less dynamic. Since 1995, productivity growth in services has on average been less than 0.5 % per year in the euro zone, 3% in America and 2% in Britain. Cross-border trade in services is puny, despite Europe's claim to be a common market. In sum, the service sector is stunted in much of continental Europe.

There are all sorts of reasons for this. Perhaps it is partly cultural. Napoleon called the English "a nation of shopkeepers", implying this was about as low as you could get. His admirer and biographer, Dominique de Villepin, who is also prime minister of France, has a similar antipathy for Anglo-Saxon mercantilism: he grumbles that attempts to liberalise services "call into question our labour laws and public services".

Europeans tend to think of services as providing low-tech things like plumbing, even though big retailers are some of the world's most high-tech-intensive companies. But Europe's retail champions have trouble spreading their wings. To protect their charming boutiques, France and Denmark have made it all but impossible to build new shopping malls. Also, European liking for state provision of services--for example in health--limits competition and innovation in those areas.

How Europe hobbles itself

But whatever the reason, the consequence is not just damaging in itself. It also explains some of Europe's wider problems. The EU has 19m unemployed. For the past decade, seven out of ten new jobs in the world's rich countries have been created in services. Europe has trouble integrating minorities--as last year's French riots showed. Services are one of the main providers of first jobs to immigrants. To encourage sexual equality and deal with ageing populations, European countries want to encourage more women and older folk to have jobs. For what it's worth, countries with the highest share of services also have the highest labour-participation rates for women and people over 55.

Europe's poorish record in services is closely connected with its failure to keep pace with America in terms of productivity growth and innovation. A report by the Institute of Advanced Studies in Vienna argues that almost all the difference between American and European productivity since 1995 can be accounted for by services, especially the bits that use a lot of information and communications technologies, which, the institute says, grew twice as fast in America as in Europe.

But encouraging services isn't rocket science. The key to improving living standards is to allow jobs and capital to flow from declining to expanding industries. Services are expanding. Manufacturing has been declining for 30 years. The vote in parliament this week will do nothing to help the flow from one to the other, and may even impede it.

Commentary article says that Europe must do much more to encourage service industries.