Services reform is welcome, not a threat

By David Kernohan

Date: 01/07/04

IN THE run-up to this month's European elections one issue seemed to act as a magnet for discontent across a number of member states: the European Commission's proposal for a directive on services.

The complaints have varied but the essential criticism is that the directive would undermine the delicately poised European social model of labour relations in favour of more liberal practices.

The key ambition of the directive is to extend further into the services sector the EU principle of 'mutual recognition' which is already well understood in merchandise trade. Thanks to gradual incorporation of the acquis into national law, the EU's core principle of free movement is now well accepted and applied across three of the so-called four freedoms - goods, workers, capital, but much less so in the fourth area, services. The free-movement principle has largely ended the ability of vested interests - often commercial but sometimes also unions - to deny consumers access to a full range of products deemed desirable in other member states.

But progress in intra-EU services trade has been relatively slow when compared to that in merchandise trade. The so-called Bolkestein directive aims to do for services trade what the '1992' agenda did for internal market activity in goods.

Critics say that the new directive will undermined the posting of workers directive, which requires service workers posted abroad to abide by the standards of the country to which they are posted.

The powerful implication of the 'country of origin' principle set out in the proposed new directive means that service providers will only have to comply with the legal standards of their home country. Is this a threat to living standards? In fact, Article 17 of the draft establishes derogations where the new provisions will not apply to industries such as postal services and energy utilities.

None of these safeguards has been enough to stop alarms being raised, ostensibly on the grounds of social protection and health and safety, in countries such as Sweden where labour relations are presently consensual rather than being enshrined in legislation. In Germany, by curious contrast, where the core labour-relations aspects of the acquis also remain consensual, set out in employer/union 'social contracts' rather than transcribed into national law, industry generally supports the reform. Could it be that in Sweden, the archetypal knowledge-driven economy, the underlying concern might be a fear of competition?

Reading between the lines of the concerns voiced, what seems to be at issue is a concern that the proposed directive, if it became law, would devolve power away from the collective bargaining process towards the courts in settling disputes where service companies feel they are being unfairly discriminated against. Trade unions, particularly in Sweden, could lose bargaining power over terms and conditions. In turn they would lose leverage in pay negotiations.

For example, particular concerns exist in the Swedish construction industry, where it is the trade unions, not the government which carry out site inspections on health and safety grounds. Their privileged position is under threat, because now there are fears of lower-cost labour from the new EU member states undercutting the construction industry's fairly high levels of pay. The Commission has made it clear that the Swedish social model should not come under threat. Suitable arrangements are being put in place to address the concerns of industries with genuine safety concerns such as construction.

At stake is whether, as now, companies bidding for work in another EU state have to comply with the 'paperwork' in the country of posting. If companies have to go through bureaucratic hoops this could amount to covert protectionism. Companies could no longer be required to file prior declarations, nor ship the employment documents to the place of posting. The crucial point is that, under the terms of the proposed directive, the bureaucracy will not be 'front loaded' and will therefore no longer be able to present such a formidable barrier to market entry.

The draft directive does not amount to a 'Trojan Horse' with the intention of undermining the delicate EU collective bargaining arrangements. What underlies the protests for both firms and unions used to operating in a high-wage/ low competition environment, is a straightforward fear of competition undercutting relatively high rates of pay.

The low level of intra-EU trade in services (only 20% are cross- border when compared to merchandise trade), suggests that the present arrangements are acting as a barrier to companies setting up in other member states. Yet ultimately it will be growth rates and efficiency that enable taxes to be paid to support high living standards.

In a modern economy it is becoming increasingly difficult to disentangle the 'manufactured' from the service element in products as diverse as ABS braking in cars, satellite navigation and digital camera phones. Technological progress also means that service activities are increasingly easy to trade.

It is perverse that, while European companies have participated fully in the pan-global trend towards trade in services, they appear hampered in penetrating the intra-EU service markets.

Properly understood and articulated, service sector reform should not be seen as a threat to living standards. Advocating efficiency and innovation in service provision should be a positive, win-win issue to commend to European electorates as part of a growth and employment-boosting agenda.

• David Kernohan is senior fellow and head of the trade policy unit at the Centre for European Policy Studies, Brussels.

http://ec.europa.eu/comm/internal_market/en/services/services/index.htm http://ec.europa.eu/comm/internal_market/en/services/services/index.htm

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