EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

Europaudvalget 2018-19 (1. samling)
EUU Alm.del Bilag 660
Offentligt

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.

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

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.

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

CONTENTS

Executive summary

The key position of services within the EU economy

The rationale of a Single Market for services

Limited reductions in trade costs

Low Intra-EU trade in services

1.1

1.2

1.3

1.4

Potentials from implementing and enforcing the

Services Directive

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

1.5

2.1

2.2

2.3

2.4

3.1

The increased servitisation of EU manufacturing 43

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

3.2

The key role of digital services in the EU economy

Services trade, new technologies and innovation

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

3.3

4.1

4.2

4.3

4.4

4.5

4.6

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

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

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

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

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

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.

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

Making EU trade in services work for all

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.

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

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

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

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.

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

Calls for action to improve the Single Market for services

Source:

Copenhagen Economics

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

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.

•

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

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

In 1992, EU policy makers formulated an ambition of a Single Market offering the free movement of

goods, services, people and capital.

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.

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.

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

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.

EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

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.

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.

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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Making EU trade in services work for all

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

The Services Directive covers the following sectors: Tourism, Cultural and sport activities, Whole-

sale and retail, Construction, Real estate, Business services, and Other services.

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.

By 2014, the Directive was not fully implemented

and enforced in all Member States and much of this gap is likely to remain.

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.

Going for-

ward, the least restrictive countries may be used as examples of best practices in terms of reducing

trade barriers.

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.

Monteagudo, Rutkowski and Lorenzani (2012) and https://ec.europa.eu/growth/single-market/services_en.

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Making EU trade in services work for all

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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Making EU trade in services work for all

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.

Following the end of roaming charges across the EU last year, for exam-

ple, tourists can now use mobile subscriptions without extra costs.

In addition, new data protection

rules ensure all EU citizens have better control over their personal data.

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.

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.

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.

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.

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.

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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Making EU trade in services work for all

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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EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

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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Making EU trade in services work for all

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.

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

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,

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.

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.

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.

12F

13F

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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Making EU trade in services work for all

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.

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,

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.

Productivity is measured as gross value added (GVA) and is based on OECD data.

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Making EU trade in services work for all

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.

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

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.

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.

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.

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.

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.

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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Making EU trade in services work for all

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.

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).

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

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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EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

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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Making EU trade in services work for all

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.

In fact, tak-

ing these embodied service jobs into account, the EU has more trade-related jobs in services than in

manufacturing.

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

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

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.

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).

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.

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

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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Making EU trade in services work for all

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.

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.

See European Commission (2017).

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Making EU trade in services work for all

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.

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.

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

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.

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

USITC, 2013, p.3-24.

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Making EU trade in services work for all

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.

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

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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Making EU trade in services work for all

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.

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

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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Making EU trade in services work for all

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.

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.

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.

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.

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.

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.

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

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.

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:

•

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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EUU, Alm.del - 2018-19 (1. samling) - Bilag 660: Brev til beskæftigelseskommissær Marianne Thyssen om effektiv håndhævelse og implementering af EU-reglerne

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.

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.

39F

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.

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:

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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Making EU trade in services work for all

•

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.

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;

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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Making EU trade in services work for all

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