The Untapped Potential of the EU Services Market

As highlighted in last week’s blogpost, the EU services market holds considerable growth potential and represents a vital component of the completion of the EU single market. While the Intra-EU trade in goods is functioning reasonably well, the corresponding trade in services is not equally integrated, although services account for around 70% of EU-GDP and a nearly similar proportion of overall employment. The possibilities and challenges of deepening the EU services market will be discussed tomorrow at the conference “Making the EU services market an engine for growth” organized by the European Commission and the Bertelsmann Stiftung in Brussels. Today we focus on the current state of the EU services market and the positive growth effects that could be generated by further integration of the service sector.

What has already been achieved?

The Services Directive adopted in 2006 represents the most substantial step forward to liberalize cross-border provision of services since the inception of the EU single market in 1993. The directive aims to remove legal and administrative barriers impairing the Intra-EU trade in services. The scope of the Services Directive covers the sectors with the greatest economic potential, such as business services, retail and construction accounting for more than 40% of EU-GDP.

The directive led to a simplification of numerous procedures and formalities, an abolishment of discriminatory restrictions as well as the establishment of the “Single Points of Contact”, which give all necessary information to prospective cross-border service providers. However, despite the notable progress that has already been made in some service sectors, the overall services market has not exploited its full potential yet.

The “Growth Engine” Services is Not Running at Full Load

As of today not all member states have fully integrated the Services Directive into their national law and there still exist numerous barriers hindering an unimpaired provision of services across all member states. These include, among others, frequent double regulation, such as the need for service providers to cover insurance in the home country, as well as, in the concerning member state where they want to conduct business. In 2011, 34.000 legal provisions were still in force, which originally should have been abolished by the enforcement of the Service Directive. Furthermore, the information provided by the “Single Points of Contact” is often incomplete and unstructured. Especially small and medium-sized enterprises are disproportionally affected by remaining legal and administrative barriers. This noticeably impedes the creation of an internal market for services due to the predominant role that SMEs play in EU service provision. Altogether, the services market contains vast opportunities for further improvement. But how significant would the benefits of a further implementation of the services directive be?

Better Implementation would bring Substantial Economic Benefits

A further integration of the internal market for services would have a substantial growth effect on EU-GDP. According to the European Commission, the implementation of the Services Directive by member states has already boosted EU GDP by approximately 0.8% (101 bn. €). However, a more ambitious integration – i.e. a reduction of barriers by EU countries to the level of the five best performing member states in the sector – could lead to an increase of EU GDP by 1.6% on top of the 0.8%. Even if member states only reduced the barriers to an average EU level, additional gains amounting to 0.4% of GDP could be realized.

Compared to the gains already achieved by the integration of the single market for goods, these numbers emphasize the high untapped potential of the EU services sector. Various economic studies estimate that the free movement of goods brought a permanent increase of EU-GDP by 2% – 2.5%. If member states are able to achieve an ambitious implementation of the Services Directive, the expected economic gains are as high as the liberalization of EU trade in goods. In other words, with a deeper integration of the EU services market, the growth effects that the single market yielded until now could be doubled.

To fully take advantage of the benefits that come with a deeper integration of the EU services market, member states need to ensure first and foremost a more ambitious implementation and enforcement of the Service Directive. In addition, the information system in the form of the “Single Points of Contact” needs to be developed further to facilitate the supply of information for service providers and customers.

If you are curious now to hear some expert’s opinions on the great potential of the EU single market for services and the challenges that come with the further integration, you can follow tomorrow’s conference live on the GED Twitter channel. It will be worth it!