Beskæftigelsesudvalget 2018-19 (1. samling)
BEU Alm.del Bilag 331
Offentligt
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 BEU, Alm.del - 2018-19 (1. samling) - Bilag 331: Orientering om brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne
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AUTHORS
Eva Rytter Sunesen
Martin Hvidt Thelle
Disclaimer
The content of the report is not intended to reflect the official position of the individual Member States
who commissioned it. The viewpoints expressed herein attempt to reflect the collective opinion of vari-
ous individuals and stakeholders who have contributed to the research and development of this report;
they do not necessarily imply an agreed position among them or ministerial endorsement by any Mem-
ber State mentioned in the report.
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PREFACE
This report was prepared for the Ministry of Industry and Trade of the Czech Republic, the Danish
Ministry of Industry, Business and Financial Affairs, the Finnish Ministry of Economic Affairs and
Employment, and the Irish Department of Business, Enterprise and Innovation.
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CONTENTS
Executive summary
1
8
The key position of services within the EU economy
14
The rationale of a Single Market for services
Limited reductions in trade costs
Low Intra-EU trade in services
15
16
18
1.1
1.2
1.3
1.4
Potentials from implementing and enforcing the
Services Directive
21
Potentials go beyond the Services Directive
The services
sector and the EU’s global
competitiveness
The EU is losing economic strength
EU growth and prosperity under pressure
A Single Market for services can enhance
productivity
Lower trade barriers can benefit small firms
Services trade and growth of tomorrow
26
1.5
2
30
31
33
2.1
2.2
2.3
37
38
42
2.4
3
3.1
The increased servitisation of EU manufacturing 43
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3.2
The key role of digital services in the EU economy
51
Services trade, new technologies and innovation
55
Calls for action
Call for action 1: Set direction
Call for action 2: Ensure fit
Call for action 3: Measure progress
Call for action 4: Commit to improve
Call for action 5: Prioritise efforts
Call for action 6: Follow-up and adjust
60
62
62
63
64
64
65
3.3
4
4.1
4.2
4.3
4.4
4.5
4.6
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Making EU trade in services work for all
LIST OF FIGURES
Figure 1 The rationale of the Single Market from a
business and consumer perspective ............................... 16
Figure 2 Trade cost reduction from EU membership vs
WTO and FTA conditions ................................................... 17
Figure 3 Trade cost reductions and share of EU value
added across services sectors ......................................... 18
Figure 4 Trade in services within the EU and other trade
blocs, 2008 and 2016 ......................................................... 19
Figure 5 Intra-EU imports as a share of total inputs in
sector, 2014 ......................................................................... 20
Figure 6 EU GDP with and without the Services Directive
.............................................................................................. 22
Figure 7 GDP impacts with full implementation of the
Services Directive ............................................................... 23
Figure 8 Reduced or remaining barriers in services
sectors in the EU, 2009-2014 .............................................. 24
Figure 9 ................................................................................ 31
Figure 10 Possible impacts of Brexit on the EU’s FDI
attractiveness ..................................................................... 33
Figure 11 .............................................................................. 34
Figure 12 Labour productivity comparisons ................... 35
Figure 13 Potential GDP per capita growth in Europe,
2016-2070............................................................................. 36
Figure 14 Remaining potential of the Services Directive
on productivity levels in the analysed services .............. 38
Figure 15 SME shares in the EU28 non-financial business
sector, 2016 ......................................................................... 39
Figure 16 Turnover per EU SME across sectors, 2016 ...... 40
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Figure 17 Core manufacturing jobs and service jobs
within manufacturing, 2015 .............................................. 44
Figure 18 Servitisation from a consumer perspective ... 45
Figure 19 The servitisation of EU and US manufacturing47
Figure 20 Service employees in manufacturing as a
share of total employees in manufacturing across
Member States ................................................................... 48
Figure 21 EU services shares in manufacturing exports
across sectors, 2011 ........................................................... 50
Figure 22 Cost share of service input in manufacturing
output, 1995 and 2011 ....................................................... 51
Figure 23 Global trade in services and digital services,
1995-2016............................................................................. 52
Figure 24 Digital Trade Restrictiveness Index (DTRI), 2018
.............................................................................................. 54
Figure 25 Innovation performance in 2017 and Service
Trade Restrictiveness Index (STRI) development, 2014-
2017 ...................................................................................... 56
Figure 26 Value added in the ICT sector as a share of
GDP, 2014 ............................................................................ 57
Figure 27 Six calls for action to improve the Single
Market for services ............................................................. 61
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EXECUTIVE SUMMARY
A Single Market with more than 510 million people (or 450 million after Brexit) offers opportunities
for EU businesses to specialise, gain scale and improve their productivity. Back in 2006, EU policy
makers aimed to create a well-functioning Single Market for services, and the Services Directive was
seen as a key step towards this ambition.
Services are increasingly important to the EU economy
Since then, services have become even more important for overall EU competitiveness:
•
•
•
Services account for an increasing share of the EU economy
The manufacturing and services sectors are increasingly intertwined
Services are an integral part of the Digital Economy and innovation
The EU’s global position is under pressure
Furthermore, the
EU’s position in the world economy is under pressure. Measured both in terms of
trade, foreign direct investment (FDI), population and size of the economy, the EU’s share of the
global pie is shrinking. Had the EU maintained its global export market share since 2010, this
would have supported one million jobs in the EU, and an additional EUR 250 billion would have
been invested if the EU had maintained its share of World FDI. Brexit is likely to reinforce the
downward trend in the EU’s global position and may
disrupt EU value chains, the location decision
of multinationals within the EU and may reduce the overall attractiveness of the EU as an invest-
ment location.
The Single Market for services falls short of expectations
From a business perspective, the reality of the Single Market for services falls short of expectations.
The Single Market has on average reduced trade costs by 20 per cent for goods but only 7 per cent
for services. Trade cost reductions have been particularly small for some of the services sectors that
account for a large share of EU value added (e.g. wholesale & retail trade and construction).
A fragmented Single Market for services means that intra-EU trade in services is less developed
than intra-EU trade in goods, and intra-EU trade in services has grown more slowly compared to
services within other trade blocs. At the same time, trade barriers within the Single Market for ser-
vices mean that entrepreneurs and growing firms are limited in their ability to scale up by expand-
ing across borders within the EU. Reduced ability to trade and expand across borders hampers the
growth and productivity of EU businesses and has a larger negative impact for small and medium
sized enterprises (SMEs).
A fragmented services market hampers productivity growth in services
Productivity in the EU manufacturing sector has grown three times faster than in the EU services
sector, and productivity in EU services has grown alarmingly slower than productivity in US ser-
vices. The period after the crisis reflects a
‘lost
decade’
with respect to the EU’s productivity growth
in services. Since 2008, the EU’s productivity in services has grown much less than that of the US
and is now half that of the US level. The
‘lost
decade’ has thereby fully eroded the catching up
achieved before the crisis. Low economic growth, slow productivity growth and an ageing popula-
tion put the
EU’s future prosperity under pressure.
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Barriers tend to accumulate over the value chain and hurt SMEs more than larger firms, and SMEs
in the services sector are on average four times smaller than SMEs in manufacturing.
A conservative estimate: Services Directive can add at least 2 per cent to EU GDP
Significant potential can be realised within the services sector itself. A full implementation and en-
forcement of the Services Directive alone will increase intra-EU trade in the affected services and
will enhance the productivity in the services covered. Based on a conservative estimate for a selected
sub-set of services covered by the Directive, the Commission finds a remaining potential of almost 2
per cent to EU GDP. The estimate is for a selected sub-set of services and ignores possible Single
Market impacts in other services. The sectors covered by the Services Directive account for 46 per
cent of EU GDP and only around half of these have been examined in the assessment covering
around 20 per cent of EU GDP. Knowing that the services sector account for more than 70 per cent
of the EU’s GDP,
the 2 per cent addition to EU GDP is clearly an under-estimate of the true poten-
tial.
Services more important because of digitalisation, servitisation and innovation
Gains from lowering barriers to EU trade in services is growing over time.
This means that the ‘cost
of doing nothing’ is growing year by year. The reason is that gains from lower barriers to services
trade are not limited to the services sectors but will spread throughout the EU economy.
With increasing digitalisation of all sectors and servitisation of the manufacturing sector, these ad-
ditional knock-on effects throughout the economy are growing in importance, and hence, so is the
economic importance of services barriers. In addition, the EU services sectors are important for EU
innovation, research and development perspective.
Digitalisation
Digitalisation has changed international trade and given rise to new complementa-
rities between goods and services, particularly for trade in more complex manufac-
tures and digitally deliverable services. Digital technologies and the amount of data
they create trigger new innovations, products, services, business models, as well as
new ways of interaction between people and machines.
Over the past ten years, trade in digital services has grown faster than trade in services in general
and much faster than trade in goods. Benefiting from the growing trade in services is critically de-
pendent on performing well in digital services as this is the fastest growing area of services trade.
However, much of the empirical evidence suggests that the EU countries are not fully prepared for
this. While some of EU’s smaller, service-orientated
economies are performing above average when
it comes to low restrictions to digital trade, some of the larger economies such as Germany, France
and Italy are lagging. Even the best EU countries are lagging the lead country, New Zealand, but
ahead of the US and notably China. This means that there is a risk that Europe does not fully realise
the potential in this area because several barriers to trade in service are holding us back.
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Servitisation
Manufacturing firms are increasingly relying on services as inputs, either to support
their own manufacturing activity or as integrated elements in the goods they sell:
•
•
•
•
Between 25 per cent and 60 per cent of employment in manufacturing
firms relates to service functions;
Around 14 million service jobs are embedded in EU goods exports;
The EU has more trade-related jobs in services than in manufacturing;
Service jobs within manufacturing account for more than 50 per cent of
jobs in manufacturing firms in many advanced and highly competitive EU
manufacturing countries, such as Germany and Sweden;
•
•
•
The process of servitisation has increased in the EU in recent decades;
EU manufacturing firms are more servitised than US firms;
Services cost 11 per cent more in the EU on average compared to the US.
Further integration of the Single Market for services can bring down prices, improve variety and
help EU manufacturing firms to improve their competitiveness through servitisation. Reducing
trade barriers is particularly important for the services sectors that sell services to the manufactur-
ing sector, such as wholesale & retail trade, freight transport and accounting and legal services.
Services and innovation
The
EU’s innovative strength hinges on a Single Market with low
barriers to trade in
services:
•
•
The services sector accounts for around 35 per cent of total R&D expendi-
ture in the EU and for around half of private innovation expenditure;
Europe, while still making progress, is behind the US and China in capturing
the opportunities offered by digitisation, artificial intelligence and automa-
tion.
For EU businesses, successful adoption of these evolving technologies will signifi-
cantly enhance performance and can be a competitive advantage and differenti-
ator.
Closing gaps in the Single Market for services calls for action
This report identifies four important gaps:
•
Adequacy gap
–
ensuring the rules are fit for purpose
•
Implementation gap
–
ensuring that EU rules are implemented in national rules and laws
•
Enforcement gap
–
follow up with proportionate sanctions for non-compliance at EU and
national level
•
Reality gap
–
ensuring it works in practice
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Making EU trade in services work for all
Four gaps in the Single Market for services
Source:
Copenhagen Economics
The evidence presented calls for action, and this report points to six concrete areas where improve-
ments to the Single Market for services can be made.
Initiatives to deepen the Single Market should be seen in relation to industrial policies, innovation
initiatives, digitalisation strategies etc. This calls for
a Single Market.
Not one Single Market for
goods, another for services and a third for digital activities.
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Calls for action to improve the Single Market for services
Source:
Copenhagen Economics
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CHAPTER 1
THE KEY POSITION OF SERVICES WITHIN
THE EU ECONOMY
A Single Market with a combined population of more than 510 million (down to 450 million after
Brexit) offers opportunities for EU businesses to specialise, gain scale and improve their productiv-
ity. When businesses become more productive they can lower their prices and/or deliver higher
quality. EU consumers and businesses buying services thus benefit from a wider choice, lower
prices and/or better quality. And with higher productivity comes better wages for EU workers.
In this chapter, we analyse the position of services in the EU economy. In Section 1.1, we look at the
rationale of a Single Market for services. In Section 1.2, we look at how the Single Market has re-
duced trade costs for goods and services. In Section 1.3, we look at the development in intra-EU
trade and compare it with trade within other regional trade arrangements. In Section 1.4, we look at
the potential from closing the implementation and enforcement gap of the Single Market. In Section
1.5, we look at the potential for stimulating intra-EU trade in services beyond the Services Directive.
The chapter highlights the following findings
:
•
In 2006, EU policy makers agreed that it was highly important to ensure a well-function-
ing Single Market for services. Since then, the services sector has grown in importance
from a share of 71.9 per cent of employment in 2006 to 73.3 per cent in 2017;
The Single Market has brought significant benefits to EU businesses, consumers and citi-
zens, but European trade in services has not seen the same growth as in goods and services
trade within the EU has grown less than within other trade blocs;
The Single Market has on average reduced trade cost by 9-20 per cent for manufacturing
but only around 7 per cent for services. Trade cost reductions have been particularly small
for some of the services sectors that account for a large share of EU value added (e.g.
wholesale & retail trade and construction);
A full implementation and enforcement of the Services Directive alone will increase intra-
EU trade and enhance productivity in the services covered. Based on a conservative esti-
mate for a selected sub-set of services covered by the Directive, the Commission finds a re-
maining potential of an almost 2 per cent addition to EU GDP. The estimate ignores possi-
ble Single Market impacts in other services;
The sectors covered by the Services Directive account for 46 per cent of EU GDP and only
around half of these have been examined in the assessment covering around 20 per cent of
EU GDP. Knowing that the services sector accounts for over 60 per cent of
the EU’s GDP,
the additional 2 per cent addition to EU GDP is clearly an under-estimate of the true po-
tential;
All Member States stand to gain from improving the Single Market for services, and clos-
ing the implementation gap has become more important as the services covered by the Di-
rective account for an increasing share of the EU economy.
•
•
•
•
•
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Making EU trade in services work for all
The services sector accounted for 73 per cent of total employment in the EU and 62 per cent of EU
GDP in 2017. An underperforming services sector can thus act as a drag on the EU economy. The
consumer and business perspective taken in this chapter shows that the reality of the Single Market
for services falls short of expectations: This chapter will make the case that there is a significant po-
tential for increasing intra-EU trade in services that will require initiatives at both the EU and na-
tional level. As part of this process, social security systems may need time to adapt.
1.1
THE RATIONALE OF A SINGLE MARKET FOR
SERVICES
0F
In 1992, EU policy makers formulated an ambition of a Single Market offering the free movement of
goods, services, people and capital.
1
Within a Single Market, services should be able to flow across
borders. Businesses should be able to structure, organise and operate across borders according to
their own strategic considerations. Within a Single Market, an EU business should be able to:
•
Provide services abroad.
A provider of call centre services in one Member State should
be able to serve clients in other Member States who wish to outsource their call centre ac-
tivities without facing additional requirements or costs. Likewise, a European company of-
fering courier, IT, telecommunications or business services should have the same possibili-
ties to trade within and across borders.
Establish a branch abroad.
An architect firm should be able to open a foreign affiliate
to be closer to its clients abroad without facing additional restrictions on ownership, pro-
fessional qualifications or investment, compared to opening a new branch at home.
Move employees to perform tasks abroad.
A service provider with operations in
multiple countries should be able to move staff across borders when their skills are re-
quired to serve customers in other Member States without any further requirements and
with full recognition of professional qualifications. This could be an engineer working on
an overseas project or after-sales personnel.
Sell services at home to visiting customers.
A dentist should be able to service do-
mestic as well as foreign patients from his clinic in any given Member State without any
additional authorisations, licensing or other requirements.
•
•
•
A Single Market with a population of 510 million (down to 450 million after Brexit) offers opportu-
nities for EU businesses to specialise, gain scale and improve their productivity. When businesses
become more productive they can lower their prices and/or deliver higher quality. EU citizens and
businesses buying services thus benefit from a wider choice, lower prices and/or better quality.
The quality of a service is only revealed upon consumption. As low-quality services can have severe
consequences for the buyer, regulation may be needed to guarantee a certain level of quality, con-
sumer protection, environmental protection etc. However, the level of regulation should always re-
main proportionate to the objective needs, in line with EU Better Regulation principles, and should
not have the effect of unjustly favouring providers from a certain location.
1
As described in Chapter 3, digitalisation has impacted the way cross-border services are provided and given rise
to new complementarities between goods and services. The free flow of data within the Single Market can thus
be considered as a fifth freedom secured by the Single Market.
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In 2002, a decade after the start of the Single Market, the European Commission (2002) concluded
that there was still a huge gap between
‘the
vision of an integrated EU economy and the reality as
experienced by European citizens and European service providers’.
Since 2002, a new common
regulation of the Single Market has been developed to ensure that EU service providers face similar
regulatory requirements at home and abroad, particularly by eliminating unjustified and dispropor-
tionate restrictions to the cross-border provision of services and to the establishment of businesses.
This is illustrated in Figure 1.
Figure 1
The rationale of the Single Market from a business and consumer perspective
Source:
Copenhagen Economics
1.2
LIMITED REDUCTIONS IN TRADE COSTS
While far from perfect, the Customs Union, harmonised EU rules and the principle of mutual recog-
nition have been significant instruments in implementing the Single Market for goods. The Single
Market has on average reduced the costs of selling goods across borders within the EU by more than
20 per cent (for agri-food products by more than 40 per cent) compared to trading on WTO terms
and by 9 per cent compared to a free trade agreement (FTA), cf. Figure 2. For services, the trade
cost reduction offered by the Single Market amounts to only around 7 per cent. Likewise, the Euro-
pean Commission (2017) estimates that the administrative costs of establishing a business across
borders within the EU alone amount to around EUR 5,000-10,000.
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Making EU trade in services work for all
Figure 2
Trade cost reduction from EU membership vs WTO and FTA conditions
Per cent
Note:
Source:
Trade costs for agri-food and manufacturing include tariffs, border costs and trade costs related to regula-
tory harmonisation and convergence. Trade cost reductions in services shows the average intra.EU effect
for cross-border services trade. Trade cost reductions are calculated as simple averages over the individ-
ual sub-sectors. The FTA numbers are based on a modest FTA in the long run.
CE analysis based on CGE-simulations from J Francois
Trade cost reductions have been particularly limited in some services sectors that account for a
large share of EU value added. Wholesale & retail trade (11.1 per cent of EU value added) has seen a
trade cost reduction of around 2 per cent, and construction (5.3 per cent of EU value added) has
seen a trade cost reduction of around 9 per cent compared to a free trade agreement (FTA) effect, cf.
Figure 3. Business services (7.2 per cent of EU value added) and telecommunications have seen the
largest trade cost reductions of 16 per cent compared to an FTA effect. As will become clear in Chap-
ter 3, business services also play an important role in connection with the increasing servitisation of
the manufacturing sector, which is one of the key components in ensuring its competitiveness.
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Figure 3 Trade cost reductions and share of EU value added across services sectors
Services share of EU value added
Per cent
Trade cost reduction within the EU
Per cent
Note:
Source:
The share of value added is for EU28 in 2016. Trade cost reduction reflect the intra-EU effect for cross-bor-
der services trade relative to a typical FTA.
Copenhagen Economics based on Eurostat data and simulations from Professor Joseph Francois
1.3
LOW INTRA-EU TRADE IN SERVICES
Limited trade cost reductions are part of the explanation why intra-EU trade in services only
amounts to a third of intra-EU trade in goods. According to Eurostat, intra-EU trade in goods
amounted to EUR 3,030 billion (growth from 1993 to 2016 of 169 per cent), whereas intra-EU trade
in services amounted to EUR 1,060 billion (growth from 1993 to 2016 of 244 per cent). Intra-EU
trade in goods amounts to 23 per cent of EU GDP compared to 8 per cent for services.
Not all services are equally tradeable, and intra-EU trade in services may never reach the same level
as goods. But intra-EU trade in services has also grown at a lower rate (47 per cent) than within
other trade blocs, such as the Trans-Pacific Partnership (75 per cent), NAFTA (82 per cent) and the
Asia-Pacific Trade Agreement (82 per cent), cf. Figure 4.
The comparison should be taken with some caution as other factors (e.g. the significance of proxim-
ity for services that are delivered physically, the provision of personal services and the costs of buy-
ing services) should be taken into consideration. In addition, intra-EU services trade is growing
from a more advanced level compared to the other trading blocs, and trade would tend to grow at a
slower rate once it is at a higher level of integration. Still, the low level of trade in services compared
to goods and the lower rate of growth in intra-EU trade in services compared to other trade blocs
indicate that there is an untapped potential for increasing intra-EU trade in services.
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Making EU trade in services work for all
Figure 4
Trade in services within the EU and other trade blocs, 2008 and 2016
EUR billion
Note:
Source:
Export values have been converted from USD into EUR with the average currency conversion for the given
year.
Copenhagen Economics based on UNCTAD and FRED data
Low intra-EU trade in services means that EU businesses forego opportunities to improve their
productivity, and EU consumers face higher prices and/or less choice. The services sector accounted
for 73 per cent of total employment in the EU and 62 per cent of value added in 2017, and an under-
performing services sector can act as a drag on the EU economy. The underperformance of intra-EU
trade in services relative to intra-EU trade in goods and trade in services within other trade blocs
calls for putting services high on the EU competitiveness agenda.
National legislation, geography, size, cultural factors, domestic market structures and a range of
other factors besides common EU regulation shape the dependency of a country on services im-
ports. For the services sector as a whole, the five Member States most dependent on intra-EU trade
are all smaller Member States (Malta, Luxembourg, Hungary, Belgium and Estonia). They imported
on average 21 per cent of all the services used in their respective countries from other Member
States, whereas the least dependent Member States are all larger countries (the UK, Spain, Italy,
France and Romania), which imported 5 per cent of their services from other EU countries.
2
1F
Within a specific services sector, the Member States that are most/least dependent on intra-EU
trade varies. Cross-country variation is largest for maritime and air transportation for obvious rea-
sons, for example Malta will always be dependent on maritime and air transport, while other coun-
tries such as Austria are not dependent on, for example, maritime transport to any degree. The five
most dependent countries import on average 73 per cent of the total use of maritime services from
other EU Member States and the bottom five countries on average import 8 per cent, cf. Figure 5.
2
Copenhagen Economics based on WOID database.
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Variation is lowest for construction and courier services, and detailed market analysis about the
structure and the functioning of these markets may help identify initiatives that can make regula-
tion more adequate from a business perspective.
Figure 5
Intra-EU imports as a share of total inputs in sector, 2014
Per cent
Note:
Source:
Total service use in each country is the sum of imported inputs and domestic inputs for each sector. Aver-
ages are simple averages of the countries.
Copenhagen Economics based on the WOID database
Import patterns largely reflect the choice of private businesses and consumers but national authori-
ties also have a role to play. First, the implementation and enforcement of common EU regulation
by national authorities is of immense importance for the actual trade costs facing EU businesses
(see next section). Second, the public sector is also a significant buyer in some sectors, and public
procurement procedures impact the ease with which service providers can tender for public tasks in
other Member States. In the case of cleaning services, for example, the complexity of national public
procurement procedures in some cases poses a trade barrier, cf. Box 1.
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Box 1 The complexity of public procurement procedures as a trade barrier
Markas is a family-run company with more than 9,000 employees, which provides facility ser-
vices in Italy, Austria, Germany and Romania. The company specialises in high-quality clean-
ing, catering and other facility services at hospitals, retirement homes, schools and other big
institutions. In 2017,
Markas’s
revenue totalled about EUR 190 million in Italy, around EUR 50 mil-
lion in Austria and EUR 10 million in Germany and Romania. Most of Markas’s
customers are in
the public sector. This implies that they are highly impacted by EU and national public procure-
ment regulation as well as by trade barriers in services.
The EU Directive on Public Procurement from 2014 had the goal of reducing trade barriers for
foreign service providers. The Directive has been implemented differently across EU Member
States, which imposes costs for EU service providers.
Markas has, for example, experienced that the national implementation of the EU Directive in
one Member State has added a certain degree of complexity to the public procurement pro-
cedures compared to the implementation of the Directive in Austria. The higher level of com-
plexity in the national implementation in that Member State has resulted, for example, in longer
times for awarding contracts, the need to produce more documentation during the tendering
process and a higher risk of appeal cases in situations where a tender has been won. Markas
identifies the added legal complexity and the resulting legal insecurity as one of the main rea-
sons why some foreign service providers might think twice before entering the Italian public
procurement market.
Source: Copenhagen Economics based on an interview with Markas
1.4
POTENTIALS FROM IMPLEMENTING AND ENFORCING
THE SERVICES DIRECTIVE
2F
The Services Directive covers the following sectors: Tourism, Cultural and sport activities, Whole-
sale and retail, Construction, Real estate, Business services, and Other services.
3
Covering services
that account for more than 46 per cent of EU GDP, the Services Directive is one of the key instru-
ments put in place by EU policy makers to implement the Single Market for services.
Following its adoption in 2006, Member States were given three years (i.e. until late 2009) to trans-
pose the Directive into national law. An interim assessment has found that the full impact of the Di-
rective is an additional 2.6 per cent to EU GDP.
4
By 2014, the Directive was not fully implemented
and enforced in all Member States and much of this gap is likely to remain.
3F
3
4
See European Commission (2012).
The assessment covers 15 selected services sectors in the EU27 and with data for 20 specific authorisations or re-
quirements. Not all sectors affected by the Directive are included in the analysis. The 15 sectors represented ap-
proximately 20 per cent of EU GDP and around half of the GDP covered by the Services Directive. This also
means that some relatively large sectors are left out, notably wholesale. According to the authors of the study,
the study covers those sectors which “seem to be more affected across a large number of Member States by the
Directive's provisions”, cf. European Commission
(2012), page 17.
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The European Commission has estimated that EU GDP would have been 1.7 per cent higher in 2014
if all EU Member States had moved to the level of restrictiveness of the five best countries at the
time within each sector (within the sub-set of services covered by the assessment), cf. Figure 6. The
assessment covers a sub-set of services that amounts to around 20 per cent of EU GDP, which is
half of what is covered by the Services Directive. The remaining potential of a full implementation
of the Services Directive for all services covered by the Directive is thus more than a 2 per cent addi-
tion to EU GDP.
According to the European Commission, the services falling under the Services Directive account
for an increasing share of EU GDP (up from 40 per cent in 2012), which makes it increasingly im-
portant to close the implementation and enforcement gap for the Services Directive.
5
Going for-
ward, the least restrictive countries may be used as examples of best practices in terms of reducing
trade barriers.
4F
Figure 6
EU GDP with and without the Services Directive
Note:
Source:
The full implementation of the Services Directive reflects a scenario where all Member States achieve a
restrictiveness level that resembles the five least restrictive Member States.
Copenhagen Economics based on Monteagudo et al. (2012) and European Commission (2014)
All Member States stand to gain from a full implementation and enforcement of the Services Di-
rective, and therefore have an interest in pursuing further integration of the Single Market, but
gains are not equally distributed across countries. The average impact from full implementation is a
2.6 per cent addition to GDP. Some of the smaller Member States, including Cyprus, Luxembourg,
the Netherlands, Denmark, Austria and Sweden, would have an impact of 3 to 4 per cent of GDP, cf.
Figure 7. The small size of the domestic market in these countries makes them more dependent on
trade than larger countries. A Single Market will expand the size of the addressable market and
make it easier for SMEs to scale-up. Likewise, smaller Member States benefit from opening their
markets to foreign firms.
5
Monteagudo, Rutkowski and Lorenzani (2012) and https://ec.europa.eu/growth/single-market/services_en.
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Some of the large Member States such as Spain, the UK and France will also have larger than aver-
age impacts
–
either because they have high remaining barriers or because they have highly com-
petitive services sectors. For all Member States, lower trade barriers will allow businesses to better
engage in global value chains and enhance their global competitiveness.
Figure 7
GDP impacts with full implementation of the Services Directive
Per cent
Note:
Source:
The full implementation of the Services Directive reflects a scenario where all Member States achieve a
restrictiveness level that resembles the five least restrictive Member States within each of the 15 sectors
covered by the impact assessment.
Copenhagen Economics based on Monteagudo et al. (2012)
According to the assessment by the European Commission, a large number of barriers to trade in
business services (e.g. legal services, architects, accountants and tax advisors) remain or have only
been partially abolished by the Services Directive, cf. Figure 8. While the seriousness of barriers is
also a relevant factor, a high number of barriers will in itself be limiting intra-EU trade because
businesses face a fragmented set of regulations that tend to cumulate over the value chain. As ex-
plained later in the report, even the full implementation of the Services Directive does not provide
everything that is needed to capture the full potential of a Single Market (e.g. in terms of the digital
economy).
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Figure 8
Reduced or remaining barriers in services sectors in the EU, 2009-2014
Number of barriers
Note:
Source:
Based on existing barriers in 2009. Potential new barriers are not included. The share of barriers remaining
include both unchanged and partially abolished barriers.
Copenhagen Economics based on European Commission (2014)
Construction is in principle covered by the Services Directive, but trade cost reductions have been
limited and intra-EU imports account for a low share of total demand. A study from Estonia sug-
gests that part of the explanation for the low level of intra-EU trade in this sector is the large num-
ber of requirements (>20) and the number of organisations a business needs to interact with (~10)
pose a burden and a risk for construction firms, cf. Box 2. Construction accounts for a significant
share of EU value added, and lowering barriers to trade in construction services could be a priority
going forward. This conclusion is in line with the priorities of the European Commission (2012) to
focus its efforts on those services sectors with significant economic weight and with above average
growth potential: Business services, construction, tourism and retail.
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Box 2 Complexities for Estonian construction firms to serve the Finnish market
An in-house study from Estonia has mapped all the required steps relating to the provision of
construction services within the Single Market as illustrated by exports from Estonia to Finland
and Sweden benchmarked against Estonian regulation. Preliminary findings from the study indi-
cate that:
•
There are no substantial differences in the three
Member States’ requirements;
•
None of the steps or requirements appear particularly difficult to fulfil in relation to others;
•
Fulfilling the requirements does not appear to be excessively time consuming or involving
high costs. The only exception seems to be the recognition of professional qualifications
which may take months, but such qualifications are not always required, the process is rarely
used and there are relatively simple workarounds;
•
The large number of requirements (>20) and the number of organisations a business needs to
interact with (~10) pose a burden and risk for construction firms.
The study also looked at the possibilities for cross-border data exchange. Since the information
requirements are mostly simple registrations (e.g. ID information and specific dates), the study
finds that there is relatively low potential for cross-border data exchange. However, there is
substantial potential for data exchange and implementing the
‘once
only’ principle within
Member States.
The study puts forward the following recommendations:
•
Carrying out further such sectoral mappings in other Member States and sectors would help
policy makers, legislators and public service owners to identify relatively low user satisfaction
rates and therefore areas for improving the functioning of the Single Market;
•
Such mappings should be made publicly available since they are already in themselves val-
uable for businesses;
•
The Commission and Member States could look at possibilities for reducing (or limiting to one)
the number of contact points to provide information about requirements and other interac-
tions.
Note:
The study is based on ten expert interviews with five construction company representatives and five
accounting companies, where all claims from relevant Estonian, Finnish and Swedish legislation
have been fact-checked by experts at the relevant Estonian authorities.
Source:
Estonian Ministry of Economic Affairs (2018), see https://www.mkm.ee/en/objectives-activities/euro-
pean-union-and-international-co-operation/mapping-cross-border-provision
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1.5
POTENTIALS GO BEYOND THE SERVICES DIRECTIVE
In parallel with the implementation of the Services Directive, sector-specific EU regulation has also
brought down barriers to trade in financial services, transport, energy, telecommunications, postal
services and broadcasting.
6
Following the end of roaming charges across the EU last year, for exam-
ple, tourists can now use mobile subscriptions without extra costs.
7
In addition, new data protection
rules ensure all EU citizens have better control over their personal data.
5F
6F
From a business perspective, developing a Single Market for services is an ongoing process that
needs regular updating, and the full potential of a Single Market for services goes beyond the sec-
tors covered by the Services Directive and the trade barriers addressed by the Directive. Within this
process, social security systems in many EU Member States may need time to adjust and adapt to
ensure the continued protection of EU workers.
Free movement of workers
The free movement of workers is a fundamental principle of the Single Market. EU citizens are enti-
tled to look for a job in another EU Member State, to work there without needing a work permit, to
reside there for these purposes without needing a residence permit, to remain for a certain period
even after employment has ended, and to enjoy equal treatment with national workers.
8
In 2016, 4
per cent (11.8 million) of EU citizens of working age were living in another EU Member State than
their country of citizenship.
9
7F
8F
EU movers are, in general, well integrated within labour markets in most countries. At the aggre-
gate EU level, 72 per cent of the national population is employed, whereas 75 per cent of citizens
originating from other Member States are employed.
The free movement of labour creates easier access for companies to attract workers with the right
competencies from other EU countries. A common pool of labour can ease bottlenecks in Member
States in need of labour and reduce unemployment in other Member States. In the Czech Republic,
for example, unemployment is around 3 per cent, and the country is lacking 300,000 skilled work-
ers. Some companies are even putting ads in papers in Italy, Spain and Portugal to attract many of
the unemployed in those countries.
10
Labour mobility across borders also enables foreign businesses
that expand across borders to bring staff from their home country, and the free movement of labour
is thus an essential element in the business model of international service providers.
9F
In some Member States, it is burdensome for local businesses to get an overview of local require-
ments related to the temporary location of workers in other Member States, cf. Box 3. High compli-
ance costs and legal uncertainty create hindrances to cross-border trade and are examples of the
untapped potential of the Single Market.
6
7
8
9
10
See initiatives listed by DG Growth at https://ec.europa.eu/growth/single-market/services_en.
See the European Commission at https://ec.europa.eu/digital-single-market/en/faq/question-and-answers-
roaming.
The European Commission at http://ec.europa.eu/social/main.jsp?catId=457&langId=en.
This section draws on European Commission (2018).
Czech Chamber of Commerce at https://www.komora.cz/tiskova_zprava/kvuli-rekordnimu-poctu-ne-
obsazenych-pracovnich-mist-dojde-letos-k-obrovskym-skodam-v-ceske-ekonomice/.
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Box 3 Temporary movement of workers is key element in business models
Kompleet A/S specialises in retail design and the construction of restaurants, shops, showrooms
and fairs. The company employs 40 people from Denmark, Germany, the UK, and Iceland, and
carries out short and specialised projects across the Single Market.
The design concept of a specific store is developed in continuous dialogue with the customer.
To do the actual shop fitting, Kompleet typically moves a site manager and a couple of crafts-
men but hires local freelance staff. For tasks requiring authorisation such as electrical installa-
tions, it is often necessary to hire local subcontractors. Building materials are usually purchased
locally, and equipment, such as lifts, is rented locally.
The possibility of delivering the company’s know-how
and services throughout the Single Mar-
ket is important and allows the company to scale cross-border. The staff has also gained new
knowledge from doing business abroad, both personally and professionally. However, it is bur-
densome to get a full overview of all the different requirements that the company, its subcon-
tractors, and suppliers need to comply with when entering a new market, including:
•
•
•
•
•
Where to register or notify the company before commencement of work;
Tax and VAT rules;
Building regulations and product rules;
Different disciplines and responsibilities in the construction process;
Conditions of employment, rules on social security and taxes as well as notification of as-
signed employees;
•
Different rules for different nationalities in a project team working on the same task;
•
Requirements related to the working environment, special ID cards for construction workers,
certificates and employee approvals (lack of recognition of professional qualifications), or
approval schemes for equipment and machinery.
Kompleet would appreciate having one single authority in each country that could provide
the company with a checklist of everything that is required to undertake a job in each particu-
lar Member State.
Source: Danish Business Authority (2018)
The free movement of workers is not always without costs. There are big differences in the way dif-
ferent EU Member States have organised benefits, healthcare and other social security services.
Each EU country has its own laws determining what benefits laid off workers are entitled to, how
much they will receive and for how long. Furthermore, laws vary with respect to how long laid-off
workers must have worked in a particular country before qualifying for unemployment benefits, the
rules for calculating benefits and the duration of the benefits.
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Some countries may experience that labour mobility puts a pressure on their social systems. Some
workers may also experience that labour mobility puts a downward pressure on wages. However,
stalling progress in further deepening of the Single Market means that Member States are losing out
on economic gains that will eventually result in citizens being left less well-off.
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CHAPTER 2
THE SERVICES SECTOR AND THE
EU’S
GLOBAL COMPETITIVENESS
The EU is the second-largest
economy in the world after the US, but the EU’s share of the global pie
is shrinking. In
this chapter, we analyse how the services sector impacts the EU’s global competi-
tiveness. Section 2.1 looks at the EU’s diminishing economic position in a global context. Section 2.2
looks at how low productivity growth and an ageing population are putting EU prosperity under
pressure. Section 2.3 looks at how a Single Market for services can enhance productivity, and Sec-
tion 2.4 looks at how the Single Market offers scale-up opportunities to SMEs within the services
sector.
The chapter highlights the following findings:
•
•
The IMF, World Economic Forum and OECD all agree that strengthening the Single Mar-
ket is key to securing the EU’s place at the forefront of the global economy;
Measured both in terms of trade, foreign direct investment (FDI), population and size of
the economy, the EU’s share of the global economy is shrinking. Had the EU maintained
its share of World imports since 2010, it would have supported one million jobs, and an
additional EUR 250 billion would have been invested if the EU had maintained its share of
World FDI over the same period;
Brexit is likely to
reinforce the downward trend in the EU’s global position and may dis-
rupt EU value chains, the location decision of multinationals within the EU and reduce the
overall FDI attractiveness of the EU;
Productivity growth in the EU manufacturing sector has been three times greater than
productivity growth in the EU services sector;
The productivity level of EU services is only half that of the productivity of US services,
and the period after the crisis reflects a lost decade, where the divergence of EU productiv-
ity in services vis-à-vis the US after the crisis has fully eroded the catching-up achieved be-
fore the crisis;
Low economic growth, slow productivity growth and an ageing population puts EU future
prosperity under pressure;
A full implementation and enforcement of the Services Directive in a sub-set of sectors that
amount to around 20 per cent of EU GDP will enhance the productivity in these services by
an average of around 9 per cent;
SMEs in the services sector are on average four times smaller than SMEs in manufacturing
and deepening the Single Market for services will be particularly beneficial for SMEs be-
cause barriers tend to accumulate over the value chain.
•
•
•
•
•
•
Taking the size of the services sector and the slow productivity growth into consideration, restoring
EU global competitiveness and securing future EU prosperity without reforms of the services sector
seems like a difficult task. A better functioning Single Market for services is essential for improving
the productivity of the services sector.
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2.1
THE EU IS LOSING ECONOMIC STRENGTH
The recovery of the EU economy after the crisis has been slow, and the EU is losing economic
strength. Measured both in terms of trade, foreign direct investment (FDI), population and size of
the economy, the EU’s share of the global pie is shrinking, cf.
Figure 9. The EU share of global trade
in goods and services has fallen from 15.3 per cent in 2000-2007 to 14.6 per cent in 2010-2016,
which suggests that the competitiveness of EU businesses is under pressure. A drop in the global
market share of 0.7 percentage points may not sound significant, but a maintained EU share of
World imports over this period would have supported one million jobs in the EU.
11
10F
The EU share of global value added has dropped by 2 percentage points after the crisis from 26 per
cent to 24 per cent. If this trend continues at the same rate, the EU’s share of global value added will
be an additional 3.5 percentage points lower by 2030.
Figure 9
The EU is losing economic strength
EU share of World imports
(goods and services)
EU share of World value added
EU share of World FDI flows
EU share of World population
Note:
Source:
In top left figure,
rest of World’s imports (goods and services) are calculated as the World’s total imports
less EU27 imports.
Copenhagen Economics based on UN Comtrade and World Bank data
11
Annual EU exports to non-EU countries would on average have been EUR 73 billion larger in 2010-2016
if the EU’s
market share had been 15.3 per cent instead of 14.6 per cent (based on Comtrade data). The European Com-
mission (2016) estimates that each EUR billion of extra-EU exports support 14,000 jobs in the EU.
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As barriers to cross-border trade and investments have been dismantled over the past two decades,
worldwide competition for attracting global investment and multinational firms has intensified. Be-
fore the crisis, the EU was the destination for more than half of global FDI, but the EU share has
only been around 35 per cent on average during 2010-2016. If the EU had maintained its share, an
additional EUR 250 billion would have been invested in the EU every year. As FDI is an important
source of economic activity and knowledge, the lower EU share of global FDI flows may be a source
of concern for EU policy makers, cf. Box 4.
Box 4 FDI inflows can improve global competitiveness and EU productivity
In November 2015 General Electric, an American world leader in power generation, finalised
the acquisition of the French Alstom.
Because of the constant increase in energy demand, new generation capacity is required to
provide reliable and price-competitive energy supplies. The merger of the American and the
French companies responds to this need by integrating Alstom’s generation capacity with GE’s
portfolio and digital expertise. The newly created GE Power Services can benefit from a
greater global reach complemented by enhanced local service capabilities. Due to huge in-
vestments in software and data analytics undertaken by GE, operators are also able to im-
prove efficiency and overall performance.
The acquisition enabled GE to deliver solutions that improve
operators’ performance and
value through access to technology and expertise resulting in better plant design. In February
2016, GE’s Power Service business secured an order valued at USD 86 million to upgrade three
gas turbines at Centrica’s South Humber Bank, showcasing GE’s contribution in helping UK utili-
ties to increase their competitiveness in the power industry.
Source:
Copenhagen Economics based on https://www.powerengineeringint.com/articles/2016/04/how-
ge-s-alstom-acquisition-is-helping-power-plant-owners.html
Empirical evidence suggests that EU membership has increased FDI inflows by about 30-40 per
cent,
12
but Brexit may reinforce the negative trend in global FDI flows towards the EU. Without the
UK, the EU’s share of the global population in 2016 would have dropped from around
7 per cent to
less than 6 per cent.
13
The lower market size may make it less attractive for third countries to engage
in free trade negotiations with the EU and to invest in the EU, cf. Figure 10. This is so because mar-
ket demand is the factor that is most frequently identified as a main driver of the location of FDI.
14
While Brexit will have even more severe consequences for the UK, Brexit may also make the EU
business environment more uncertain and disrupt EU value chains, which will also make the EU
less attractive for multinational firms compared to locations outside Europe.
1F
12F
13F
12
13
14
Bruno et al. (2017) estimate an impact of 30 per cent, whereas ECB (2018) finds that the impact is as high as 44
per cent.
World Banks, WDI table SP.POP.TOTL.
See also Copenhagen Economics (2018).
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While still offering access to the Single Market of 450 million people after the UK leaves, Brexit may
also offer the opportunity for the EU to attract investments which have until now been located in
the UK. For the EU to be attractive for foreign investors from within and outside Europe, it is im-
perative that the Single Market offers an attractive business climate and ensures a well-integrated
regulatory regime. A well-integrated EU market is a key element in ensuring the EU’s
attractiveness
for foreign investment vis-à-vis other advanced markets around the world. The net impact of Brexit
on the reallocation of FDI remains to be seen.
Figure 10
Possible impacts of Brexit on the EU’s FDI attractiveness
Note:
Source:
The figure illustrates some of the possible impacts of Brexit on FDI flows towards the EU. Other investment
locations may also be indirectly impacts by Brexit, but these impacts are not illustrated in the figure.
Copenhagen Economics (2018)
2.2
EU GROWTH AND PROSPERITY UNDER PRESSURE
According to IMF projections, the recovery of the EU economy after the crisis will slow down, and
the EU economy is expected to grow by only around 2 per cent annually over the next five years, cf.
Figure 11. This growth is on a par with the US but significantly below the rest of the World, particu-
larly growth in the emerging economies.
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Figure 11
Actual and projected real GDP growth in the EU, US and World, 2008-2023
Annual growth in per cent
Note:
Source:
Growth numbers for the World vary up to 1%-point between World Bank and IMF growth rates.
Copenhagen Economics based on International Monetary Fund
Productivity in the EU manufacturing sector has grown faster than in the EU services sector, partic-
ularly after the crisis, cf. Figure 12. Due to the size of the services sector, low productivity in the ser-
vices sector is a key factor in the weak growth performance of the EU.
15
At the same time, it should
be noted
–
as will be shown in Chapter 3 - that services and manufacturing are increasingly inter-
twined and contrasting productivity developments in the two parts of an integrated production sys-
tem should not be over-emphasised.
14F
Low productivity in the services sector is, however, key to overall economic welfare in the EU. The
poor productivity development in EU services is quite alarming when comparing with the produc-
tivity development in US services. While labour productivity in the EU tended to catch up with the
US before the crisis, the gap between EU and US productivity has widened dramatically after the
crisis and reflects a lost decade of productivity growth, cf. Figure 12. EU productivity in services is
now around half that of the US. Restoring productivity growth in the services sector is key to eco-
nomic growth and will help secure EU competitiveness and jobs going forward.
There are several reasons for the increasing productivity gap vis-à-vis the US.
First,
we have seen
large drops in productivity levels across all EU services sectors in 2009. This did not happen to
same extent in the US in 2009.
Second,
the actual number of working hours per employee (in total
across all sectors of the economy) went up in the US after the crisis, whereas it continued to fall in
the EU along the pre-crisis trend. This matter when productivity, as in Figure 12, is measured per
person employed.
Third,
we see significantly larger productivity increases in IT services in the US
than in the EU with much of these increases being driven by the large US tech giants.
Finally,
we
also see extremely high productivity levels in professional services such as legal, accounting, archi-
tecture and engineering services in the US, and these sectors are both growing their productivity
and increasing their size in the overall US services sector.
15
Productivity is measured as gross value added (GVA) and is based on OECD data.
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Behind most of these factors is a common denominator, namely the major difference in the size of
the home market in the EU versus the US. In the US, there are few regulatory barriers preventing a
firm from considering all US states as its home market. Although equally advanced and as well
equipped with knowledge and R&D as the most advanced US state, firms in the EU have a smaller
home market, particularly in the smaller Member States. These firms would need many countries or
potentially all of Europe as their home market to have the same conditions to grow as an identical
US firm.
The lack of a large home market is increasingly important in the current
‘winner-takes-it-all’
digital
markets. US tech firms have taken full advantage of the new technological opportunities and have
succeed at home before expanding abroad. EU firms, especially those facing small home markets
and with service barriers keeping them out of larger markets in the EU, are having a harder time
competing in these digital markets.
The numbers speak for themselves. In the US, more than 58 per cent of all companies have grown
to have more than 250 employees. In Germany, known for its successful businesses, the number is
37 per cent and the same is true for France.
16
15 F
Figure 12 Labour productivity comparisons
EU services compared to EU
EU services compared to US services
USA = 100
manufacturing
EU manufacturing = 100
Note:
Source:
Left figure: Labour productivity is calculated as value added per hour worked. Services include wholesale
and retail, transportation and storage, accommodation and food services, information and communica-
tion, financial and insurance, legal and accounting, scientific research, administrative and support service
activities, arts entertainment and recreation, and other service activities. Right figure: Labour productivity
is calculated as value added per person employed to ensure comparability with the US data. The com-
prehensive coverage of services allowing for like-for-like comparison is used.
Copenhagen Economics based on OECD data
16
See Atkinson (2018).
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The problem with low economic growth and slow productivity growth facing some Member States is
exacerbated by an ageing population which puts a pressure of EU welfare systems. The European
Commission (2018) projects that the ageing population (increase in people aged 65 or above rela-
tive to those aged 15-64) will increase the pressure significantly in the EU in the coming decades.
For the EU, GDP per capita is expected to grow by 1.3 per cent annually towards 2070, and this
growth rate is pulled down by -0.2 percentage points due to the ageing population. Over time, real
wages and prosperity will suffer from low projected economic growth rates, slow productivity
growth and an ageing population.
Figure 13
Potential GDP per capita growth in Europe, 2016-2070
Per cent
Note:
Source:
EU27 includes all EU Member States except the UK.
Copenhagen Economics based on European Commission (2018)
Higher productivity will increase GDP per capita. When workers are highly productive, they create
high value added for every hour they work. This enables companies to pay higher wages, and high
productivity is thus related to high prosperity. EU workers can turn high wages into more consump-
tion of goods and services, or - over time see the working week being reduced and enjoy more lei-
sure. A highly productive workforce also supports the global competitiveness of EU businesses. Tax
revenue from exporters and their positive knock-on impacts on suppliers increase tax revenues and
open up more choices for national and EU policy makers. Higher productivity in the services sector
is thus associated with higher prosperity in the EU.
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2.3
A SINGLE MARKET FOR SERVICES CAN ENHANCE
PRODUCTIVITY
Lower barriers to cross-border provision of services within the Single Market can improve produc-
tivity by strengthening competition and allowing for scale economies and specialisation. The IMF,
World Economic Forum, OECD and the European Parliament all agree that strengthening the Sin-
gle Market is key to securing the EU’s place at the forefront of the global economy.
17
16F
As mentioned in Chapter 1, a better functioning Single Market for services will enhance cross-bor-
der trade and investments within the EU services sector and increase EU GDP. The transmission
mechanism by which EU GDP increases is via higher productivity in the EU services sector.
The implementation of the Services Directive alone has a remaining potential to increase the
productivity level in 15 selected services sectors by an average of 9 per cent across Member States.
18
Implementing the remaining potential of the Services Directive in these 15 sectors will have a posi-
tive impact on productivity across Member States. Some of the smaller countries, such as Austria,
Malta, Bulgaria and Belgium, are among the Member States that will realise the largest productivity
gains from closing the implementation gap, cf. Figure 14.
17F
Trade restrictions are particularly costly for smaller Member States where the size of the local mar-
ket is insufficient to secure efficient competition, scale and, consequently, productivity. But the larg-
est EU Member States will also improve their productivity if the Services Directive is fully imple-
mented. Germany (11 per cent increase in productivity), France (9 per cent increase) and Spain (8
per cent increase) are some of the large Member States that will benefit from implementing the re-
maining potential of the Services Directive.
17
18
For example:
the IMF (2014) states that ‘although
well-functioning services are key for growth, they are not yet
delivering their full potential’; the World Economic
Forum (2013) notes that ‘full
implementation of the Single Mar-
ket, including services and sectors that until now have remained protected at the national level, could make
markets work better for Europe’; the OECD (Economic Surveys European Union, 2014) recommends that the EU
‘improve
the implementation of the Services Directive, in particular by eliminating unjustified and disproportion-
ate restrictions to the cross-border provision of services and to the establishment of businesses’ and the European
Parliament
(2015) maintains that ‘a further deepening of the ‘classic’
Single Market could still yield very signifi-
cant additional gains
for EU consumers and citizens.’
See European Commission (2012).
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Figure 14
Remaining potential of the Services Directive on productivity levels in the analysed
services
Per cent
Note:
Source:
The assessment covers 15 selected services sectors in the EU27. Not all sectors affected by the Directive
are included in the analysis. The 15 sectors represented approximately 20 per cent of EU GDP which is
around half of the GDP covered by the Services Directive. The full implementation of the Services Directive
reflects a ‘what
if’ scenario where all EU Member States move to the level of restrictions of the five best
countries at the time within each sector within the sub-set of services covered by the assessment. The re-
sults shown are the additional impact under the so-called
‘what
if’ scenario in the study net of the impact
under the
‘central
scenario’.
Copenhagen Economics based on Monteagudo et al. (2012)
2.4
LOWER TRADE BARRIERS CAN BENEFIT SMALL FIRMS
18F
SMEs are highly important for the EU economy. All but 0.2 per cent of enterprises which operated
in the EU non-financial business sector in 2016 were SMEs.
19
These SMEs employed 93 million peo-
ple, accounting for 67 per cent of total employment in the EU non-financial business sector and
generating 57 per cent of value added in the EU non-financial business sector. Within the non-fi-
nancial business sector, SMEs play a particularly important role in accommodation and food ser-
vices, business services and construction services, where they accounted for more than 80 per cent
of EU employment in 2016, cf. Figure 15.
19
This section focuses on SMEs in the non-financial business sector in line with European Commission (2017). The
non-financial
business sector consists of all sectors, except ‘financial services’, ‘government services’, ‘educa-
tion’, ‘health’, ‘arts’, ‘culture’ and ‘agriculture, forestry and fishing’.
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Figure 15
SME shares in the EU28 non-financial business sector, 2016
Per cent
Source:
Copenhagen Economics based on European Commission, Eurostat, National Statistical Offices, and DIW
Econ
SMEs in the services sector are smaller than in the manufacturing sector with an average turnover
of EUR 0.3 million across the services sector compared to EUR 1.3 million in the manufacturing
sector, cf. Figure 16. The Single Market can make it easier for EU SMEs to realise their growth po-
tential by expanding abroad and engaging in global value chains.
20
Early work by the European
Commission demonstrates that even seemly manageable regulatory heterogeneity can be costly for
EU businesses, and hence for EU citizens, because barriers tend to accumulate over the value chain
(e.g. from establishment and purchase of inputs to promotion, distribution and sales of services and
eventually to after sales services).
21
A fragmented Single Market increases the fixed costs of entering
new markets, and enhanced integration of the Single Market will be particularly important to the
growth prospects of EU SMEs.
19F
20F
20
21
See, among others, Copenhagen Economics (2018) on the outward investment patterns of European SMEs.
European Commission, COM (2002) 441 of 30 July 2002, pp. 58-59.
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Figure 16
Turnover per EU SME across sectors, 2016
EUR million
Note:
Source:
The Irish services sectors data are not available and are therefore not included. SMEs are defined by the
European Commission as having less than 250 persons employed, an annual turnover of up to EUR 50 mil-
lion, or a balance sheet total of no more than EUR 43 million.
Copenhagen Economics based on Eurostat data
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CHAPTER 3
SERVICES TRADE AND GROWTH OF
TOMORROW
In this chapter, we look at services trade and three sources of EU competitiveness. Section 3.1 looks
at services trade and the increasing service elements of manufacturing (so-called
servitisation).
Sec-
tion 3.2 looks at services trade and the on-going digitalisation of our economies and in Section 3.3
we look at services trade and the take-up of new technologies such as artificial intelligence and big
data. These three areas are obviously closely linked.
The chapter highlights the following findings:
•
In some of the most competitive manufacturing countries in the EU, such as Germany and
Sweden, service functions account for more than half of the jobs within manufacturing.
The same is true in non-EU countries such as Switzerland;
More than 14 million jobs in the EU are service jobs within manufacturing, and accounting
for these, there are more EU export jobs in services than in manufacturing;
The process of servitisation has increased in the EU in recent decades, with the service
share of value added in manufacturing increasing from 24 per cent in 1995 to 27 per cent
in 2011;
EU manufacturing firms are more servitised than US firms: 27 per cent of the value added
of manufactured goods in the EU is generated by services compared to 20 per cent in the
US, and the growth and competitiveness of EU manufacturing is therefore deeply inter-
twined with the services sector;
The price of services in the EU is on average 11 per cent higher than US prices;
Trade in digital services has grown faster than services in general and much faster than
trade in goods;
Some of the
EU’s smaller, service-orientated
economies are performing above average
when it comes to low restrictions to digital trade, while some of the larger economies such
as Germany, France and Italy are lagging. Even the best EU countries are lagging the lead
country, New Zealand, while being more open than the US and particularly China;
The services sector accounts for around 35 per cent of total R&D expenditure in the EU
and for around half of private innovation expenditure;
Europe, while still making progress, is behind the US and China in capturing the opportu-
nities of digitisation, artificial intelligence and automatization. For EU businesses, the suc-
cessful and timely adoption of these evolving technologies will significantly enhance per-
formance and can be a competitive advantage and differentiator.
•
•
•
•
•
•
•
•
The pervasive nature of new digital technologies and the ever-increasing servitisation of the modern
economies is resulting in blurred lines between services and manufacturing and makes the distinc-
tions between digital and non-digital services or business close to meaningless. Digital technologies
also provide for unprecedented potential for the cross-border delivery of some services, especially
services where local presence is not a necessity (e.g. professional services). Developing efficient pol-
icies that support all EU businesses thus requires that the relations between industrial policy, Single
Market policy and digitalisation are properly understood and considered.
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Across all these areas, we find that a better functioning Single Market for services can improve the
global competitiveness of EU firms and offer EU businesses the flexibility to choose their optimum
business model.
3.1
THE INCREASED SERVITISATION OF EU
MANUFACTURING
Services is an important part of EU manufacturing. OECD data across countries shows that between
25 per cent and 60 per cent of employment in manufacturing firms is made up of service functions
within manufacturing, cf. Figure 17. According to Miroudot, and Cadestin (2017), this includes ac-
tivities such as R&D, engineering, transport, logistics, distribution, marketing, sales, after-sale ser-
vices, IT, management and back-office support.
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Figure 17
Core manufacturing jobs and service jobs within manufacturing, 2015
Per cent of total employment
Note:
Source:
Data is from 2012 for Korea, 2010 for Japan, 2014 for Canada and 2011 for Australia.
Copenhagen Economics based on OECD data
In the EU, there are around 14 million service jobs embodied in EU exports of goods.
22
In fact, tak-
ing these embodied service jobs into account, the EU has more trade-related jobs in services than in
manufacturing.
23
Service jobs within manufacturing make up more than 50 per cent of jobs in man-
ufacturing firms in many advanced and highly competitive manufacturing countries within the EU
such as Germany (59 per cent) and Sweden (57 per cent). Outside the EU, this is exemplified by the
case of Switzerland (55 per cent).
21 F
2F
Services also matters from a consumer perspective. Consider a loaf of bread. Producing and deliver-
ing a loaf of bread involves around 30 different services which account for 72 per cent of the final
22
23
See presentation by John Drummond, OECD, 13 October 2017 at European Services Forum.
See presentation by Lucian Cernat, European Commission, DG Trade, 13 October 2017 at European Services Fo-
rum.
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Making EU trade in services work for all
price, cf. Figure 18.
24
In this context, removing all tariffs on the product and aligning product regu-
lation across the EU will not fully bring the benefits to the final consumer if barriers to services are
eating up the savings and benefits of lower trade barriers before they reach the consumer. There-
fore, it is important to consider all types of barriers to the Single Market, of which the so-called ser-
vice barriers account for an increasing part.
23 F
Figure 18
Servitisation from a consumer perspective
Source:
Copenhagen Economics
Increased servitisation
is part of manufacturing firms’ attempts
to maintain or improve global com-
petitiveness. The new services jobs and the growth related to Industry 4.0 are heavily reliant on ser-
vice skills and data (see also next section).
25
Econometric analyses by the OECD have shown that
policies restricting trade in services (as captured in the OECD Services Trade Restrictiveness Index)
are associated with a lower output of foreign affiliates not only in services industries but also in the
manufacturing sector.
26
This demonstrates the intertwined nature of manufacturing and services
activities in global value chains
as well as the manufacturing sector’s dependency on a well-func-
tioning Single Market for services.
24F
25F
24
25
26
See presentation by Andreas Maurer, WTO, 13 October 2017 at European Services Forum.
Presentation by Lucian Cernat, European Commission, DG Trade, 13 October 2017 at European Services Forum.
See Andrenelli, A. et al. (2018).
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Box 5 Defining servitisation
According to the OECD,
servitisation
refers to the phenomena that the manufacturing sector is
increasingly relying on services as inputs, as activities within firms or as output sold bundled with
goods.
Manufacturing firms use services when they:
•
develop new products (e.g. engineering services)
•
produce products (e.g. management consulting)
•
distribute products (e.g. transportation)
•
sell products (e.g. retail services), and
•
provide aftermarket services (e.g. maintenance services)
Manufacturing firms can integrate services either by employing service skills within the firm (e.g.
an internal management consulting unit), or by purchasing services from an external supplier
(e.g. a management consultancy firm). The purchase of services from an external supplier can
either be from a domestic or a foreign supplier. In the latter case, the manufacturing firm be-
comes dependent on cross-border services trade for purchasing the service from a foreign
supplier.
A final element of servitisation is that manufacturing firms are also selling services, which for ex-
ample is the case when the toy manufacturer LEGO also sells films, or when a wind turbine pro-
ducer is selling software to optimise the electricity generation for the owner of the windfarm.
Source:
Miroudot and Cadestin (2017)
Detailed data show that EU manufacturing firms have become increasingly servitised. In 1995, ser-
vices accounted for 24 per cent of manufacturing output in the EU, while this figure had increased
to 27 per cent in 2011. Measuring the value-added contribution from services in manufacturing in
the EU, we see the same tendency with an increase from 36 per cent in 1995 to 40 per cent in 2011,
cf. Figure 19.
A comparison with the US also shows that manufacturing firms in the EU use and sell more services
(are more servitised) than manufacturing firms in the US, and EU manufacturing exports have a
higher share of value added from services than manufacturing exports from the US, cf. Figure 19.
The share of service inputs in manufacturing is 27 per cent in the EU compared to 20 per cent in the
USA. Similarly, the share of service value added in final manufactured goods is 40 per cent in the
EU, compared to 33 per cent in the US. In addition, EU manufacturing firms sell more services. Ser-
vice output is 5 per cent in EU manufacturing compared to 3 per cent in the US.
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Figure 19 The servitisation of EU and US manufacturing
Services output share in manufacturing
Per cent
Services value added share in manu-
factured
Per cent
Note:
Source:
Shares of service value added are computed as % of final manufactured goods.
Copenhagen Economics based on Swedish National Board of Trade (2016) and WIOD
There are large cross-country differences in servitisation within the EU. In some EU countries, ser-
vitisation of manufacturing is substantial and increasing significantly over time. This makes ser-
vices especially important for manufacturing in countries such as the Netherlands, France and Ger-
many, cf. Figure 20.
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Figure 20
Service employees in manufacturing as a share of total employees in manufacturing
across Member States
Per cent
Source:
Copenhagen Economics based on Swedish National Board of Trade Sweden (2016) and WIOD
Manufacturing firms use and sell services to gain advantages against competitors, strengthen cus-
tomer relationships, differentiate market offerings and diffuse new innovations, cf. Box 6. As part of
the solution, it is proposed to tackle this issue through the Single Digital Gateway.
27
The Gateway
aims to improve online availability, quality and findability of information and assistance services on
EU rights and national rules concerning operation and movement in the EU. It will require Member
States to offer key national procedures fully online and to make all online procedures fully accessi-
ble for cross-border EU users. The Gateway will thus have the potential to reduce compliance costs
for private businesses.
26F
Empirical evidence provided by the Swedish National Board of Trade (2016) indicates that busi-
nesses that start selling services increase their profitability, employment and total sales of goods.
Moreover, in-house employed service professionals increase the export intensity in manufacturing.
Part of the reason for this is that in-house services can be used to overcome the fixed costs of ex-
porting and enhance productivity.
27
See European Commission (2017).
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Box 6 Increased services content in EU manufacturing exports
A Danish company manufactures and sells production plants to customers in the food industry.
As part of the contract, the Danish manufacturer installs the plant at the customer’s factory
and provides after sales service such as installation and maintenance of the plant. As the man-
ufacturer is delivering a product as well as a range of services the company is subject to many
different national requirements when exporting to other EU countries. For example, there may
be national requirements for:
•
Type-approval, insurance for safety reasons
•
Qualifications of employees, certificates of employee competencies, local safety certifi-
cates, documentation of work ability and health etc.
•
Other occupational health and safety requirements
•
Information on and remuneration of workers temporarily located abroad
•
Various tax matters, including registration of employees at local tax authorities
•
Use of vehicles and machines to perform the service
•
Permission if the work, e.g. requires transportation of very large items
To find out
which rules to comply with on the customer’s market, the company must consult
several different information webpages. Some are national and others are European, which
makes it difficult for the company to obtain a comprehensive and workable overview of all the
rules, as they must comply with the required documents as well as the competent authorities to
be contacted.
Source: Danish Business Authority (2018)
Likewise, manufacturers buy services to improve their productivity. Around 30 per cent of the total
value added of manufacturing goods exports is generated by EU services.
28
The services content is
particularly high for food products (37 per cent) and textiles & apparel (35 per cent).
27 F
Empirical research indicates that internationally traded services (i.e. service import) improve per-
formance in manufacturing more than domestically provided services. Services from foreign suppli-
ers help increase the manufacturing firm’s exports and productivity,
whereas domestic service in-
puts do not display a positive effect.
29
This partly reflects the fact that the nature of imported ser-
vices differs from domestic services, and that trade in services increases the availability of service
providers. Greater availability and variability of service providers give manufacturers access to cost-
efficient, high-quality and better-matching service inputs. Thus, services trade is important for im-
proving performance in manufacturing through efficiency gains, quality gains and knowledge spillo-
vers.
28F
28
29
Copenhagen Economics based on Swedish National Board of Trade (2016) and WOID.
A recent study commissioned by the European Commission confirms the positive relationship between the per-
formance of business services and the performance of manufacturing. Manufacturing sectors that buy-in a rela-
tively higher proportion of business services have a better productivity performance than sectors with a relatively
lower buy-in of business services. See ECSIP Consortium (2014).
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Figure 21
EU services shares in manufacturing exports across sectors, 2011
Per cent
Source:
Copenhagen Economics based on WIOD
Because of the high and increasing dependency on services for EU manufacturing, barriers to trade
in services become more and more important to EU competitiveness. Service barriers drive up costs
of services trade and reduce the choice of foreign services suppliers. Service barriers also hinder the
use and sales of services by manufacturing firms directly and make it more difficult for manufactur-
ing firms to integrate into global value chains.
Box 7 Atlas Copco had 40 per cent of revenue from services
Atlas Copco is an industrial group that produces compressors, construction and mining equip-
ment, power tools and assembly systems. Atlas Copco puts a lot of emphasis on services, both
tool maintenance and production optimisation, and offers services such as maintenance and
repairs, sales of spares, diagnostic tools, surveillance, management and rental/leasing of
equipment. Some of these services are built into the products, others are sold separately.
In 2011, 40 per
cent of Atlas Copco’s revenues came from the aftermarket and rental/leasing.
Rental/leasing is a separate division, Atlas Copco Specialty Rental, where Atlas Copco rents
equipment to customers, either for planned business or in emergencies. Maintenance and ser-
vice technicians are included. By leasing the equipment, Atlas Copco offers customers a ser-
vice where they originally would have sold them a good.
Source: Swedish Board of Trade (2012)
The EU economy is suffering from high costs of services which are, on average, 11 per cent higher in
the EU compared to the US.
30
Further integration of the Single Market for services can bring down
prices, improve variety and help EU manufacturing firms improve their competitiveness through
servitisation.
29F
30
USITC, 2013, p.3-24.
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All in all, barriers to services trade within the EU impose an important constraint on the competi-
tiveness of EU manufacturing firms and the smoothness by which they can tap into global value
chains. In some cases, proximity between manufacturers that buy services and the service suppliers
is important, which makes trade in services through foreign establishment essential.
Reducing trade barriers is particularly important for the services sectors that sell services to the
manufacturing sector, such as wholesale & retail trade, freight transport and accounting and legal
services, cf. Figure 22. More than 11 per cent of the services used in manufacturing come from
wholesale & retail trade. In this context, reducing the regulatory burden in the services sector is
found by empirical research to be particularly important.
31
This challenge of further reducing the
barriers to services trade in the EU is becoming even more important because of the increasing size
of the services sector combined with the deteriorating productivity development of EU services rela-
tive to the US.
30F
Figure 22
Cost share of service input in manufacturing output, 1995 and 2011
Per cent
Note:
Source:
Shares of service inputs are computed as percentages of gross output in manufacturing. Data are not
available for Croatia.
Copenhagen Economics based on the Swedish National Board of Trade Sweden (2016) and WOID
3.2
THE KEY ROLE OF DIGITAL SERVICES IN THE EU
ECONOMY
Digitalisation has changed international trade and given rise to new complementarities between
goods and services, particularly for trade in more complex manufactures and digitally deliverable
services. Digital technologies and the amount of data they create trigger new innovations, products,
services and business models, as well as new ways of interaction between people and machines. The
31
Barone and Cingano (2011), Fernandes (2009) and Nordås and Rouzet (2015).
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digital economy has therefore changed the way citizens and businesses live, work, communicate,
travel and consume.
Over the past ten years, trade in digital services has grown faster than services in general and much
faster than trade in goods, cf. Figure 23. Since the EU economy is increasingly reliant on services,
performing well in digital services trade is imperative. The digital transformation is a significant
structural change. This holds considerable potential for the EU economy, since most European
countries generate a large share of their value added in the services sector.
Figure 23
Global trade in services and digital services, 1995-2016
Index growth rate
Note:
Source:
Growth index of trade in services and ICT services (1995–2016).
Copenhagen Economics based on World Bank data and Bertelsmann Stiftung
Benefiting from growing trade in services is critically dependent on performing well in digital ser-
vices as this is the fastest growing area of services trade. However, much of the empirical evidence
suggests that European countries are not fully prepared for this. This means that there is a risk that
Europe does not fully realise the potential in this area because several barriers to trade in services
are holding us back.
Recent studies suggest that the EU’s performance in digitalisation lags behind the US, and the EU
has a large untapped potential in spurring digitisation and replacing US imports with higher intra-
EU trade in digital services, cf. Box 8.
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Box 8
Europe’s digitisation potential
According to the McKinsey
Global Institute’s
Industry Digitisation Index, Europe has a long way
to go to fully tap the potential of digitisation. In 2013, the six European digital frontiers (the UK,
the Netherlands, Sweden, France, Germany and Italy) operated only at 12 per cent of their
digital potential. By comparison, the US operated at 18 per cent of its digital potential.
The European digital frontier, represented by the ICT sector, is only 60 per cent as digitised as
the US frontier. Some large sectors, such as professional services, wholesale trade, and real es-
tate, are further behind the digital frontier in Europe than they are in the US.
Furthermore, Europe is a net importer of US digital services, running a digital trade deficit
amounting to nearly 5.6 per cent of total EU‑US services trade. A stronger Single Market for ser-
vices could offer an import substitution opportunity for Europe, i.e. if these digital services could
be obtained from within the EU. Sectors and businesses that successfully deploy digital capabil-
ities are able to realise efficiencies; however, to the extent that these capabilities are imported
into Europe, there is a lost opportunity for additional economic gains in the form of domestic
innovation, investment, and job creation. Measured by market capitalisation, for instance,
there are no European businesses in the 20 largest digital companies. In addition, leading Euro-
pean digital hubs, including Berlin, London, Paris, and Stockholm, tend to have fewer unicorns
(start-ups valued at over USD 1 billion) per vested company relative to the leading US digital
hubs such as Boston, Los Angeles, New York and San Francisco.
Note:
The index is based on 21 indicators and gives a view across sectors of how enterprises are investing
or spending on digital capabilities; how they deploy digital technologies to engage their customers,
suppliers, and partners; and how they digitise their internal processes, create a digitally enabled
workforce, and digitise work itself.
Source:
McKinsey (2016)
A ranking of digital trade restrictiveness prepared by ECIPE (2017) shows that some European
countries have prepared well for trade in digital services and are competitive on an international
scale. The ECIPE study finds that it is mainly
some of Europe’s
smaller, service-orientated econo-
mies that seem to be performing above average. However, the report also points at large disparities
across the EU, and especially among the large Member States, with Germany, France and Italy lag-
ging. Furthermore, there is a gap between the best EU countries and the OECD lead country in the
study (New Zealand, cf. Figure 24). Still, the EU is found to be less restrictive than the US for digital
trade and much less restrictive than China, which is the most restrictive country for digital trade ac-
cording to the ECIPE index.
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Figure 24
Digital Trade Restrictiveness Index (DTRI), 2018
DTRI score
Note:
Source:
The DTRI score is between 0 (least restrictive) and 1 (most restrictive).
Copenhagen Economics based on ECIPE data
If more is done to adopt, diffuse and use digital solutions within the Single Market, tremendous
economic value could be captured through:
•
•
•
Higher productivity, due to the faster flow of information, benefiting particularly
knowledge service industries which depend on information for their services
Structural changes in the EU economy, with activity moving away from manufacturing and
traditional services sectors towards knowledge services
Efficiency improvements and reduced transaction costs in traditional sectors, such as the
free movement of goods and services
The European Commission estimates that structural reforms
of the EU’s digital markets
could add
up to EUR 415 billion a year to EU GDP, create jobs and transform public services.
32
The long-run
growth impact of the already observed digital reform effort is above 1 per cent, and further efforts in
line with the Digital Agenda for Europe targets would entail an additional 2.1 per cent of GDP
growth. This estimate of GDP impact is based on innovations that are already spreading through the
European economies and have the potential to offer substantial economic benefits in the near fu-
ture. In reality, the potential boost to GDP is likely to be much greater as the digital frontier contin-
ues to move forward at a rapid pace.
31 F
32
See European Commission, European Economy, Economic Papers 529 by Dimitri Lorenzani and Janos Varga,
(2014). The authors point to four specific types of digital structural reforms which are considered in this work,
namely: i) assigning rights of use of radio spectrum frequencies to mobile operators; ii) enhancing digital skills in a
professional setting; iii) fostering the take-up of eCommerce; iv) increasing availability and the take-up of high-
speed fixed broadband. The size of the impact is in line with earlier estimates from Copenhagen Economics
(2005) and Copenhagen Economics (2007).
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3.3
SERVICES TRADE, NEW TECHNOLOGIES AND
INNOVATION
32F
The pace and disruptiveness of technological change are creating unprecedented opportunities and
challenges during the emerging Fourth Industrial Revolution.
33
Recent advances in robotics, ma-
chine learning or artificial intelligence (AI) are pushing the frontier of what machines are capable of
doing in all facets of business and the EU economy.
34
These advances have the potential to provide
the EU economy with a much-needed boost to productivity and enable businesses to realise sub-
stantial performance gains.
3F
Box 9 Case: Caterpillar using software to improve efficiency
Caterpillar manufactures earth-moving machines. These big machines are often operating in
remote, harsh environments and it is costly if such equipment breaks down in unpredictable
ways. This can make the repair process long and difficult.
By mounting remote sensors and internet technology on its machines and by applying predic-
tive software analytics, Caterpillar has managed to reduce the typical cost of 900 hours of
downtime and USD 650,000 in repair costs to less than 24 hours and only USD 12,000.
Source:
Case summarised in DG Trade (2017)
The last decade has seen some important emerging markets move closer to the technology frontier
—
although a clear gap remains with the leading advanced countries, which continue to benefit from
their historically strong innovation ecosystems.
35
With the growing importance of countries such as
Japan, Republic of Korea, China and India as innovation centres, it is becoming immensely im-
portant to maintain the level of innovation activity in the EU.
34F
The Innovation Union Scoreboard shows that the EU’s innovation performance falls short of our
main competitors although some degree of convergence to the US can be observed, cf. Figure 25.
36
The services sector accounts for around 35 per cent of total R&D expenditure in the EU and for
around half of private innovation expenditure.
37
The services sector is thus a key driver of innova-
tion in the EU economy. The EU has maintained the same level of restrictiveness to trade in services
(measured by the STRI index), whereas other countries such as Republic of Korea and China have
become more open.
35F
36F
33
34
35
36
37
World Economic Forum (2018).
McKinsey (2017).
World Economic Forum (2018).
The scoreboard tracks a broad range of innovation indicators, including educational standards, R&D expendi-
ture, patent production and business innovation. See also European Commission (2013).
European Commission (2018). The report finds that the manufacturing sector is responsible for 64 per cent of pri-
vate sector R&D expenditure and for 49 per cent of innovation expenditure. Figures for the services sector are
approximated by the residual.
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Figure 25
Innovation performance in 2017 and Service Trade Restrictiveness Index (STRI) de-
velopment, 2014-2017
EU = 100
Note:
Source:
A positive change in the Service Trade Restrictiveness Index (STRI) index means that the services sectors
have become more restrictive. The STRI is measured as a simple average across sectors and countries for
the EU. *EU is only EU23 for the STRI index. EU23 is EU28 without Malta, Cyprus, Bulgaria, Romania and Croa-
tia because numbers for these countries are not available.
Copenhagen Economics based on OECD data
Recent EU regulation has ensured that data can flow freely across the Single Market
–
just like
goods, services, capital and labour. This implies that private businesses and public authorities can
store and process data anywhere in the EU. Free data flows also support the development and adop-
tion of AI and block chain. According to IDC (2017), the value of the EU data economy was more
than EUR 285 billion in 2015, representing over 1.9 per cent of EU GDP.
The digital transformation does not occur in isolation. It is shaped by, and contributes to shaping,
the broader economy and society. Recent research by the OECD shows that making the most out of
the digital transformation for trade requires approaching market openness more holistically, think-
ing about measures affecting goods, services and digital connectivity more jointly, and considering
measures affecting the full value chain, including the enablers of digital trade and tackling all these
through greater international cooperation.
38
37 F
First,
OECD (2017) finds that framework policies play an important role in ensuring that the condi-
tions exist for the digital transformation to flourish. International trade in both goods and services
is crucial for access to new technologies and both trade and international investment can help to
transfer skills and knowledge. Furthermore, the OECD highlights in particular the following indica-
tors of good framework conditions as building the foundations for digital transformation, many of
which are relevant for the level of freedom to provide services:
•
•
38
Barriers to entrepreneurship
Barriers to trade and investment
López and Ferencz (2018).
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Making EU trade in services work for all
•
•
•
•
Regulation in the telecommunication sector
Regulation in the retail trade sector
Regulation on professional services
Trade restrictiveness
Second,
engaging in digital trade in goods means paying attention to a broader range of supporting
services, such as logistics or e-payments. An efficient Single Market for services with low barriers to
trade and investment combined with harmonised regulation (e.g. in telecommunication, retail trade
and professional services) will therefore support the digital transformation of the EU economy.
Third,
the ability to engage in trade in services, particularly those that are digitally delivered, is also,
in part, affected by market access to ICT goods. The economic importance of the ICT sector goes
well beyond its size. ICTs encompass positive spillovers to other sectors and are crucial to ensure
that technological developments and capital deepening can stimulate innovation in private busi-
nesses, and eventually translate into productivity gains, also in more traditional sectors. ICTs can be
regarded as general-purpose technology, providing inputs and enablers for several other economic
and social activities. It is therefore a cause of concern that the ICT sector accounts for a smaller
share of the economy in the EU compared to other OECD countries, cf. Figure 26. ICT value added
as a share of EU GDP has grown by 0.7 percentage points since 1995, which is at a similar level as
the US but below that in many of the emerging economies.
Figure 26
Value added in the ICT sector as a share of GDP, 2014
Per cent
Note:
Source:
Data for Canada is from 2013. The ICT sector is defined by the European Commission and includes ICT ser-
vices industries (telecommunications, computer and related activities) and ICT manufacturing industries
(manufacture of electronic components and boards, manufacture of computers and peripheral equip-
ment, manufacture of communication equipment and manufacture of consumer electronics).
Copenhagen Economics based on 2017 PREDICT database
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CHAPTER 4
CALLS FOR ACTION
Europe has an opportunity to create more growth and cohesion by making intra-EU services trade
work better for all. Much of the debate on the Single Market has seen services as separate from
manufacturing and seen digital as a layer separate from the rest of the economy.
Our study finds that much of the future sources of growth and welfare creation lies in combining
services and manufacturing in new ways. The pervasive nature of new digital technologies and the
ever-increasing servitisation of the modern economies result in blurred lines between services and
manufacturing. This makes the distinctions between digital and non-digital services or business
close to meaningless. Our economies, businesses and personal lives will be
digital by default
–
and
the way we integrate and regulate our markets should reflect these realities. Rather than standing in
the way of these developments, policies and regulation should support the new key technologies and
business models, since these are the keys to unleashing future European growth.
In this report, we have tested whether EU regulation of services is fit for purpose against these reali-
ties. We have underlined the importance of the service markets considering the challenge in regain
competitiveness. Considering the increasing competitive pressure from other regions of the world, a
better functioning of services trade within the EU is essential to realising the full growth potential in
our part of the world. In the previous chapters, we have identified four gaps in relation to the Single
Market for services, and in this chapter we formulate actions to address these.
Four gaps in the Single Market for services
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Making EU trade in services work for all
We have identified six calls for action to improve EU services trade. The six calls for action are ad-
dressing the identified gaps and thereby drive future growth and cohesion of the services markets in
Europe.
Figure 27
Six calls for action to improve the Single Market for services
Source:
Copenhagen Economics
In combination, the six calls for action seek to match the progress made in areas such air travel and
telecommunications in other areas of intra-EU services trade and seek to make the functioning and
regulation of the European service economy work in ways that are better fit for the future.
The overall aim is to dismantle unhelpful barriers to trade in Europe. The common denominator for
these actions is that they are business and consumer focused and aim to be better fit for a digital fu-
ture and the realities of service-manufacturing inter-dependence. In the following, we elaborate on
each of the six calls for action.
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4.1
CALL FOR ACTION 1: SET DIRECTION
Put the Single Market for services high on the EU competitiveness agenda
To put services high on the competitiveness agenda of the Union and of the Member
States, the High Level Working Group on Competitiveness and Growth (or the Internal
Market Advisory Committee) should set clear ambitions for the performance of the Single
Market for services.
On this basis, the Competitiveness Council could:
•
Consider the performance of the Union and Member States annually with respect
to addressing remaining barriers to EU services trade and remaining gaps in the
Single Market affecting services as part of the competitiveness check-up (e.g. via a
Single Market Scoreboard 2.0, see Section 4.3 below);
•
Identify, in conjunction with the European Commission, horizontal measures to
lower barriers for services to enhance the Union’s
competitiveness in services.
4.2
CALL FOR ACTION 2: ENSURE FIT
Digital proofing of key rules and directives
To ensure fitness for purpose in the Digital Age and boost competitiveness, a
‘digital
proofing’
of the existing regulatory regime for services, should be performed.
Digital trade is growing rapidly, which may lead to a gap in the adequacy or fitness for pur-
pose of the regulatory regime in the context of emerging services in the modern economy.
This ‘adequacy
gap’ should be addressed in an examination of the regulatory regime for
services.
The digital proofing exercise should ask whether the EU regulatory regime for services
(e.g. the e-Commerce Directive and the Services Directive) is adequate for addressing the
challenges and opportunities of the digital economy. Many of the key directives were
drafted before the advent of services delivered in the form of, for example, AirBnB and
Uber, and the ECJ has been called upon in recent years to adjudicate on what should, ide-
ally, be straightforward questions of scope in the context of new service models. This is
harmful to legal certainty (before the cases are decided) and discourages entrepreneurs
from innovating with new service models.
The digital proofing could for example be achieved by actively pursuing the digital by de-
fault principle stated in the Tallinn Declaration on eGovernment and broaden the principle
outside eGovernment. In doing so, it should be recognised that modern business increas-
ingly involves a mixture of physical and digital components in the delivery of services. This
implies that, as part of addressing
the ‘Adequacy
gap’ identified above, we are seeing new
mixtures of services and new business models, which need to be assessed on the boundary
of the existing key directives, e.g. the e-Commerce Directive and the Services Directive.
Chapter 3 has shown a growing contribution of services within manufactured goods, and
the crucial importance of services to the development of the digital economy. At a policy
level, Europe’s actions on these fronts –
industrial policy, digital, and services
–
must be
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Making EU trade in services work for all
joined-up and holistic. In particular, it is time to move beyond a separate treatment of a
Digital Single Market and move to ensuring a Single Market that is fit for the Digital Age in
all respects
–
encompassing goods, services, capital, digital innovation and infrastructure.
To this end, the Commission could:
•
Actively pursue and broaden
the ‘digital
by default’ principle stated in the Tallinn
Declaration in the design of regulation for the delivery of services to ensure that
digital services face no unnecessary barriers;
•
Consider more initiatives to strengthen links between the digital economy, manu-
facturing, artificial intelligence and data flows;
•
Assess the workings of EU rules from a firm and or sector perspective holistically
across different areas of rules and laws.
4.3
CALL FOR ACTION 3: MEASURE PROGRESS
Develop
a ‘Single
Market Scoreboard 2.0’ of Member State performance in re-
ducing service restrictiveness
The existing Single Market Scoreboard is one the monitoring instruments in the Commis-
sion’s toolbox to assess national compliance with EU Directives in the Single Market. The
intention is to improve the Single Market by showcasing the progress made by Member
States. The main focus has been on the timely and correct transposition of directives and
providing data on infringement procedures.
The Single Market Scorecard has done a good job in measuring the transposition, imple-
mentation and infringement performance related to Single Market legislation. And has
done so at both Member State and Union level. Indeed, transposition gaps have come
down since the first version of the Single Market Scoreboard in 1997.
39
38F
The existing Single Market Scoreboard has been developed and improved over many years.
It continues to serve an important role in ensuring transparency and compliance with the
agreed Single Market legislation at a given date. This effort will remain useful and needed
in years to come.
However, the existing toolbox does not provide EU policy makers with an overview of re-
maining levels of restrictiveness facing services providers or consumers in the EU econ-
omy. To measure progress in the Single Market from a business and consumer perspective,
an updated Single Market Scoreboard would add this element to the existing tool. The am-
bition should be to develop a
‘Single
Market Scoreboard 2.0’ of
the Union’s and individual
Member States’ performances in reducing service restrictiveness and assess whether low
performance is due to an adequacy gap, implementation gap or enforcement gap.
40
39F
39
40
See Lombaerde and Saucedo Acosta (2017).
According to ECIPE (2016), the scoreboard is often criticised because, as a ratio of transposition deficit versus
total number of directives related to the Single Market, it exaggerates the legal integration. There are two rea-
sons behind it: first, it accords the same weight to the transposition of critical directives, such as the Services Di-
rective, as to less important directives; and second, the total number of directives grew much faster than the
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On this basis, the European Commission could:
•
Continue the current monitoring of the elements in the current Single Market
Scoreboard;
•
Develop a Single Market Scoreboard 2.0 and use it proactively;
•
Identify best practice amongst the Member States.
4.4
CALL FOR ACTION 4: COMMIT TO IMPROVE
Member States should commit to improving their performance year by year
To ensure continued focus and improvements, the Commission should urge Member states
to make commitments to improve their performance taking account of their existing rank-
ing as to openness to intra-EU services trade.
Based on the scoreboard of services trade openness, it should be clearly stated which
Member States are the Single Market Leaders. All Member States should be ranked in
groups in a similar manner to the European Innovation Scoreboard which groups all Mem-
ber States into categories according to level of performance.
41
40F
On this basis, Member States could be obliged to:
•
Study the five least restrictive Member States to identify best practices;
•
Set targets to improve, and those below the top category of Leaders should aim to
move upwards to the next group.
4.5
CALL FOR ACTION 5: PRIORITISE EFFORTS
Prioritise reduction of barriers and better enforcement in the areas of great-
est economic potential
To make the most effective use of efforts, the Commission should direct efforts to reducing
unnecessary barriers to trade in services and enforcement efforts towards areas of greatest
economic potential and/or least well-functioning markets.
Enforcement of the existing regulatory acquis, and its implementation in Member States,
should be refocused to prioritise the areas of greatest potential economic benefit, espe-
cially to the primary users of the Single Market
–
businesses and consumers. Enforcement
efforts and/or new measures to reduce barriers should prioritise removing the restrictions
causing greatest harm to cross-border operators.
To this end, the Commission could:
41
transposition deficit declined. It, therefore, provides a false signal of improvement. Consequently, the figure cov-
ering the transposition deficit is not a good tool for understanding actual implementation and enforcement.
Moreover, it is not only a matter of transposition but also of the quality of implementation. Transposition concerns
only directives and does not take into account regulations that have recently gained more prominence; 976
regulations relate to the various Single Market policy areas. When a Member State fails to transpose a Directive
or to follow regulation an infringement procedure might be enacted. It is the main legal and administrative re-
course to enforce correct application of EU law. Despite the slow, costly and difficult process they entail, the
number of open infringement cases is significant, reaching almost 1000 pending cases in 2014. It takes on aver-
age of 30 months to resolve an infringement case.
See: https://ec.europa.eu/growth/industry/innovation/facts-figures/scoreboards_en.
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•
•
•
•
Prioritise enforcement and/or new measures to reduce barriers linked to the aim of
lifting more restrictive Member States up to the next level on the Single Market Score-
board 2.0 (see above).
Prioritise enforcement and/or new measures to reduce barriers to the Single Market
aiming at removing the persisting restrictions (as shown in Section 1.4), which are
economically significant, within a given time horizon (e.g. 5 years)
Explore sectors which could benefit from the introduction of certain services stand-
ards;
Consider an effects-based approach to enforcement whereby the commission is priori-
tising sanctions where infringements are most harmful, and aim to ensure that sanc-
tions are proportionate to the harm caused by the infringement;
4.6
CALL FOR ACTION 6: FOLLOW-UP AND ADJUST
Conduct regular reality tests
To ensure that firms and consumers make use of the rules and harvest the intended bene-
fits, the Commission could conduct reality tests
–
from a business perspective and looking
holistically across the entire set of EU rules for businesses to ensure that what is agreed
and implemented in law is also working in practice from a user perspective.
To this end, Member States could:
•
Make mutual recognition of professional qualifications a reality through the simplifi-
cation of existing processes and by stringently testing the introduction of any new pro-
cedures
•
Increase efforts to meet the needs of service providers to get the information they
need and complete administrative procedures online - for example by updating the
Points of Single Contacts (PSCs) according to the quality criteria in the Single Digital
Gateway to make the PSCs fully compliant with the requirements of the Services Di-
rective.
42
41F
In addition, the Commission could:
•
Identify possibilities for the simplification and streamlining of regulation to pro-
vide maximum legal clarity;
•
Ensure further progress on the suggestion already being on the table to introduce
a system of notification of new regulatory requirements;
•
Meet the request from businesses to make it easier for businesses to comply with
administrative requirements in another Member States by electronic means, in-
cluding via further consultations with businesses and Member States as to how
this could most appropriately be achieved;
•
Finalise the Single Digital Gateway to ensure that bureaucracy is minimised in
implementing the Gateways, to ensure that compliance costs are minimised;
•
Eliminate regional language or local partner requirements;
42
Deloitte and Danish Technological Institute (2012) found that the economy-wide impact of the already pursued
Points of Single Contact alone is more than 0.1 per cent of GDP for the EU on average. The predicted additional
impact of a benchmark level of procedural streamlining is 0.1-0.2 per cent of GDP in the long run.
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•
•
Introduce more effective sanctions for non-compliance where the level of the
sanction is proportionate to the economic harm;
Improved forms of redress and dispute resolution, e.g. by exploring ways of im-
proving the use of SOLVIT in the field of services.
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