Explanatory Memorandum to COM(2002)441 - State of the internal market for services presented under the first stage of the Internal Market Strategy for Services

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dossier COM(2002)441 - State of the internal market for services presented under the first stage of the Internal Market Strategy for Services.
source COM(2002)441 EN
date 30-07-2002
Avis juridique important

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52002DC0441

Report from the Commission to the Council and the European Parliament on the state of the internal market for services presented under the first stage of the Internal Market Strategy for Services /* COM/2002/0441 final */


Contents

1.

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT ON THE STATE OF THE INTERNAL MARKET FOR SERVICES presented under the first stage of the Internal Market Strategy for Services


TABLE OF CONTENTS

EXECUTIVE SUMMARY

INTRODUCTION

I. Barriers to the internal market for services

A. Legal barriers

2.

1. Difficulties relating to the establishment of service providers


3.

2. Difficulties relating to the use of inputs necessary for the provision of services


4.

3. Difficulties relating to the promotion of services


5.

4. Difficulties relating to the distribution of services


6.

5. Difficulties relating to the sale of services


7.

6. Difficulties relating to after-sales aspects of services


B. Non-legal barriers

8.

1. Lack of information


9.

2. Cultural/language barriers


II. The common features of the legal barriers

A. The changing nature of the barriers

10.

1. Administrative practice


11.

2. Regionalisation of the barriers


12.

3. Implementation of Community instruments


13.

4. Collective non-government rules


14.

5. The conduct of operators


B. The horizontal nature of the barriers

15.

1. Application of a single system to establishment and the provision of services


16.

2. Legal uncertainty surrounding freedom of establishment and the free provision of services


17.

3. Application of the same type of requirements in different fields


C. The common origin of barriers

18.

1. Lack of mutual trust between Member States


19.

2. Resistance to modernisation of the national legal frameworks


20.

3. Protection of national economic interests


III. The impact of the barriers

A. The knock-on effects on the entire economy and on European competitiveness

21.

1. The key role of services in the economy


22.

2. The interdependence of services


23.

3. The demand for cross-border services


24.

4. The costs of barriers to services


25.

5. The lost growth and performance of the European economy


B. The principal victims

26.

1. Small and medium-sized companies


27.

2. The users of services, in particular consumers


C. The weak credibility of the internal market in services

28.

1. Perception of the internal market as a danger zone


2. 'Arrangement' strategies

3. 'Black market' strategies

29.

CONCLUSIONS


ANNEX


NOTICE TO THE READER

This report is intended to present the difficulties affecting the provision of services between Member States as perceived by interested parties according to the consultations carried out by the Commission and Member States, or which arise from complaints, written and oral Parliamentary questions, petitions or studies and surveys. These consultations, accompanied by specific studies, will be continued in order to obtain further information, in particular on the situation of consumers in the Internal Market for services.

The report does not set out:

* to make a judgement on whether measures causing difficulties are compatible or not with Community law, and in particular with the principles of the freedom to provide services and/or the freedom of establishment, or with secondary Community law. Indeed, these measures could be justified by objectives of overriding public interest such as protection of health, consumers, workers or the environment. The report does not prejudice the position that the Commission may take with regard to current or future complaints. Certain difficulties listed may already have been pronounced as justified by the Court or, on the other hand, condemned by it. Others may be covered by existing Community instruments but arise from the unsatisfactory application of these, while other problems may be addressed by further Commission initiatives.

* to determine the type of measures necessary to resolve these difficulties, in particular the need for harmonisation or adaptation of existing rules or any infringement procedures which it might be necessary to begin against certain Member States

In the course of the second stage of the implementation of the Internal Market Strategy for Services, the Commission will undertake a legal and economic evaluation in order to determine what initiatives should be proposed at the Community level to resolve the problems encountered both by providers and recipients of services. This evaluation will be carried out in consultation with all interested parties, including consumer organisations.


30.

EXECUTIVE SUMMARY


The Lisbon European Council adopted an economic reform programme with the aim of making the EU the most competitive and dynamic knowledge-based economy in the world by 2010. A key part of this programme is to make the Internal Market work for services. With this aim the Commission adopted its two-stage Internal Market Strategy for Services. This report, which completes the first stage, attempts to draw up a comprehensive inventory of the Internal Market barriers that continue to inhibit services. This report analyses the common features of the barriers and makes a preliminary assessment of their economic impact.

The large-scale consultation which forms the basis of this report involved the European Parliament, the Economic and Social Committee, the Committee of Regions, Member States and interested parties, and was carried out throughout 2001 and early 2002. This report provides a basis for actions that will be launched as a second stage in 2003. Because of the interdependence of different service activities, this report, in line with the Internal Market Strategy for Services, is based on a horizontal rather than a sectoral approach. The report covers a large variety of activities, such as consultancy services, certification services, estate agents, engineering, construction, distribution, tourism, leisure and transport. Furthermore, since a barrier affecting a consumer or service provider at any one stage of the business process, may undermine the entire cross-border service, this report covers barriers encountered at each of the six stages of the business process ranging from establishment of the service provider, use of inputs necessary for the provision of the service, promotion, distribution and selling of services, to the after-sales phase. The report covers the whole range of difficulties perceived as obstacles by the providers and users of services, but does not at present seek to assess whether they are compatible with Community law; this question will form part of the second stage of the strategy which will propose solutions.

A key element of the state of the Internal Market for services is consumption. The report emphasises that the recipients of services, and particularly consumers, are the principal victims of the dysfunctioning of the Internal Market. Consumers can be prevented from having easy access to services from other Member States, or have to pay a high price, or lack the confidence to buy from other Member States. A more fundamental analysis of the nature and impact of these difficulties on consumers will be carried out during the second stage of the Internal Market Strategy for Services, with a view to bringing forward appropriate solutions.

31.

Services are the engine of economic growth


Growth in the economy is essentially driven by services. They account for 70% of GDP and employment in the majority of Member States. Services are to be found in all areas of modern economies, including traditional manufacturing sectors, where, for instance, car manufacturers offer financial, consulting, training and rental services. A number of demand-based factors have contributed to an ever-growing number of different services, ranging from more traditional service sectors such as transport, retail distribution, telecommunications, tourism and the regulated professions, to more recently developed services such as waste management, energy conservation, business services (including management consulting), data processing and technical analysis and testing.

However, the potential for growth in services cannot be fully realised while expansion of services activities across national borders in Europe is hampered by a wide range of Internal Market barriers.

Internal Market barriers hit services harder than goods...

Services are much more prone to Internal Market barriers than goods and are harder hit. Because of the complex and intangible nature of services and the importance of the know-how and the qualifications of the service provider, the provision of services is often subject to much more complex rules covering the entire service activity than is the case for goods. Furthermore, while some services can be provided at a distance, many still require the permanent or temporary presence of the service provider in the Member State where the service is delivered. Whereas with goods only the goods themselves are exported, in the case of service provision it is often the provider himself, his staff, his equipment and material that cross national borders. As a result, some or all of the stages of the business process may take place in the Member State where the service is provided and be subject to requirements differing from those in the Member State of origin. This also means that barriers at a single stage of the business process cannot be looked at in isolation; their cumulative impact throughout the service activity must be considered.

...and occur at every stage of the business process...

Barriers to establishment in another Member State may result from, for example, requirements relating to authorisation or professional qualifications, restrictions on the use of a certain legal form for the service provider or on the partnerships between different professions. The number of authorisations required, the length and complexity of the procedures, discretionary powers of local authorities and duplication of conditions already fulfilled in the Member State of origin of the service provider have all emerged as key themes in the consultation. The next problem service providers meet when engaging in cross-border activities concerns the use of inputs necessary for the provision of the service. A variety of restrictions affect, for example, the posting of workers, the use of equipment or material by the service provider or the use of cross-border business services. The promotion of services is rendered particularly difficult because of very restrictive and detailed rules for commercial communications ranging from outright bans on advertising for certain professions to strict control on content in other cases. The large divergence of legislation between Member States impedes pan-European promotional activities for many services.

The distribution of services across borders is hampered by a variety of restrictions, including requirements for the service provider to be established or resident in the Member State where the service is provided, which precludes service provision from the provider's home base. In addition, there are authorisation, registration and declaration requirements which are combined with requirements concerning professional qualifications or other conditions for exercising an activity which differ significantly from those of the service provider's country of origin. Problems directly or indirectly linked to the selling of services across borders result from differences in contract law, fixed or recommended prices for certain services, requirements relating to payment and reimbursement of VAT subject in different Member States to different rates, classification systems and procedures. Finally, in the after-sales phase a service provider can also face particular difficulties resulting from divergences between Member States concerning professional liability and insurance, or financial guarantees, or problems with repair or maintenance services if they involve the posting of workers across borders. At the very least, all service providers encounter barriers at one stage of the business process; often they encounter them at several or even at all stages. Since many barriers have been reported to exist in Candidate Countries, problems will multiply with enlargement.

32.

....as well as affecting consumers


Lack of transparency, lack of confidence, divergent rules between various Member States: these factors prevent consumers, who account for a large part of the demand for services, from enjoying the full benefits of the Internal Market and from playing their full role in the market. From the perspective of consumers, the difficulty in obtaining information, problems of access to cross-border services and the weak protection against, for example, abusive behaviour, contribute to the fragmentation of the Internal Market for services.

33.

Lack of information as well as cultural and language barriers add to the burden


Business and consumers have considerable difficulty in obtaining precise information on the regulatory framework, the competent authorities and the procedures in other Member States. Furthermore, companies and consumers are often not aware of the principles of the Internal Market which allow them to challenge unjustified or disproportionate measures or to enforce their right to supply or receive services. In addition, the question of cultural and language barriers, and the tendency of a large number of companies still to think only in terms of their domestic market, which can make life particularly difficult for consumers, were both raised in the consultation.

34.

Barriers have common features across service activities


Although barriers are widespread, they have a number of common traits in both their origins and effects. It is apparent that while the previous Internal Market programmes were effective in removing physical and technical barriers, these have been replaced by 'legal barriers' arising from national, regional and local regulation. In addition, new barriers arise from the behaviour of administrations, including the use of discretionary powers or heavy and non-transparent procedures, which favours domestic operators. A number of difficulties result from unsatisfactory application of certain EU instruments. It seems obvious that Member States lack the necessary confidence in the quality of each other's legal regimes and are reluctant to adapt their own regimes where necessary to facilitate cross-border activities.

Many barriers are horizontal and affect a range of service activities. One common feature is that Member States apply a single regime both to service providers who want to establish themselves on their territory and to those who want to provide services from their home base. For the latter, which are already subject to legal requirements and control by national authorities in the country where they are established, this may result in duplication of requirements and disproportionate burdens. Another common trait is the legal uncertainty resulting from unclear requirements applied on a case-by-case basis by national authorities, the result of which is often unpredictable.

The impact of barriers to services hits the entire economy ...

The impact of the barriers identified in this report is on all sectors of the economy. Barriers to one service will trigger knock-on effects for other services and also for the wider industrial economy, given the integration of services into manufacturing. Services are intricately intertwined. They are often provided and used in combination and feature as inputs at each stage of the service provider's business process. For example, an operator of retail stores established in one Member State and wanting to establish in a number of other Member States might wish to use the services of the real estate agents, shop designers, architects, engineers, construction companies, banks and insurance companies with whom he works in his Member State of origin. In most cases this is impossible because of barriers affecting those service providers who may not have, say, the authorisations or qualifications required in the other Member States. As a result, the establishment of the retailer may be delayed or rendered more costly and difficult, which in turn affects the services he provides to manufacturers and consumers. This interdependence of services means that it will be necessary at the second stage of the strategy to develop further the economic assessment of the problems identified so that it covers the effects on the entire economy and is not limited to the impact on one service activity.

Barriers result in considerable costs for companies engaging in activities doing business between Member States. A service provider seeking to enter a market, whether through establishment or cross-border service provision, will have to bear the significant costs associated with complex legal assistance. Such assistance is required to examine whether he can export his business model or whether parts of it, such as his promotional strategy, will have to be altered. These costs are additional to costs resulting, in particular, from different languages or cultural differences in commercial and consumption habits. Since barriers may occur at each stage of the business process, these costs will multiply throughout the provision of the service. Furthermore, in addition to the legal assistance costs, a company bears significant further costs resulting from necessary changes to its business model. The impossibility of using the same business model throughout the Internal Market prevents companies from taking advantage of economies of scale. The consequence of these negative effects is a general misallocation of resources within the companies concerned, limiting investment in innovation and differentiation of services. Given the key role of services, this in turn affects the performance of the entire economy.

35.

... but SMEs and ultimately all consumers are particularly affected


Small and medium-sized enterprises (SMEs) are prominent in the services industry, but their prospects for cross-border growth are severely hampered. They are hit much harder than their larger rivals, since the legal assistance costs are fixed and not proportionate to firm size. As a result, SMEs will either be dissuaded from cross-border activities altogether or will be put at a clear competitive disadvantage compared to domestic operators. SMEs in small and peripheral Member States seem to be particularly disadvantaged. Furthermore, SMEs may become an attractive target for acquisition by larger companies because of their significant local knowledge, experience and innovation potential.

However, it is the service users and in particular consumers who pay the price for these restrictions through not being able to benefit from a greater variety of better quality and competitively priced services. Ultimately this affects their quality of life. They suffer directly when administrative and legal requirements prevent them from using services offered from other Member States, or they suffer indirectly when existing barriers dissuade companies from offering their services to customers in other Member States or result in higher prices, less differentiation and lower quality. Finally European citizens suffer from the lost job creation potential of the services industry as a whole.

36.

Barriers need to be removed urgently to meet the objective of economic reform


A decade after the envisaged completion of the Internal Market, there is a still huge gap between the vision of an integrated EU economy and the reality as experienced by European citizens and European service providers. The range of barriers perceived as affecting service provision and use, which are far more wide-ranging than was expected, amounts to a considerable drag on the EU economy and its potential for growth, competitiveness and job creation.

It is clear that the goal set by the Lisbon Council to make the European economy the most competitive in the world cannot be met unless sweeping changes are made to remove barriers to cross-border services in the near future. The nature and the scope of the problems to be addressed require a major effort and a clear political commitment by all European institutions and Member States finally to make the Internal Market work for services. This report provides a framework for actions to be launched in 2003 as a second stage of the Services Strategy on the basis of further discussions with the European Parliament, Member States and interested parties.

This report, and the reactions to it, forms the basis of work for the next stage of the services strategy. It will involve both legislative and non-legislative actions whose scope and content require further analysis. In respect of possible legislative proposals, a careful balance has to be found between the need to avoid too detailed and wide-ranging regulation at Union level and the need to protect the general interest objectives concerned. In respect of non-regulatory initiatives, the Commission will in the first instance consider what measures could provide to consumers and business the information and assistance necessary to allow them to benefit fully from the EU's Internal Market.


37.

INTRODUCTION


Services are everywhere in the modern economy. In the EU they account for almost 70% of GDP and employment and offer prospects for further growth and more jobs. Realising this potential, and ensuring that services deliver better quality and value to European citizens and business, is a major aim of the EU's economic reform programme. Much more progress is required in order to make the Internal Market work for services.

This challenge has been recognised by European leaders. The Lisbon European Council in March 2000 asked the Commission and Member States to devise a strategy for the removal of barriers to services i. The need for further action was also highlighted by the Stockholm and Barcelona summits in 2001 and 2002, while the Internal Market, Tourism and Consumer Affairs Council, in reviewing the EU's priorities for economic reform, concluded that improving the Internal Market in services remained 'a crucial strategic challenge for the Community' i.

In response to the call from the Lisbon summit, the Commission set out a broad-ranging strategy in December 2000 i. The strategy recognises the impact of the information society on methods of supplying and using services. As more and more businesses use a mixture of techniques to meet customer needs and provide both on-line and off-line services, it is increasingly necessary to ensure that the Internal Market for off-line services can develop in a way which complements the Internal Market for services delivered on-line i.

The objective of the strategy is to allow services to move across national borders in the EU as easily as within a single Member State. It takes in the first instance a horizontal approach across all economic sectors involving services and proposes two stages. The first stage of the strategy, which is completed by this report, involves identification and analysis of existing barriers to the cross-border movement of services whilst at the same time accelerating a number of ongoing initiatives. Amongst these, flanking measures have been initiated with the aim of gaining a comprehensive view of employment in, and the added-value created by, the sector. The gathering of data and economic analysis are being completed by studies on productivity in services and on the 'virtual economy'. The second stage, based on this analysis, will bring forward appropriate solutions to the problems identified. This approach has been endorsed by the European Parliament i, the Economic and Social Committee i and the Committee of Regions i.

The Services Strategy is consistent with, and complements, a range of other initiatives designed to facilitate the operation of the Internal Market in services. The '2002 Review of the Internal Market Strategy' i provides an overview. It shows that progress has been made in many fields, for instance in implementing the Financial Services Action Plan, the adoption of the regulation on cross-border payments in euro, the adoption of the new regulatory package on electronic communication networks and services and the directive on postal services, the forthcoming adoption of the regulatory package for public procurement and the presentation of the Commission's proposals to harmonise the legal regime for sales promotions and to provide a uniform, transparent and flexible regime for recognition of professional qualifications.

In the area of consumer protection, the development of consumer policy at the EU level has been the essential corollary of the progressive establishment of the Internal Market. The free circulation of goods and services has necessitated the adoption of Community rules aimed at providing sufficient protection for consumers while eliminating regulatory obstacles as well as distortions of competition. The strategy adopted by the Commission on 12 May 2002, and in particular the Community approach envisaging a high common level of consumer protection i, aims to remedy those aspects linked to consumers' lack of confidence in cross-border transactions. Moreover, the consultation launched by the Green Paper on consumer protection i recognised that existing EU rules in the area of consumer protection did not match up to the challenges posed by a market in constant evolution and so had to be reformed. A number of responses indicated that the disparities between national rules, particularly in the area of commercial practices, led to significant distortions of competition. The majority of responses to the consultation expressing a preference wished for reform to proceed on the basis of a framework directive on fair commercial practices in relations between business and consumers. In order to reduce legal fragmentation as well as to improve consumer confidence, the framework directive should be accompanied by the revision in due course of consumer protection directives and by the replacing of minimum harmonisation clauses with maximum harmonisation rules.

It should be noted that consumer protection may involve obligations to services of general interest such as transport, energy (electricity and gas), telecommunications and postal services. In this respect, the Commission Communication 'Services of General Interest in Europe' emphasises the importance of these services and the role of public service obligations or other obligations relating to consumer protection to which certain activities might be subject.

In the area of contract law, future initiatives i should be mentioned which follow up the consultation launched by the Communication on European contract law i in order to resolve legal problems affecting the functioning of the Internal Market.

In the context of the European social dialogue, initiatives in skills, qualifications and the promotion of quality have been launched or completed in several areas such as personal, cleaning, private security and construction services.

In the area of the free circulation of persons, the abolition of internal border controls, which has become a reality due to the Schengen acquis being integrated in the EU by the Treaty of Amsterdam i, will also facilitate contact between service providers and their potential clients i. This removal of controls will also gradually contribute to citizens and economic operators becoming more aware of all the dimensions of the internal space without frontiers.

As far as the international dimension is concerned, there is a synergy between internal market policy and external trade policy, including the services negotiations in the context of the GATS (General Agreement on Trade in Services). More specifically, it will be necessary to take account of the results of the current discussions on domestic regulation in the context of article VI:4 of GATS.

This report forms an important step in the process of creating a true Internal Market for services by presenting an overview of the reality of the Internal Market today. For the first time since the presentation of the 'General Programmes' for the suppression of restrictions to the freedom of establishment and the free provision of services in 1962 i, the Commission has undertaken a comprehensive analysis of the existing barriers in the Internal Market for services. Since then, progress has been limited. The Commission's 1985 White Paper on completing the Internal Market i stated that 'progress on the freedom to provide services has been much slower than the progress achieved on the free movement of goods'. And the 1992 Cecchini report i concluded that the potential of services sectors 'for much more significant growth is being artificially pinned back by regulations and practices which significantly inhibit the free flow of services and thus the free play of competition between companies supplying them'.

Some measures have already been adopted in order to suppress the most obvious difficulties which limit the development of the Internal Market in services. These measures are the result of the application by the Commission of its role as guardian of the Treaty and of exercising its power of initiative to bring forward harmonisation proposals aimed at making the Internal Market work. These measures have enabled the Internal Market to reach a higher level of economic integration than regional trading arrangements elsewhere in the world. Nevertheless, in spite of progress so far, contributors to the consultation were able to identify a wide range of difficulties which remain and which are the object of this report.

This report is based primarily on a large-scale consultation with interested parties, but also draws on information from other sources such as European Parliament petitions and questions, complaints to the Commission, economic and statistical studies and Member States' contributions. The consultation, which lasted throughout 2001 and early 2002, was launched in order to gather first-hand information on the barriers which hinder the development of cross-border services in the EU. It covered any and all problems encountered in the context of the provision and use of services, and of cross-border establishment in the EU. It is clear from the jurisprudence of the Court that any measure liable to prohibit, impede or render less advantageous the supply or use of cross-border services or cross-border establishment within the EU could constitute a barrier. This report therefore includes examples of barriers which are not simply prohibitions, discriminations or conditions which are impossible to meet, but various types of requirements which, if applied to companies from other Member States, would undermine the freedoms to establish or provide services. Some barriers are due to complex, burdensome or non-transparent regulation or practices; most are just due to the wide divergence of national rules.

The overall aim of the report is to describe the realities of the Internal Market as seen by providers and users of services. It does not at this stage seek to assess whether any individual barrier is justifiable or not.

The report covers areas which are subject to Community instruments or proposals. Furthermore, the report reflects comments made in the consultation on barriers faced by EU companies in the Candidate Countries. In these countries the companies are confronted with the same obstacles as in the Member States. However, additional barriers may result from nationality requirements, restrictions on ownership of companies in certain sectors by non-nationals or restrictions on access to real estate.

In line with the Services Strategy, this report covers barriers throughout the entire business process, starting from establishment and the use of inputs necessary for the service provision, to promotion, distribution, sales and after-sales activities. It is clear that service providers are far more exposed than producers of goods to barriers in each of these stages of their business activity. This is because the provision of services often requires the permanent or temporary presence of the service provider in the Member State where the service is delivered. As a result, some or all of the stages of the business process may take place in the Member State where the service is provided and be subject to requirements differing from those in the Member State of origin. For instance, a company wanting to establish in, or provide services to, another Member State might face obstacles in gaining authorisation, including mutual recognition of qualifications, posting its employees or using its equipment, promoting its services, distributing its services, concluding contracts with customers and providing guarantees or after-sales services. Obstacles at any of these stages may render the entire cross-border activity less attractive.

Furthermore, in accordance with the horizontal approach of the Services Strategy, this report covers barriers affecting a large variety of different economic activities. The reason is not only that a number of barriers, such as authorisation procedures, affect different sectors in a similar way, but that services are intricately intertwined and barriers affecting one service have knock-on effects on a number of different other services. A comprehensive approach is required to evaluate barriers to services in the Internal Market and their overall impact.

Services play a key role in the economy and in the life of every citizen. Barriers to services therefore not only affect the competitiveness of service providers themselves, they also deprive the recipients of services, which includes every business and every consumer in the EU, of the increase in innovation, price competition and quality, which greater access to services would bring.

38.

I. Barriers to the internal market for services


With regard to the definition of the 'Internal Market' in the EC Treaty ("an area without internal frontiers") and the objective, set out in the 'Internal Market Strategy for Services', of making the provision of services between Member States as easy as within a Member State, it has to be said that the Internal Market for services is far from being a reality. Two broad categories of problems can be singled out: those deriving directly or indirectly from legal constraints and those deriving from non-legal factors.

39.

A. Legal barriers


The term 'legal barriers' covers all obstacles to the development of service activities between Member States deriving directly or indirectly from a legal constraint and which are liable to prohibit, impede or otherwise render less advantageous such activities. Such barriers also stem from difficulties caused by divergent national regulations, as well as from problems relating to the behaviour of national authorities, or from the legal uncertainty caused by the complexity of some cross-border situations. In all cases, the result is the same: consumers and businesses alike are discouraged from using services from other Member States, and service providers are discouraged from offering their services in other Member States i.

The inventory of barriers set out below highlights the difficulties which service providers are liable to encounter when seeking to exercise freedom of establishment or freedom to provide services in order to develop their activities in other Member States. These are difficulties which were identified by interested parties and Member States in the course of the consultation or which have emerged from complaints made to the Commission, from European Parliament petitions and written question, from recent cases filed with the European Court of Justice or from studies and surveys which have come to the notice of the Commission. This method, aimed at taking stock of how the Internal Market for services is operating in reality, has three major consequences

- This report does not take a position on the compatibility with Community law of the barriers identified, this question being the subject of the second phase of the Strategy, which will focus on solutions, particularly in terms of harmonisation needs. It is not the object of the inventory to call into question the need for, or content of, national rules as such, but merely to highlight problems to which they may have given rise when applied to cross-border activities;

- The difficulties identified may already be the subject of ongoing Community initiatives, existing Community instruments or measures, infringement proceedings or Court judgments;

- Some difficulties may not have been identified, even though this risk has been minimised by drawing on numerous sources of information.

In order to draw up as broad an inventory as possible of all difficulties hindering the development of service activities between Member States i, the method employed was to identify the problems which a service provider is liable to encounter at any stage in his activity, whether it be during the process of establishment in another Member State (stage 1), when posting staff to or using equipment in another Member State (stage 2), when promoting the particular service in another Member State (stage 4), when selling the service (stage 5) or, finally, after having provided the service in another Member State (stage 6). The inventory set out below presents all the difficulties identified as affecting cross-border activities in relation to each link in the business process.

40.

1. Difficulties relating to the establishment of service providers


The consultation showed that a national of a Member State, or a company already established in a Member State, wishing to become established in another Member State in order to engage in a service activity there, may face a large number of difficulties. These have a particularly severe impact in the case of services: whereas goods can circulate among Member States (via distribution networks) without the manufacturer having to cross a border, the provision of services depends on know-how that requires a direct relationship between service provider and client. Even though the temporary relocation of the service provider or the provision of the service from a distance may enable such a relationship to come about (and is the preferred approach of SMEs) establishment in the target market remains a key commercial strategy i. This is particularly the case where the operator intends to maintain a long-term presence in the country concerned or where he wishes to adapt to the specific conditions of the market or boost customer confidence. Moreover, the complexity of regulating services, coupled with the fact that the quality of a service is directly dependent on the characteristics of the provider, engenders a number of requirements which are not to be found in regulations governing goods, e.g. specific rules on the legal form of the service provider and restrictions imposed on multidisciplinary activities.

(i) Monopolies and other quantitative restrictions on access to activities

Monopolies in some Member States were singled out, as they have the effect of preventing the establishment of service providers from other Member States in which no such monopoly exists. The monopoly concerned may be one that is entrusted to a specific body, such as those in partially liberalised sectors (such as postal services or energy utilities), a monopoly on the distribution of certain products i, which could affect distribution services in particular, or activities reserved exclusively for certain operators i.

Quantitative restrictions which some Member States impose on access to service activities, e.g. quotas or numerus-clausus rules governing the number of service providers i, rules on maximum surface area i, or on geographical distance i limit the number of service providers and could place established national operators at an advantage over new entrants.

Difficulties identified include, for example, rules in one Member State imposing a limit of 1 optician per 10 000 inhabitants and one driving school per 15 000 inhabitants.

Territorial restrictions applying in some Member States may confine authorisation to engage in service activities i to a specific region or locality, so that service providers wishing to cover the entire national territory are obliged to become established in several regions.

(ii) Nationality or residence requirements

Nationality requirements exist in several Member States in respect of shareholders, management and staff of service enterprises i and in respect of some regulated professions i.

Residence requirements, particularly those relating to managers of service enterprises i, give rise to problems. For example, depending on the particular country, two thirds, one half or at least one of the members of the management board must be resident.

A single-establishment requirement, whereby a service provider wishing to become established in a particular Member State is directly or indirectly obliged to give up an establishment in another Member State, was pointed out by medical laboratories, for example. Such a requirement effectively prohibits the exportation of a business model by means of becoming established in several Member States.

(iii) Authorisation and registration procedures

Access to a large number of service activities i is subject to a prior authorisation requirement which often entails difficulties for operators from other Member States.

The failure to take into account requirements already met by a service provider in a Member State in which he is established, e.g. securities or guarantees already deposited i, may have the effect of duplicating and compounding the constraints facing operators who are present in more than one Member State.

The number of authorisations required for some activities considerably amplifies the restrictive effects for an operator from another Member State, even if it just means having to contact more administrative bodies, fill in more forms and provide more certificates i.

For example, in one particular Member State, seven different local and national licences are needed in order to open a hotel or restaurant i; while in another a company wishing to open a retail outlet needs a building permit, an environmental permit and a socio-economic permit, as well as having to comply with zoning regulations which can sometimes be highly complex.

The procedures and conditions associated with such regulations may have restrictive or even discriminatory effects on operators from other Member States, particularly where the procedures involve bodies made up of competitors i or where the applicant has to prove that the application for authorisation is justified by a genuine need i.

A registration requirement applying to some service providers, whereby they are obliged to register with an administrative authority, a professional body, a chamber of craft trades or a trade association, is frequently encountered and could prove very expensive for operators who have a presence in several countries, particularly on account of the annual contributions to be paid, and where, moreover, membership of a specific sickness insurance scheme is involved.

The bureaucratic nature of authorisation and registration procedures, the long time they take to complete, the onus of proof, the certification of translations, the prices or fees to be paid, the less than constructive attitude taken by some authorities and the difficulties involved in lodging administrative appeals were very often singled out on account of their discouraging effect on service providers from other Member States i, particularly SMEs and start-ups i.

(iv) Restrictions on multi-disciplinary activities

A certain number of service activities are subject to rules designed to ensure independence and autonomy between different activities, preventing them from being exercised jointly. The disparity between national rules in this domain may have a particularly pronounced restrictive effect by preventing the exportation to another Member State of know-how consisting precisely of addressing in a multi-disciplinary, innovative and less expensive manner the different requirements of a customer. These restrictions may take several forms:

- requirements concerning the structure or management of service enterprises, preventing for example the formation of associations between different professions i ;

- restrictions on the exercise of multi-disciplinary activities - these lay down that the exercise of different activities is incompatible i, oblige a service provider to exercise exclusively one particular activity i, or stipulate that different activities may only be pursued in different locations i.

In one Member State, for example, estate agencies are prohibited from engaging in other professional activities such as property management, financial consultancy or cleaning.

(v) Legal form and internal structure of economic operators

The obstacles concerned are particularly restrictive for operators who are already established in one Member State and are not subject to this type of requirement in their country of origin. The divergence between the rules in question means that operators may be obliged to create a legal entity that is 'made to measure'.

Requirements regarding legal form may impose a particular type of company on a service provider or, conversely, prohibit him from having such a legal form i. The situation can become highly complex for some activities for which different legal forms are mandatory in different Member States.

For example, a lawyer who wishes to become established in a different Member State must dissolve his or her one-person company in the Member State in which he or she is already established because in the other Member State lawyers are allowed to operate limited-liability companies only i.

In addition to the (above-mentioned) discriminatory rules affecting shareholders, the capital of service enterprises is subject in some Member States to restrictions such as a minimum amount of capital for companies providing private-security services and employment agencies i.

A minimum number of employees may be required for some service companies i.

(vi) Professional qualifications

Disparities between different countries' regulations governing professional qualifications may give rise to various kinds of difficulty for service providers wishing to become established in another Member State, particularly where qualifications for the profession concerned are not automatically recognised i.

Differences between Member States regarding activities considered to be 'regulated professions' may cause difficulties, as there are many services i which are not regulated in all Member States, while some may be regulated in one Member State only i. For example, a service provider from a Member State with no requirement for a professional diploma wishing to become established in another Member State that does have such a requirement will not find it easy to have professional qualifications recognised.

Aptitude tests required by some Member States for activities not covered by arrangements for automatic recognition of qualifications could be are a source of difficulties, particularly for SMEs i owing to a lack of transparency and predictability.

Differences regarding the fields of activity covered by a particular professional qualification may give rise to difficulties, and it may also happen that different professional qualifications are required for one and the same activity if different designations are used i.

For example, chartered building surveyors may be allowed to draw up plans for a building in one Member State, while only architects are allowed to do so in another.

(vii) Conditions governing the exercise of service activities

A decision as to whether or not to become established in a particular Member State may be influenced by differences not only between the respective conditions governing access to the service activities concerned but also between conditions relating to the way they are exercised, such as professional liability insurance regulations, rules on shop opening hours - which affect strategies for the establishment of retail outlets i - and rules on taxation and use of infrastructures, which may affect the establishment of telecommunications operators i.

The different company tax regimes result in obstacles which penalise cross-border establishment of service providers i. Although business would like to consider the Internal Market as just one market, numerous problems result from the fact that companies must conform with 15 different fiscal regimes. This situation undermines the economic efficiency of business strategies and structures. The multiplicity of fiscal laws, conventions and practices leads to significant compliance costs and constitutes a barrier to establishment which particularly affects SMEs.

In particular, it seems that service providers are especially affected by problems linked to the fiscal treatment of intra-group transfer pricing, cross-border flows of income, cross-border loss relief and cross-border restructuring operations. These difficulties present a risk of double taxation and increased compliance costs.

41.

2. Difficulties relating to the use of inputs necessary for the provision of services


The cross-border use of inputs by service providers can take two forms. In order to offer its services, an enterprise already established in one Member State may have to move to another Member State and mobilise its own inputs there: i.e. its staff, equipment or the business services of which it usually avails itself on its domestic market. On the other hand, an enterprise may need inputs from other Member States. In both cases, the contributions to the consultation revealed difficulties. In particular, the cross-border recruitment or posting of staff could be problematical i, which runs counter to the aim of facilitating the mobility of workers i.

(i) Posting of workers (employees or temporary staff) to another Member State

The provision of services between Member States often means that the service provider has to post staff temporarily to another Member State. Some difficulties may be encountered in this context. It should be noted that Directive 96/71/EC i sets out a common list of rules providing for minimum protection which must be observed in the country where the service is supplied by the employer which posts the worker in the framework of the provision of services.

The requirement to make a prior declaration, applying in several Member States to the cross-border posting of staff (permanent employees or temporary personnel), particularly in the construction sector i, may result in difficulties for operators from other Member States on account of the administrative burdens which they may impose i. Compounding these in some Member States is the obligation, on expiry of a certain period (generally three months), to register posted workers with labour authorities, administrative bodies or the police i.

The burden and complexity of administrative formalities i, the stringent and quasi-systematic checks which some posted workers may have to undergo, excessive paperwork and the associated delays (stoppage of work), could result in difficulties in the case of regular and short-term postings.

For example it was indicated that, for the installation of a lift by two workers on a ten-day posting, a company had to complete a series of administrative formalities (in particular the submission to the labour inspectorate of data on the posted workers and safety measures, and an obligation to keep documentation in the language of the host country) although the company considered that it had already met similar requirements in its country of establishment.

The application to posted workers i of the host country's labour-law provisions, without account being taken of the obligations and charges already met by the employer in the country of establishment, could lead to amounts being levied twice and to additional administrative costs and burdens having to be borne by service providers from other Member States. Such cases of duplication, notably as regards the minimum wage i or paid leave i could have particularly restrictive effects in the case of short-term service provision and with regard to SMEs and service providers established in border areas who would like to post workers to several Member States on a regular basis in order to provide their services there.

For example it was highlighted that it proved economically unattractive for a small craft enterprise to carry out work in another Member State on account of an obligation to make a quarterly provision for all social security contributions for its posted workers. Even though the amount would later have been reimbursed to the company concerned, this would have tied up too much cash i.
[second experimental scheme], Inter-regional Council of the Saar-Lor-Lux Chambers of Craft Trades, 1996.

These restrictive effects are exacerbated by the existence of severe sanctions i, including criminal penalties, the application of which is sometimes perceived as being discriminatory by service providers who do not meet obligations to make a prior declaration or fail to observe labour-law provisions.

Procedures and conditions applying to the posting of third-country nationals in several Member States are tantamount to authorisation requirements i. This fact and the slowness and cumbersome nature of the procedures concerned were also highlighted i as being liable to render the provision of services difficult or even impossible in some cases. i Such difficulties could primarily affect high-tech sectors in which operators seek the skills they need by using staff, e.g. software designers, from non-EU countries.

In several Member States, the posting of personnel from third countries is subject to the condition that the staff concerned have been employed by the posting enterprise for at least a year. In some cases they must even have a contract of indefinite duration. Moreover, it can take a long time for the document(s) required for a posting to be issued (up to six months in some cases).

(ii) Use of employment agencies or temporary workers from other Member States

Enterprises which may need to use an employment agency established in another Member State or to deploy temporary workers in another Member State i, could face a series of difficulties.

Prior-authorisation rules i and establishment requirements i applying to employment agencies could prevent operators from availing themselves of an agency that is established in another Member State and does not have such authorisation. This has the effect of limiting operators' access to temporary workers from other Member States i. This could also prevent a company from calling on workers provided by an agency in its home state to supply a service in another Member State where such an authorisation is required. Such regulations could moreover delay the performance of a contract or make it impossible to meet a deadline i.

The prohibitions imposed on certain sectors and restrictions on the use of temporary staff i (such as the requirement to prove a specific need to use temporary workers) vary from one Member State to another. In the context of cross-border service provision, this is liable to hamper the posting of temporary staff employed by an enterprise i.

(iii) Other difficulties relating to the cross-border deployment of workers

Some contributions showed that operators encounter difficulties i when seeking to recruit or employ staff in one or more Member States particularly with a view to making up skills shortages i. This is especially the case for enterprises which are established in several Member States or which employ cross-border workers. These difficulties derive from obstacles to the cross-border mobility of workers within the Internal Market.

Disparities between national regulations governing remuneration, taxation i and social protection are perceived as a source of major difficulties i for enterprises employing or seeking to recruit migrant or cross-border workers i, and could give rise to additional administrative costs and paperwork.

For example, pension contributions paid by migrant workers to pension schemes in the Member State of residence are not necessarily deductible from taxes payable in the Member State in which they exercise their activities.

The complexity of social security regulations in all Member States may discourage enterprises from employing migrant or cross-border workers i and also cause additional administrative burdens.

Diversities between pension schemes and obstacles to the transfer of supplementary pensions i, may have a restrictive effect on the mobility of cross-border and migrant workers and give rise to high administrative and financial costs, preventing for example operators who are established in several Member States from centralising their pension management systems.

(iv) Cross-border use of business services

In order to engage in its particular activities, an enterprise normally requires the input not only of manpower but also of a variety of 'business services'. These may range from legal assistance and accounting services, through marketing services, website design, equipment leasing or hire, to transport and after-sales services.

The use of cross-border business services may be affected by difficulties which can prevent an enterprise from using providers from other Member States whose services are more attractive in terms of quality or price. They may also prevent a company, when supplying services in another Member State, from using service providers with which it has long had dealings.

For example, a waste-transport enterprise may be prevented, in the context of its cross-border activities, from drawing on the assistance of its environmental consultant because the latter is not entitled to provide services in other Member States.

Where such difficulties affect providers of business services, they will be dealt with from the perspective of the distribution of services.

(v) Cross-border use of equipment and material

Problems relating to the use of technical equipment in the cross-border provision of services were highlighted by contributors to the consultation. i. Service providers are liable to be seriously hindered, and their ability to benefit from the freedom of service provision compromised, by measures imposing restrictions on the use of equipment or material specifically required for the exercise of their particular activities. Such difficulties may relate in particular to the technical equipment of laboratories, the use of business vehicles, exhibition-stand materials, road-mending machinery, construction-site equipment, security vans or technical standards for electronic signatures. In some cases, Member States require the use of infrastructure and materials which cannot be transported into the country in which the service is provided i.

For example, the introduction of the euro has led to a sharp rise in demand for the cross-border transport of notes and coins, with central banks having an increasing proportion of their cash produced in other Member States in the euro-zone. Commercial banks as well as retailers may also find it worthwhile to have cash transported to and from other Member States. However, differences between national rules on the transport of cash, including technical requirements in relation to equipment and vehicles, are a hindrance to the provision of this type of service between Member States.

42.

3. Difficulties relating to the promotion of services


This is a key stage, particularly for the cross-border provision of services, it being imperative that operators promote their services if they are to penetrate a new market in another Member State. It is essential to advertise know-how and specialist capability, as these are the chief factors that differentiate operators in this field. However, communication of numerous service activities i is governed by strict and complex rules whose variations between Member States may make it difficult for service providers to promote their know-how across borders and virtually impossible for them to undertake a pan-European promotional campaign.

(i) Authorisation, registration and declaration procedures

Prior authorisation may be required for communications concerning certain services. Such authorisation mechanisms may cause delays and additional administrative burdens in the context of cross-border promotional efforts.

In the case of financial services, prior approval is required in some Member States for some or all forms of advertising of some or all types of financial services.

In the distribution sector, authorisation is required for the promotion of certain products i, for certain forms of promotion i, and for the use of certain media i.

A declaration may also have to be made to a specified body in respect of certain types of sales promotion or advertising for certain services i, which may cause delays and additional administrative burdens for cross-border activities.

(ii) Bans on commercial communications

Bans on commercial communications for certain types of services, certain categories of recipients or certain media affect service providers from other Member States as they, unlike national operators, have hardly any other means at their disposal for making their products and services known.

Some regulated professions are subject to a total advertising ban, imposed either by law or by codes of good conduct, limiting the opportunities for developing their client base beyond the borders of their Member State of residence.

Some Member States prohibit all forms of advertising for certain professions, such as physicians, accountants and engineers, preventing the communication even of factual information.

With regard to other services, such bans may be imposed in respect of specific communication media i and recipients i.

(iii) Content of commercial communications

The type of message which operators are allowed to communicate may also be subject to restrictions, causing difficulties in a cross-border context. In some Member States, not only are commercial communications by regulated professions limited to factual information, but this information itself is subject to restrictions i. For example, in some Member States, certain types of information, such as prices or a comparison between services rendered and their prices must not the subject of a commercial communication.

In some Member States professionals such as lawyers are not allowed to mention their particular specialisation in their communications to the public, which limits their scope for attracting new custom from other Member States.

Content restrictions in respect of the target audience, which vary markedly from one Member State to another, may also exist for certain services, particularly for communications aimed at minors i.

Restrictions in respect of the arguments used may, in some Member States, prohibit for example the use of certain arguments, such as those of an 'ecological' nature i or those extolling the virtues of a product or service in terms of its positive effects on health.

Restrictions on the language used in commercial communications exist in some Member States, e.g. in the form of an obligation to use the official language(s) of the Member State concerned i.

(iv) Form of commercial communications

Some regulations restricting scope for sending commercial communications without prior consent may make it difficult to canvass for business if they also apply to messages addressed to professionals i. Regulations may relate to specific forms of canvassing, such as telephone i postal or door-to-door canvassing.

(v) Non-commercial communications

The compilation and circulation between Member States of independent information on the quality of services, based in particular on trials and comparative testing, are an essential means of enabling users of services to become aware of quality services in other Member States. In this regard, the application of certain rules relating to unfair competition i, parasitic behaviour , disparagement, counterfeiting, defamation, the right of reply and the citing of comparative tests i could give rise to legal uncertainty which may be detrimental to the cross-border dissemination of this type of information.

43.

4. Difficulties relating to the distribution of services


The difficulties set out below are not those affecting the distributive trades sector proper but those encountered in the cross-border provision of all services. The distribution of services can come up against a much more complex set of barriers than does that of products. In contrast to products, the quality of a service is gauged not only by the inherent quality of the service itself but also by the provider, particularly the professional qualifications of staff, capacity, capital and the internal structure of the enterprise. Numerous requirements, varying considerably from one Member State to another, are therefore imposed on the cross-border provision of services.

More particularly, Member States tend to subject services supplied by providers established in other Member States to some or all of the requirements applicable to operators established on their territory. This explains why the inventory of difficulties affecting this stage often includes those identified as affecting the first stage, the establishment of the service provider.

(i) Monopolies and other quantitative restrictions on access to activities

The monopolies and other quantitative restrictions listed in relation to the first stage (establishment of the provider) can represent an insurmountable barrier when applied to providers of cross-border services established in other Member States. The application of a monopoly system has the effect of depriving these providers of any opportunity to supply their particular service, even on a temporary or occasional basis. It is clear that the existence and application of monopolies can have severe effects on consumers.

(ii) Nationality or establishment requirement

In addition to instances of discrimination based on nationality i, the requirement that a provider be established i in the Member State or region in which the service is delivered is one of the main difficulties faced in a large number of economic activities i in several Member States. This type of requirement represents the very negation of the freedom of provision of services which enables operators to pursue their activities in a Member State other than the one in which they are established.

For example, in some Member States certification bodies for biological products are not allowed to provide their services unless they are established in the particular country concerned. This prevents the cross-border provision of a highly specialised service and also has the knock-on effect of hindering the sale of biological products.

The obligation to have a local representative almost amounts to an establishment requirement i.

(iii) Authorisation, registration and declaration procedures

Some Member States try to subject cross-border service providers who are established in other Member States to the authorisation, registration or declaration procedures applicable to operators established on their own territory (see stage 1).

Prior authorisation in various forms (such as having to obtain a permit, licence, or other approval) is required i in numerous Member States, even in cases where a service is rendered on an occasional basis only. The application of such requirements to cross-border services can have particularly restrictive and discouraging effects, especially as severe sanctions, even criminal penalties, are frequently applied to those who do not have the requisite authorisation i.

The failure of authorisation regimes to take account of requirements already met in the Member State of establishment can, moreover, exacerbate the restrictive effects and leads to a duplication of the rules to be complied with and of the burdens to be borne.

Entry (or enrolment or accreditation) in a register (which might be kept by the national professional bodies or tax or social authorities) in the country in which the services are provided is also very often required and may cause not only a great deal of paperwork but also major costs i.

For example, a general requirement for electricians in a particular Member State to register with a national trade association means that one particular professional who occasionally provides services there has to pay an annual contribution of around EUR 776 in that country (three times the contribution he pays in his country of establishment).

A declaration is sometimes required i. While imposing less of a constraint than the requirement to obtain an authorisation or to register with a chamber of trade, this obligation may nevertheless give rise to a considerable amount of paperwork and significant costs, given the difficulties involved in obtaining the requisite certification and the obligation to have documents translated and certified.

Providers of cross-border services have to meet a whole series of requirements associated with authorisation procedures: e.g. the obligation to register with a professional body, provide proof of a minimum amount of capital, deposit a guarantee i or to keep special accounts i. The overall result of these requirements and formalities may be to cause complications, delays and administrative costs, including in the case of occasional services of very short duration i.

(iv) Requirements regarding the internal structure and legal form of the service provider

A specific legal form and specific internal structure are often required not only for establishment in a particular country but also for the cross-border provision of services. Operators i from other Member States thus have to meet very different or even contradictory requirements.

In one Member State, surveying activities may be exercised only by public limited-liability companies which have a minimum amount of capital, provide a guarantee and have a minimum number of staff. This excludes any service providers who are established in other Member States where they are not subject to such requirements and pursue their activities as sole traders.

Rules stating that various activities are incompatible with one another are also sometimes applied not only to operators established in the country in question (see first stage) but also to cross-border service providers established in another Member State. The application of these incompatibility rules to cross-border services can have particularly severe restrictive effects, given that they often relate to the very structure of enterprises.

(v) Requirements in respect of professional qualifications and experience

Disparities between national requirements concerning professional qualifications and experience (to which, moreover, the above-mentioned authorisation and registration procedures are often linked) are one of the problem areas often highlighted in the consultation i. Service providers experience difficulties in providing their services in another Member State on the basis of their original professional title. Generally speaking, they are treated in the same way as those wishing to be become established in the Member State concerned and are obliged to pursue no less arduous a procedure in seeking to have their professional qualifications recognised.

Different professional titles are in some cases required for one and the same activity, where national designations do not tally i. Sometimes, a profession is regulated in some Member States only i, or even in just one Member State; in such cases, the country requiring a specific qualification for the exercise of a particular activity thus excludes the cross-border provision of the services in question by operators established in other Member States where no such qualification is required.

(vi) Imposition on service providers of conditions governing the exercise of an activity

Differences between some rules laying down the conditions governing the exercise of service activities, in conjunction, as the case may be, with the problems just outlined, can cause numerous difficulties i. Differences between the conditions imposed by the Member State in which the services are provided and those imposed by the country of establishment may also cause serious problems for operators and sometimes prove to be discriminatory.

In one Member State, all performers' agents, including those from other Member States, are subject to a rule providing for a presumption of employed status for all performers with whom they conclude contracts and stipulating that they must keep a specific record of their activities in that country.

Territorial limits applying to a licence may cause difficulties not only for establishment (see stage 1) but also for the provision of services by providers established in another Member State. i

(vii) Transport and postal services

Transport services are subject to divergent requirements in the various Member States, particularly as regards the characteristics of the vehicles used i, such as lorries and tourist coaches. Differences also exist with regard to arrangements for the provision of transport services i, particularly in the case of the transport of deceased persons. Equally, the diversity of national rail systems (different gauge widths, different systems for supplying electricity or different maximum axle loads for wagons and locomotives) account for significant delays at border crossings and therefore extra costs i; moreover, national rules on access to networks vary and make it impossible to supply certain services i.

Some Member States prohibit, for example, the hiring of heavy goods vehicles (HGVs) registered in a Member State other than the one in which the transport operator is established, which hinders the use of hired HGVs transporting goods from one Member State to another.

Air traffic suffers from the existence of several different and incompatible management systems, which is the source of congestion, extra expense and safety risks i.

For example, a flight from Rome to Brussels flies over nine different control centres.

Furthermore, the bilateral agreements between Member States and third countries may sometimes contain provisions incompatible with the Internal Market, which disadvantages Community airlines while profiting airlines form third countries operating in the EU.

Postal services are also the subject of complaints, with regard for example to the slowness of deliveries, the knock-on effects of postage-rate differences on cross-border distribution activities, and the economic consequences of partial harmonisation. This is liable to make the development of pan-European express delivery services particularly difficult.

(viii) Restrictions on the receipt of services

Service recipients, and particularly consumers, as well as providers, are the direct victims of obstacles to the distribution of services, facing difficulties which may even make it impossible to receive certain services i.

Preferential treatment for residents of a particular Member State or of a particular part of its national territory, such as rules reserving the provision of services exclusively for nationals or residents of a particular Member State (or region or locality), may prevent recipients of services from other Member States from having the same access to services as nationals or residents of the Member State in which the services are provided. Such cases were highlighted in particular with regard to tourism, leisure activities, sport, distribution, transport and mobile telephony i.

For example, numerous consumers complain that they cannot have free-to-air access to both private and public-service television channels broadcast by satellite. Programmes on these channels are encrypted solely in order to prevent their reception outside the Member State in which the broadcaster is established.

44.

5. Difficulties relating to the sale of services


The difficulties encountered at this stage are linked directly or indirectly to the transaction in question. They stem from rules or practices, differing markedly from one Member State to the other, relating to contracts, prices and payments, invoicing, accounting and VAT, but also to access to public contracts or to rules governing the reimbursement of costs to service recipients. These difficulties have a greater bearing on the sale of services than on that of products, especially as contracts play a more important role for services. This is because they determine the nature of the service concerned or because the drawing up of the contract is the service itself. Moreover, price calculation is often more complex in the case of services and may be subject to fixed or recommended prices varying from one Member State to the next.

(i) Formation and content of contracts

The formation and content of contracts can give rise to specific issues regarding services. The consultation launched by the 'Commission Communication on European contract law' i has resulted in the identification of numerous problems with the functioning of the Internal Market, resulting from the legal regimes of Member States relating to contract law i. These difficulties also affect services and especially financial services (such as the insurance sector in particular). For example, the results of the consultation confirm that the existence of different national regimes of contract law results in additional transaction costs, in particular possible expense on information and litigation which weighs particularly heavily on SMEs and consumers. Moreover, the diversity of rules governing contract content, and the uncertainties surrounding the identification of mandatory or public policy rules from which the contracting parties may not derogate, make it impossible to use standard contracts throughout the Internal Market i. These problems make themselves particularly felt in the financial services sector.

Some Member States still require operators who are established in other Member States to give prior notification of the general and specific terms and conditions of insurance policies, in order to carry out checks and prohibit the use of certain clauses.

Other specific issues may affect certain cross-border services. For example, employment agencies may be confronted with rules which are specific to each Member State regarding the duration and renewal of contracts in the posting of workers. Even in domains for which minimum harmonisation has been introduced, such as doorstep sales, problems persist.

(ii) Price setting, payments, invoicing and accounting

Price regulations applicable to a certain number of services i, whether providing for maximum prices, minimum prices or prices set or recommended by Member States or professional bodies, can result in very different calculation methods and price levels for one and the same service, depending on the Member State in which it is rendered, and are liable to cause problems in the case of cross-border service provision.

Rules and practices in relation to invoicing and payment are perceived as being particularly complex in the various Member States and cause problems in cross-border transactions i. As far as invoicing is concerned, the rules relating to the law of VAT (notably obligatory indications, electronic invoicing and retention of invoices) have been recently harmonised i but other conditions (for example indications imposed by commercial law or linguistic rules) remains governed by national law. Means of payment do not have the same legal status in all Member States, and enterprises wishing to pay by credit card may have to establish contractual relations with the local bodies responsible for the administration of payments. Bank transfer costs are always too high, which affects both service providers and recipients i.

Opening a bank account in the Member State in which a particular service is provided is often necessary in order to facilitate payments, but is difficult as it involves making a declaration of residence or of non-residence, which in turn gives rise to tax declarations and causes administrative delays and costs.

Accounting rules i are designed amongst other things to meet tax inspection needs; for this reason in particular, they differ markedly from one Member State to another. For example, accounting documents have to be itemised in accordance with classifications drawn up by each of the Member States in which an enterprise files a VAT return. An enterprise which is active in several Member States is therefore obliged to maintain parallel accounting systems while at the same time ensuring consistency in the accounting of the enterprise as a whole.

(iii) Taxation

The payment and reimbursement of VAT is one of the problems most frequently cited in relation to the cross-border provision of services. Indeed, the rule according to which services are subject to VAT in the country of establishment of the provider is accompanied by numerous exceptions which give rise to complex situations in the context of cross-border sales. This results in numerous service providers being subject to VAT obligations in Member States other than the one in which they are established.

The burden of VAT obligations i as well as the very significant differences between Member States (for example in terms of rates, obligations, procedures or forms) result in considerable difficulties. Furniture removers, for example, are obliged to deal with the competent authorities in each of the Member States in which they offer their taxable services, and ask for a VAT number i in each of these Member States and settle their affairs according to the different rules.

Where a travel agency sells hotel accommodation to other agencies in another Member State, it is subject to VAT obligations in that Member State, which is a significant source of practical difficulties.

Similar problems were also identified in relation to passenger transport, conference-organisation and business services i.

An excessively pedantic approach by tax administrations was underlined in numerous contributions as regards both the form and number of declarations i and the means of payment i.

The reimbursement of VAT is a particularly long and complex procedure in the case of cross-border transactions and is liable in some Member States to take several months or even years i.

(iv) Reimbursement, subsidy or aid to the service recipient

Authorisation for the reimbursement of medical costs incurred in another Member State is only granted by national authorities under certain conditions and this may therefore discourage persons insured under social security schemes from turning to service providers established in another Member State. Persons who decide for various reasons (waiting times, change of residence for private or professional reasons i) to travel to a Member State other than his or her country of social security affiliation in order to receive medical treatment there, will not often be reimbursed i.

A large number of patients face difficulties when they apply for the direct billing to national insurance schemes of medical costs incurred in another Member State, whether these relate to consultations with physicians, dental treatment, hospital treatment, detoxification treatment or thermal cures in another Member State.

Reimbursement of costs below the level granted in the country of social insurance affiliation for treatment in another Member State also represents an obstacle to freedom to provide and use services.

More favourable tax treatment for services received from local providers is a major, and indeed discriminatory, hindrance to the provision of services. In some Member States, for example, the costs of professional training are tax-deductible only if the courses take place in the particular country concerned. Similarly, life insurance and additional insurance policies, as well as pension fund and investment fund contracts can be offset against tax only if concluded with local insurance companies.

(v) Public contracts and concessions

The objective of most public contracts i is the performance of services, e.g. architectural services, construction work, waste management or public transport. In the context of the award and execution of public contracts and other forms of partnership, however, enterprises may face a whole series of obstacles.

Restrictive practices such as single-tendering or preferential treatment during a direct award, some approval procedures or qualification systems and negotiated procedures i, could lead to the reservation of certain contracts to enterprises established in the Member State of the purchaser.

For example, local authorities decide to outsource their domestic-refuse collection and treatment or waste-water treatment activities by contracting these services out to a third party in the private or public sector without a prior call for competition or by granting long-term concessions which are afterwards renewed.

Procedures for the award of public contracts, the complexity and the lack of transparency of certain national rules for the award of contracts below the thresholds at which Community directives would apply, and certain practices of public authorities i were identified as hindering operators from other Member States wishing to tender for public contracts.

Certain contractual clauses and conditions governing the performance of contracts are prone to making the submission of tenders by foreign operators more difficult. i.

45.

6. Difficulties relating to after-sales aspects of services


The period after the sale of a service may give rise to difficulties both in the context of relations between the client and the service provider and vis-à-vis third parties. The distinctive characteristic of services compared with goods derives from their intangible and complex nature. This gives rise, for example, to specific professional liability insurance schemes and makes the provision of proof and expert evidence in legal disputes a complex affair. Another feature of this stage is the absence of retailers or resellers who could take care of after-sales services on behalf of the original service provider.

(i) Liability and professional indemnity insurance of service providers

Professional liability insurance schemes vary markedly between Member States across a wide range of professions, such as auditors, tax advisers and architects i. Civil liability systems are often specific to certain activities and are sometimes combined with general systems, which may result in a high degree of legal complexity. Differences between Member States may relate in particular to the possibility of limiting liability or the maximum period of liability.

Service activities are often subject to specific professional liability insurance schemes laid down by legislation or governed by rules or recommendations issued by professional bodies, relating in particular to compulsory insurance, the field of activities to be insured, the minimum amount of coverage, including the basis on which it is calculated i, or the body with which the insurance must be taken out. These schemes may vary markedly between Member States.

For example, the minimum insurance coverage for auditors varies, depending on the Member State, between EUR 70,000 and EUR 4,090,385 i.

These disparities may cause difficulties in the cross-border provision of services, as Member States have an incentive either to impose their own insurance schemes on service providers from other Member States i or to require proof of equivalent insurance coverage in the country of origin, which is difficult if not impossible to provide.

Specific financial guarantee schemes are mandatory for certain service activities such as those of property registrars and estate agents. There is a very great disparity between Member States, as a particular activity may be subject in some Member States to an obligation to put up a guarantee or have a minimum amount of stock capital, whereas in the other Member States no obligation of this type exists. What is more, the amount concerned and the methods of calculation may differ markedly.

Reconciling these liability, professional-indemnity insurance and guarantee systems is a particularly complex matter, especially in the context of cross-border service provision, e.g. where coverage of a specific risk is provided in one Member State under a financial guarantee scheme and in another under a mandatory professional-indemnity insurance scheme.

(ii) Debt collection

Difficulties encountered in the context of debt collection i are a problem which was the subject of complaints in numerous contributions and which is exacerbated by excessive delays in cross-border payments i: a number of enterprises use the payment delay as a kind of credit facility, as the interest charged on late payments is low and redress procedures are slow. Also, some chambers of craft trades may offer to intervene in the event of late payment, but this avenue is not open to service providers established in other Member States. One particular difficulty relates to the use of debt collection agencies and the protection of creditors' rights in the event of bankruptcy in other Member States.
[...]. Surveys show that over 20% of European businesses would export more if they could obtain shorter payment periods from their foreign customers. SMEs are particularly affected by late payments", section 3.7.

An enterprise cannot use its debt collection agency if the latter is not established in other Member States: approval formalities for debt collection agencies differ between Member States and sometimes even from one region to the next, the provision of legal assistance may be the preserve of the legal professions and the costs of debt collection are not always for the account of the debtor.

(iii) Provision of after-sales services

The organisation of a cross-border after-sales service could be more difficult as it is liable to come up against specific technical problems i, or legal ones, particularly as it often requires personal intervention on the part of the service provider and/or the posting of his workers. In this case, after-sales services are hampered by problems which mean that the service provider or his staff have to travel to another Member State. For example, a boiler fitter who has installed a boiler in another Member State and wishes to carry out a repair on it faces the posting difficulties already described above i.

Disparities between rules on guarantees are liable to constitute another barrier to the cross-border provision of certain services. Some contributions highlighted difficulties in the construction sector stemming from the application of a mandatory guarantee system in the Member State in which services were provided.

(iv) Legal redress

Legal uncertainty, the costs and slowness of procedures, and the difficulty of using services or experts from other Member States in the context of cross-border legal proceedings were highlighted. It emerged from contributions that enterprises which were a party to legal proceedings outside their Member State of origin felt they were placed at a disadvantage compared with the opposing party, whose case was viewed more favourably by the national courts.

46.

B. Non-legal barriers


47.

1. Lack of information


A strong theme of the responses to the consultation was the difficulty in accessing information about the regulatory framework in other Member States. This was a concern for both service providers and consumers and was considered a major disincentive to cross-border activities. A second issue that became apparent from the consultation is the low level of awareness of the opportunities of the Internal Market and the rights of citizens and business under the principles of the freedom of establishment and the free provision of services set out in the EC Treaty.

(i) Lack of regulatory information

Lack of information about applicable national rules and their interpretation takes various forms and occurs at all stages of the business process. Numerous examples of such problems were given in the contributions to the consultation including lack of information on necessary authorisations (including planning requirements), qualifications requirements and other conditions attached to them, employment law, technical standards for the equipment and material to be used by the service provider, rules on commercial communications, selling over the internet, taxation and contract law. Particular problems occur in areas where there are questions of interpretation of national laws resulting from unclear, inconsistent or unpredictable national jurisprudence. i

Lack of knowledge of competent authorities, procedures and formalities hinders the cross-border provision of services. Lack of information and transparency are a particular problem in relation to identifying the appropriate competent authorities in another Member State, obtaining all the necessary forms and understanding the procedures. Some respondents complained that on occasion public authorities provided contradictory information and it was suggested that there was little co-operation between government bodies in the various Member States. The lack of availability of necessary forms on-line was also emphasised.

(ii) Lack of awareness of the principles of the Internal Market

The replies to the consultation suggest that business and consumers are often unaware of their rights in relation to the provision and use of services and that more information is needed on the principles of the free provision of services and the freedom of establishment as well as on the Internal Market in general. This situation, at least for SMEs, is explained by a lack of available resource to monitor and interpret legal information. At the most basic level, this lack of awareness restricts the ambition of individuals and companies, especially SMEs, to take advantage of the opportunities which the Internal Market offers and 'to think European'.

The right to challenge non-discriminatory measures seems to be largely unknown and many service providers still believe that the Internal Market only prohibits discrimination (or applies so-called 'national treatment'). They seem to be unaware of the jurisprudence of the Court of Justice, according to which free movement principles preclude not only discriminatory measures but also non-discriminatory measures which are liable to prohibit, impede or otherwise render less advantageous cross-border activities. Replies to the consultation indicated that while there were some areas where companies experienced inconvenience or complications, domestic and foreign companies were subject to the same rules. They therefore considered these as business-related conditions which applied in a given country and which had to be accepted.

The right to question proportionality is also not well understood. Even where respondents identified barriers, they rarely questioned whether the relevant measure was proportionate. This suggests lack of awareness that, even where a measure is motivated by the protection of an overriding objective of general interest (for instance public security), it must not duplicate requirements already fulfilled in the Member State of origin, and must be proportionate, i.e. appropriate to achieve the relevant objective, and not go beyond what is strictly required to achieve it.

The right to receive services seems to be virtually unknown as a principle and the recipients of services, in particular consumers (for instance, tourists or patients), are often unaware that the Treaty also gives them the right to receive services without restriction. This includes the right to go to another Member State and use services under the same conditions as nationals. The need for information for consumers was also brought up in the context of the consultation. It was suggested that consumers need to be informed about services in other Member States in terms of quality, conditions and prices to enable them to take an informed view of services on offer and their rights. This would increase their confidence to buy services across borders i.
'Rapport franco-anglais', op cit.

48.

2. Cultural/language barriers


The question of cultural barriers, particularly concerning language, arose frequently during the consultation. Numerous businesses, and particularly SMEs, see these as a major constraint on selling into different markets and some consider this to affect service providers much more heavily than manufacturers of goods. However, it is essential to distinguish between those barriers which are often described as cultural, but which in fact directly or indirectly result from different regulatory environments, and others which arise as a result of customer preference and market conditions.

(i) Barriers related to different regulatory environments

Language barriers in proceedings with authorities are sometimes described as cultural although they also arise from legal and administrative requirements. A number of replies to the consultation highlighted the difficulties arising from the use of local language with the authorities and cited as a barrier the necessity to provide translations of documents, often to be carried out by an official translator and certified by a notary. It was perceived as especially frustrating when this procedure was instituted in order to carry out checks which had already been made in one or more of the other Member States.

Cultural barriers related to different administrative practices were highlighted in a number of contributions. SMEs consider it particularly difficult to understand how to deal with national authorities in other Member States and are often in the position of beginning an authorisation process without knowing how and when it will end or how much it will cost.

(ii) Barriers related to different market conditions

Commercial and consumer habits including language cause difficulties which arise from the need to know the language, values and habits of a specific country or region. Although this type of difficulty was frequently mentioned in the contributions, respondents to the consultation seemed to accept that these were part of the reality of doing business, and that they would have to take into account such factors wherever they carried out their activities, even within their home market. i However, the costs involved in overcoming language barriers can make cross-border services less attractive.

Companies still think national and often do not consider growth across national borders, even if their services are not specifically designed for the domestic market and could potentially be exported. This applies especially to SMEs. A lack of trust and a natural resistance to deal with habits in other Member States was highlighted in some of the contributions as a cultural barrier. As some companies put it, there is still a lack of 'awareness of Europeanness' or of 'thinking European'.

49.

II. The common features of the legal barriers


Despite their apparent diversity, the difficulties affecting the operation of the internal market have many points in common.

50.

A. The changing nature of the barriers


The inventory of difficulties shows that the abolition of the discriminatory features referred to in the 1962 general programmes and the elimination of the physical, technical and fiscal barriers referred to in the White Paper of 1985 have, in the field of services, been partly offset by the erection of new legal barriers or by the increasing impact of those which were already there but whose effects became evident only gradually as trade between the Member States developed.

This changing nature of the barriers appears in terms of the content of the regulations, which has to adapt constantly to differentiation and innovation in service activities, as explained in greater detail in the third part of the report.

However, the changes in the legal barriers are also apparent in terms of the form which they may assume. One common feature of many of the difficulties reported is that they derive not from national legislation but from other forms of intervention and regulation whose impact on the internal market is becoming more and more evident.

51.

1. Administrative practice


A study of a large number of the difficulties reported shows that the restrictions are no longer to be found in the body of the legal texts, but rather in the behaviour of certain administrations or in the way in which the administrative procedures are perceived or implemented, including through circulars or practical guides. Nevertheless, two types of problem are worthy of particular emphasis.

The authorities' discretionary power of appreciation under the authorisation system is behind many difficulties, as it makes the decision finally reached by the authority concerned unpredictable and may make it possible, under a veneer of neutrality, to take decisions which place providers from other Member States at a disadvantage.

For example:

- Certain regulations on distributive services lay down that authorisation for establishment is granted on the basis of general socio-economic criteria such as the needs of the existing businesses. Moreover, the authorisation procedure may involve bodies made up of competing operators already present in the area concerned. Such criteria, which are to be found in other sectors such as hotels and employment agencies, give the competent authorities a wide margin of appreciation and have the effect of placing the established operators at an advantage compared with newcomers, albeit in a way which is less visible than a provision which is openly discriminatory;

- Discriminatory legislation governing services organising fairs and exhibitions was replaced, following infringement proceedings by the Commission, by an authorisation system based on a set of general criteria and regional implementing measures which, in practice, leave it open to the authorities concerned to take decisions which discriminate against other Community operators.

The excessive formalism, length, procedural costs and lack of transparency were emphasised in a large number of contributions. The accumulation of formalities and procedures, combined with a lack of transparency and sometimes over-zealous implementation, could have a particularly dissuasive effect on service providers from other Member States, since they are not familiar with the administrative culture of the other countries.

For example:

- administrations sometimes demand certificates which do not exist in the provider's country of origin, or else certified translations by an authorised translator in the country where the service is to be provided; or else the head of a building undertaking is required to go personally to the Chamber of Trades of the country of provision to obtain a certificate. In practice, all these requirements are clearly easier to fulfil for a national provider than for one from another Member State;

- in the field of customs, contributions have shown that the benefits of abolishing customs duties appear to have been somewhat mitigated by the complexity of certain remaining customs formalities affecting transport services i.

As an indication of how widespread this type of problem is, the Court has had to pronounce several times in recent years on these new practices, as well as on the discretionary interpretation i and the extremely cumbersome and costly nature of certain authorisation procedures i. In addition, moves to simplify administrative procedures are under way at national and Community level, particularly subsequent to the report by the Mandelkern Group i.

52.

2. Regionalisation of the barriers


The inventory of difficulties shows that the legal barriers tend to appear more frequently at the level of local or regional rules and practices. They may involve new barriers introduced under the decentralisation, federalisation or regionalisation measures taken in several Member States over the last few decades, or else restrictions which had already existed for a long time but whose impact became evident as and when the other barriers at national level (discriminatory measures, physical, technical and fiscal barriers) were abolished.

Local or regional authorities play an important role in regulating service activities either through legislative power of their own or through local implementation of national rules. The interest of the regions and their active role in developing the service economy is confirmed by the clear support given by the Committee of the Regions to the 'Internal Market Strategy for Services', which emphasises in particular the need to allow regional SMEs to operate in the internal market using the new technologies to the maximum i. The inventory of difficulties showed, however, that in some cases the requirements of the operation of the internal market are not sufficiently well-known at regional level, and this can lead to difficulties for providers from other Member States. Moreover, when a provider from another Member State wishes to develop his activities not just in a given region but throughout the national territory, the multiplication of procedures, specific provisions and contacts with the regional or local authorities could make such an operation more complex and costly than for national operators, who can adapt to them more easily.

For example:

- in one Member State, service activities such as debt collection are subject to an authorisation system for each province, which means that coverage of the entire national territory requires more than one hundred authorisations from different authorities;

- in some Member States, the lists of tourist sites which can be visited only if accompanied by a locally approved guide are drawn up by the local authorities according to differing criteria. In the absence of a list covering all the national territory, tourist guides and travel agencies in other Member States are confronted with a multitude of local lists which may cover specific museums or archaeological sites as well as entire cities or tourist zones;

- establishing distributive undertakings, hotels and restaurants is particularly affected by this regionalisation of the legal barriers, as in several Member States the authorisation criteria (including for town planning) are laid down and/or applied at local or regional level;

- in one Member State, many municipalities have introduced a tax on satellite aerials, which has had the effect of penalising consumers in particular as regards the reception of television channels from other Member States, and in particular by residents of foreign origin.

This trend towards the regionalisation of restrictions is illustrated by a recent judgment of the Court i in which it examined the compatibility with the principles of the free movement of services and the freedom of establishment of 14 different regional regulations in one Member State originating in six regions and dating mostly from the 1980s.

53.

3. Implementation of Community instruments


Because of the gradual development of secondary Community law over the last twenty years, a number of difficulties reported are directly related to the acquis communautaire.

The problems of unsatisfactory application of the directives lie behind a number of the difficulties reported. These problems may derive, in particular, from the presence in certain directives of provisions giving too much leeway to the Member States, or laying down derogations or optional requirements, or else minimum harmonisation clauses which allow stricter national rules to be adopted i. The Commission has already had occasion to note the negative effects of this latter type of clause i, and the Court has been obliged to limit its abuse by certain Member States i .


The following were cited as examples in contributions:

- the directives on insurance, and in particular the widely differing application of the possibility given to the host Member States to take measures to protect the general good i;

- the directives on tax issues, and in particular the 6th Directive on VAT i;

- the directive on the transport of waste, for which the registration and authorisation system has been applied differently, making cross-border waste transport activities particularly complex in practice between four adjoining countries i.

Issues relating to the implementation of the principle of the free movement of services by means of instruments of secondary law were also sometimes reported i. It should be noted that, to tackle this kind of situation, the Court has in recent years, and notably in the field of health services, had to refer to the principle of the freedom to provide services laid down in the Treaty, rather than to an instrument of secondary law i.

For instance, interpretation of the conditions under which Member States apply Regulation 1408/71 i caused problems for recipients of health services wishing to obtain reimbursement of treatment provided in another Member State i.

In the area of contract law, problems of coherence and of the uniform application of secondary Community law were emphasised by the Commission i and by those parties consulted i. Problems of coherence concern, for example, the different treatment of similar situations in several Community acts. The absence of coherence in the definitions used in secondary Community acts concerning such terms as 'damages' or 'contract', may create problems for the uniform application of such acts in Member States. Such problems may also result from transposition by Member States who make reference to different pre-existing rules of a general nature which form part of their legal systems.

Certain directives contain, for example, different definitions of the term 'damages'; other directives use this term without defining it i.

54.

4. Collective non-government rules


A number of the difficulties reported come not from regulations issued by the public authorities, but from the disparity between standards adopted by non-public bodies in a Member State, such as professional associations, sports federations, the social partners drawing up collective agreements, or interested parties or groups drawing up codes of conduct or collective rules i.

Service activities are particularly affected by this kind of disparity, since the regulated professions are traditionally regulated by professional bodies at national level. The use of codes of conduct is tending to spread to other fields such as information society services, and the current debates on new forms of governance may lead to more frequent use of such codes, as well as co-regulation and other ways of putting economic regulation on a contractual basis.

- For example, codes of conduct adopted by certain professional bodies which prescribe quantitative limits on access to the profession or impose limitations on the types of services which can be offered, may cause difficulties for professionals of other Member States wishing to establish in the country in question or to offer their services there.

55.

5. The conduct of operators


This concerns the practices of individual operators which have the effect of making their activities or selling prices and conditions territorial. In particular, it may involve the refusal to sell to customers from other Member States for the sole reason that they are not resident in the country of the operator. Such practices penalise service users who wish to buy from providers in other Member States, and in particular consumers. Such behaviour can only be the result of legal barriers which make certain cross-border activities extremely risky. In certain cases, however, where such risks are fewer, it is more a reflection of a commercial resolve to break the internal market down into several national markets i.

One Member State, for instance, made a specific contribution stressing that it was impossible for its citizens to obtain access to encrypted television channels available in other Member States, because the channel operators refuse to sell or rent decoders to persons not resident in the countries where those channels are on offer.

56.

B. The horizontal nature of the barriers


An analysis of the wide range of legal barriers reported shows that many of them are common to a large number of widely varying sectors of activity. Three types of horizontal problems can be distinguished.

57.

1. Application of a single system to establishment and the provision of services


A large number of services encounter the same problem: the Member State of destination treats the service provider as if he were established on its territory, and hence subjects him fully to its legal system.

For example:

a patent agent who occasionally provides a service in another Member State is subject to an obligation to obtain authorisation from the latter, to meet the professional qualifications required there, and to enrol in a specific register; or a landscaping architect who is temporarily providing a service in another Member State is subject to the obligation to be a member of the national association and to comply with all the professional rules of that country.

The inventory of difficulties, in particular those relating to the distributive stage of services (stage 4 in the economic chain), shows that this kind of problem may assume various forms such as the following:

- an obligation to become established in the country in which the service is provided, whereby such establishment involves the operator becoming subject to all the rules of that country;

- a system of authorisation (or registration) by the authority in the country in which the service is provided, such authorisation being subject to compliance with all or some of the rules of that country;

- systematic subjection of operators to the rules of the country in which the service is provided (regardless of the existence of an establishment requirement or an authorisation system).

The objective is the same in all cases: to put the situation of a provider established in another Member State on the same footing as that of an operator in the Member State in question, so that he can be systematically made subject to the latter's regulations. Contrary to the case law of the Court i, this approach amounts to reducing the principle of the free movement of services to a simple obligation not to discriminate.

58.

2. Legal uncertainty surrounding freedom of establishment and the free provision of services


A wide range of cross-border services are affected by a high degree of legal uncertainty as to the their legality, since this will depend on a case-by-case assessment by the national authorities of the country in which the operator wishes to exercise his activity. This legal uncertainty becomes evident in two ways:

- national regulations are often unclear or ambiguous as to whether they might be applicable to providers established in another Member State. In many cases, the rules imposing obligations on service providers do not explicitly circumscribe their territorial scope, and in particular whether they apply only to providers established on the territory of the Member State in question. Such a situation leaves a margin of interpretation to the national authorities and will cause the provider to seek specific legal assistance or clarifications from the national authorities, or even their 'green light';

For instance, a significant number of the draft national laws on information society services notified i to the Commission in 2001 revealed this type of problem.

- Certain national rules subject the provision of services or freedom of establishment to systematic compliance with a criterion or test to be assessed case by case by the authorities, with the outcome being difficult to predict.

In one Member State, for instance, the use of an analytical laboratory in another Member State is possible only if that type of analysis 'cannot be carried out' on its territory. It may involve criteria such as 'the impact on existing businesses' (distributive services), 'the need for placement' (agency services for the placing of artists), 'the general good' (financial services), or 'aptitude' or 'equivalence' (regulated professions).

In practice, the effect of this legal uncertainty is to reverse the roles, since an operator who wishes to provide his services in another Member State finds himself in the paradoxical situation of having to invoke and justify the principles of the free movement of services and freedom of establishment, whereas normally, in line with the case law of the Court, it would in fact be for the national authority to justify any exceptions to those principles, whereby such exceptions may not at any event be applied in a general and systematic fashion i.

59.

3. Application of the same type of requirements in different fields


An analysis of the inventory reveals that certain types of restriction recur in a large number of sectors or service activities (even though the details may vary), and in particular the following: systems of authorisation, declaration, registration and inscription with a professional body or a chamber of trades, quantitative limits (numerus clausus, quotas, surface areas, etc.), territorial limits to the provision of services, rules applicable to the posting of workers in the framework of the provision of services in another Member State, the rules governing multidisciplinary activities, bans or limits to commercial communications, rules governing the fixing of prices, rules on professional liability, professional insurance and financial sureties or guarantees; certain aspects of the rules on contracts; the collection of debts; the rules on taxation.

60.

C. The common origin of barriers


Despite the apparent variety of the legal barriers, the reasons behind them are very often the same and can be explained by three factors.

61.

1. Lack of mutual trust between Member States


Many of the difficulties reported can be attributed primarily to a lack of trust of certain authorities in the quality of the legal systems of the other Member States.

Systematic application of the rules of the country in which the service is provided, the simple evocation of 'general good' objectives to justify obstacles, without verifying the equivalence of the protection offered in the country of origin or the proportionality of the restriction, the subjection of operators from the EU to the same system as that applied to 'foreign' undertakings from third countries, the presumption of circumvention of national rules by any cross-border service, more frequent checks on providers from other Member States - all these reveal a degree of automatic suspicion of services from other Member States and amount to considering that the protection of the general good and the regulation of service activities are not objectives shared by all the Member States of the European Union.

This lack of mutual trust may derive from ignorance of the implications of the principles of freedom of establishment and the free provision of services, but also from a lack of transparency and administrative co-operation between the Member States or, in certain fields, from a lack of harmonisation of the national rules, reflected in an excessive disparity between the levels of protection of the general good guaranteed by the national systems.

62.

2. Resistance to modernisation of the national legal frameworks


A number of legal barriers can be attributed to the fact that the Member States have not really taken into account the requirements of the internal market in services. The fundamental principles of the Treaty, the importance attached to them by the Court, and the follow-up to the ambitious programmes of 1962 and 1985, have not always resulted in the adjustment of national legislation which might have been expected. On the contrary, as explained above, when the legal systems evolve it may be in the direction of confirming legal barriers or establishing new ones, rather than of abolishing them.

A survey i reveals that 42% of heads of undertakings active in the field of services consider that the regulations applicable to them are not in line with the facts on the market, or are slightly outdated, or even totally outdated i, with the rate being higher for the services sector than for all sectors of activity together (36.6%) i.

There may be several explanations for this reluctance to modernise:

- The weak monitoring of the judgments of the Court by the national authorities does not always allow them to identify the need to modify their national legislation. The existing mechanisms in the national administrations appear to concentrate on cases affecting their own country or, upstream, on the need to draw up written observations on a case concerning another Member State. Downstream, however, it seems that few Member States engage in any real active and systematic monitoring of all the judgments concerning other Member States in order to assess the needs in terms of adjusting their own legislation i. This explains why many of the problems reported have in fact already been the subject of judgments of the Court of Justice condemning similar measures or practices;

- Treatment on a case-by-case basis and the relative effectiveness of penalties for infringements of the law of the internal market help to give some national authorities the impression that an adjustment of their regulations is not indispensable as long as they are not directly and explicitly questioned by the Commission or the Court.

63.

3. Protection of national economic interests


Despite the established case law of the Court, according to which "measures constituting a restriction of the free provision of services cannot be justified by objectives of an economic nature such as the protection of national undertakings i", it has to be pointed out that, notably with regard to certain preparatory Parliamentary work, a number of the difficulties reported show that the defence of purely national interests still remains fairly firmly anchored in certain Member States.

64.

III. The impact of the barriers


A. The knock-on effects on the entire economy and on European competitiveness

Barriers will affect all services directly or indirectly. Part 1 of this report has shown that Internal Market barriers impact on each of the six stages of a service providers' business process, which is also referred to as the 'economic chain'. Every service provider considering expansion into another Member State is likely to face one or several obstacles and will also be affected by barriers that his service suppliers encounter. This is because, in order to create, promote and distribute his service, the provider relies on a multitude of other services. This interdependence of services means that a comprehensive approach is necessary to evaluate the overall impact of barriers. This part of the report will examine the role of services in the economy, the interdependence of services, the potential for cross-border growth in services if barriers were removed and make a first evaluation of the impact on the economy as a whole that will be further developed during the course of the second phase of the strategy. The Commission will carry out work in 2002-2003 to develop the economic impact analysis with the aid of economic experts.

65.

1. The key role of services in the economy


Services play a key role in the EU economy, accounting for almost 70% of jobs i and GDP in most EU countries i. The growth of services has exceeded overall economic performance for decades, and so they account for an increasing share of the EU economy. It is clear that the major part of the potential for future job creation will come from the service sector as job creation in services is exceeding overall job growth i.

However, notwithstanding that manufacturing industry statistics are probably overestimated, due to the integration of services in manufacturing, the relative difficulty in classifying services, and practical difficulties in identifying basic flows in services, the importance of services in transactions does not bear relation to their importance in the economy. In 1999 services still only represented 21.6% of all commercial transactions in the EU, of which 11.9% was within the EU 15. Moreover, the statistical trend is towards a decrease in this share of services (they constituted 22.8% in 1992 i). This gap can be partially explained by the existence of a functioning Internal Market in the field of goods but not in that of services. In the area of services, market participants have a tendency to rely on direct investment overseas and mergers, rather than cross-border trade; more than 40% of foreign direct investment derives from the area of services, of which 20.59% is intra-community, as opposed to 44% and 27.6% respectively for goods, with 15% unattributed i.

The potential for growth in services transactions is consequently significant. Even if the contribution of services to growth in productivity remains difficult to measure, it is probable that greater competition between operators from different Member States would lead to an increase in productivity.

Services are to be found in all areas of the modern economy, including in what might be regarded as 'traditional' manufacturing sectors. For example, some car manufacturers now offer financial, leasing and rental services, consulting, training and fleet management services, or road assistance and recovery services i; and electronic hardware producers are increasingly offering custom-made software services i for their products i. At the production stage itself , the automobile industry uses IT, design services or quality control services, for instance. Industry is thus very dependent on services and their quality. Many of these services are hidden in the official statistics for manufacturing companies i. This 'bundling' of goods and services and efficient integration of service inputs allows business to provide differentiated products more adapted to customers' needs i. This in turn improves the productivity, competitiveness, sales and, ultimately, the profitability of firms. i

A recently published U.S. study illustrates the increasing importance of services for the value-added of major corporations:

"What company is the world's largest service business- Disney- Citibank- American Express- Based on several measures the answer is actually IBM or General Electric - two corporations far better known for their products than their services." i

For example, manufacturers of quality goods have always attached great importance to the issue of client service. This is particularly true in the case of sophisticated engineering products, where extensive consultation is often needed at the design stage, in order to meet the exact customer requirements. Customer service continues in the form of training, maintenance, 'teleservice' via the internet, hotline support, and may extend to financing and 'build and operate' models for large infrastructure projects.

Surveys undertaken in Germany in the engineering sector show that revenue derived from service functions is growing. About 10% of engineering companies derive more than 50% of their income from service activities. In the past these services were usually included in the final price of the product, but there is an increasing tendency to charge for them separately.

Leading edge goods manufacturers frequently derive their competitive advantage from buying in advanced information technology services. Sometimes the know-how for developing products with embedded intelligence is available in-house, but frequently it is provided by specialist providers of computer related and communications services. Examples can be found in the automotive sector, where engine management systems, automatic braking systems and navigation systems are increasingly common. Other traditional engineering products, like cranes and machine tools, are also frequently equipped with systems for remote monitoring and diagnostics, in order to provide maximum availability, and reduce the cost of maintenance.

At the same time, manufacturers have been outsourcing the service functions which they do not regard as part of their core activities to service providers who can provide them more efficiently. There is a close inter-dependency between goods manufacturers and the companies that supply services to them. This has not only had consequences for the structure of the industrial sectors, but has also changed the way in which manufacturing companies organise themselves internally.

The extent to which service functions are provided by manufacturing companies is often obscured by published statistics. Even though their primary business is manufacturing, several leading companies in Europe employ tens of thousands of people in their services divisions.

Demand-based factors contribute to the growing role of services in EU economy. i There is increasing demand: for specialist business services due to outsourcing; for services combined with goods; for knowledge-based and leisure-related services; and for a variety of services as a consequence of demographic changes i such as health and personal support services i. This has resulted in an ever growing number of different services ranging from more traditional service sectors such as transport, retail distribution, telecommunications, tourism, health and financial services to more recently developed services such as business services in the areas of environmental/waste management, energy conservation, management consulting, data processing and technical analysis and testing, to name but a few.

66.

2. The interdependence of services


Services are intricately intertwined since they are used often in combination in each stage of the economic chain of a service provider's business activity. For example, a retailer provides services to manufacturers and a bundle of services to the final consumer including in-store catering and after-sales services. The retailer relies in turn on numerous other services at each stage of the business process ranging from establishment, via the use of inputs, promotion, distribution and sales to the after-sales stage. This is illustrated below.


67.

Economic chain for a retailing service


>TABLE POSITION>

Barriers to one service will trigger knock-on effects on other services because of this interdependence. For example, as has been highlighted in the consultation, a retailer established in one Member State and wanting to establish in a number of other Member States would normally wish to use in those other countries the services of the real estate agents, shop designers, architects, engineers, construction companies, banking and insurance companies with whom he works in his Member State of origin. This would enable him to gain from the long-standing co-operation with his existing service suppliers as well as to exploit efficiency gains and economies of scale. However, there are numerous barriers to the provision of these services in other Member States, which will in turn make the establishment of the retailer more costly and onerous i.

Barriers will multiply throughout the economic chain. To take the same example of a retailer, he may discover that he cannot use as an input the temporary employment agency he used to work with, his promotions can no longer be provided for by his usual sales promotion agency, his road haulage company cannot provide him distribution services and his accountant cannot design and verify his sales activities. All these services either cannot be offered across borders easily (or at all) because of problems at one or several stages of their own economic chains i. As a result the retailer will at each stage of his economic chain be obliged to use different services in other Member States and will suffer significant efficiency losses as well as higher costs.

Barriers to services in the Internal Market require a horizontal impact assessment in order to take into account all the knock-on effects which they produce on a multitude of activities, in line with the Commission Communication on impact analysis i which foresees an integrated method of analysis of economic, environmental and social consequences. The latter includes, amongst other things, the impact on public health and safety and consumer rights i. As regards economic consequences, an analysis which only deal with effects on one particular activity or a given sector would be one-sided and misleading. It is necessary to use an evaluation methodology which includes not only the impact of a difficulty listed in the economic chain in relation to a particular service up to the final consumer, but also includes the impact of that problem on the economic chain of other linked activities. Such a dynamic and qualitative evaluation will be undertaken by the Commission services, with the assistance of specialist economists, during the second phase of the Internal Market Strategy for Services i.

68.

3. The demand for cross-border services


Demand for cross-border services is steadily increasing i. Demand for services is not limited to national markets. However, despite the predominant role of services in the economy, the absolute level of cross-border service provision is less than trade in goods. Since, over the past decade, real (i.e. adjusted for inflation) turnover growth of European enterprises has been export-led i, this suggests that there is considerable potential for further economic growth driven by exports of services.

Globalisation and the linkage between service firms and their multinational clients is one well-documented reason for such growing demand in the field of business services. Multi-national service providers, as well as manufacturers which have increased their international operations, have encouraged the service providers they use to support these operations either by export or secondary establishment. i

Specialisation and differentiation in business services that may be scarce in certain Member States is also contributing to cross-border demand. The increasing need to look beyond national markets to recruit specialist and skilled labour, in particular in hi-tech and knowledge-based services, is well documented i.

New information and communications technologies will further enhance the trend towards internationalisation of services. New technologies allow knowledge-based services to be provided at a distance and facilitate the import and export of services without the need for foreign direct investment. i

Increased mobility and the higher disposable income of consumers combined with more information, thanks to new information technologies, have all resulted in increasing cross-border demand for a range of consumer services including tourism, health and leisure services.

The resulting potential for cross-border services cannot, however, be fully realised because of Internal Market barriers i and resulting costs and their chain effects throughout the economy.

The liberalisation of electricity and gas markets is likely to result in an increase in cross-border demand, not only in relation to energy, but also as regards ancillary services, such as lighting, heating, cooling and energy-efficient power generating systems. These services will be closely linked to the actual delivery of gas and electricity and thus provide a further example of the complex interaction between services. However, this potential will not be capable of full exploitation unless barriers to the provision of the whole range of services are removed.

69.

4. The costs of barriers to services


Barriers result in ex-ante compliance costs on cross-border service use and provision. The barriers identified in Part I of this report give rise to a series of compliance costs. A company seeking to enter a market, either through establishment or via cross-border service provision, will have to rely on complex legal assistance to examine whether it can roll out its operations into the new market or whether and how parts of its business model will have to be altered.

Ex-ante compliance costs multiply throughout the economic chain. The examples in the field of retailing below show that ex-ante compliance costs are considerable even when they concern only one or two stages of a service provider's economic chain. However, since barriers normally affect each of the stages of the business activity, the overall level of ex-ante compliance costs is much higher.

Examples of ex-ante compliance costs i

A major fixed-store retailer had to allocate a senior manager full time for 8 months (costing EUR200,000) to research necessary adjustments to the selling strategy (stage 5 of the economic chain) of the group to comply with legislation in another Member State, whose market it wished to enter.

Prior to the adoption and transposition of the e-commerce directive a mail-order company, considering marketing and selling via a web-site, was charged EUR25,000 by a law-firm for advice on how to comply with the different rules throughout the EU relating to advertising, including product specific rules (stage 3) and contracting (stage 5).

A retail bank paid a law firm EUR19,500 to assess how it would need to alter its advertising (stage 3) of a particular investment service in two other Member States.

A cosmetics distance-selling company had to place one of their full-time legal staff for six months in another Member State to assess how the company's retailing model would need to be modified to comply with that Member State's rules. The company finally decided not to enter the market given the radical alteration to their business model that would have been required.

Ex-ante compliance costs are not linked to the size of the enterprise: examining national legal requirements and administrative practices and assessing the possibility of offering or using a service normally requires almost the same up-front investment in legal advice whether the company is large or small i. Moreover, ex-ante compliance costs are sunk costs which have to be paid before a company can even decide whether or not to enter another Member State's market.

Small firms will find ex-ante compliance costs prohibitive yet micro- or small enterprises play a key role in the service sectors i. Average firm sizes in the European retail sector suggest that ex-ante compliance costs are disproportionately high compared to turnover and would, in all likelihood, dissuade an average sized European retailer from even considering an Internal Market strategy.

Average firm size in the retail sector (EUR 13, 1998) i

average number of employees: 3.2

70.

average annual turnover: EUR582,207


In 1998, for those Member States providing data, around 90% of retailing firms employed fewer than five people. This size class covered 73% of retail businesses in Ireland (the lowest percentage) and as many as 94% of companies in Italy.

Organisational compliance costs are an additional burden over and above the ex-ante compliance costs, that arises when a company is obliged to change its optimal strategy in each stage of its economic chain. There are both static costs in each stage of the economic chain and dynamic costs which result from the knock-on effects throughout the economic chain as the company redesigns a new business model for each market it enters. Organisational compliance costs are very broad ranging and can be considerable as the following examples suggest.

71.

Examples of organisational compliance costs


A major fixed-store retailer had an in-house architectural team. However, in order to get approval for this team's store design plans in certain Member States, the company had to hire nationally registered architects, leading to considerable extra costs (stage 1 of the economic chain).

A clothes retailer explained that, unlike its home Member State where sales could be organised according to fashion seasons i, regulations limiting sales to twice a year required a major change in their operations. The store's promotional campaigns had to be totally readjusted (stage 3). Moreover, this also had further organisational effects on other stages of the firm's economic chain, such as changes to purchasing contracts with suppliers - as fewer seasonal lines could be offered in such Member States (stage 2) - inventory management (stage 2) and pricing strategy (stage 5).

A retailer that was used to Sunday opening in its home Member State was not allowed to do this in another Member State. Since 60% of its sales were achieved at weekends this meant that sales were concentrated on Saturdays. This required the building of much larger stores, bigger aisles, reduced stock on display and larger car parks (stages 1 and 4). These higher costs had to be borne even though lower levels of sales were achieved compared with the home country.

72.

5. The lost growth and performance of the European economy


Compliance costs have implications for the entire economy. Examining compliance costs for individual service providers gives only a partial assessment of the impact of barriers identified in part 1, since they do not take account of the consequences of these costs for the wider economy over time i. In particular, due account has to be taken of the following:

Reduced investment in research and development, innovation and training will result as available resources are diverted to meet the ex-ante and organisational compliance costs and as there will be lower levels of revenue growth. Since service growth depends on innovation, further specialisation and training of specialised staff it follows that the service provider's competitiveness and performance will suffer i.

Reduced investment in information gathering, differentiation and customisation of services for clients will also result as a consequence of this misallocation of resources within service companies. Given that services are heavily knowledge-intensive and that they require detailed information to be tailored to their clients' specific needs, such reductions will be particularly harmful to the performance of service firms as well as their clients.

Reduced economies of scale and scope result from the fact that a successful business model cannot be exported because several or all of the stages of the business process need to be changed to comply with differing legal and administrative requirements in other Member States. Although services are differentiated or even personalised, certain upstream or back-office tasks can be standardised or can benefit from technology if sufficient demand levels are achieved.

Over-reliance on merger and acquisition strategies will increase costs of expansion. Organisational compliance costs may persuade service providers to rely more on cross-border growth by acquisition than by green-field investment i. Growth by acquisition is generally considered to be more rapid to execute but also more costly to organise in that two firms with two business models have to be combined and managed.

Anti-competitive defensive strategies also arise from regulatory fragmentation. Given the constraints on cross-border green-field investment and the risk of becoming acquisition targets for larger suppliers, service firms seek to grow through acquisition or agreements at national level to defend their markets i rather than grow through innovation or differentiation. i

High levels of inflation of service prices result from this unrealised potential for cross-border growth in services in the Internal Market and the lack of cross-border competition. Consumers in particular suffer from the negative impact of fragmented markets, since they are denied the benefits of price competition i. Given the interdependence of services, it is evident that this price inflation will further erode the competitiveness of companies using services. That will in turn have a negative impact on growth and employment in the European economy as a whole.

73.

B. The principal victims


74.

1. Small and medium-sized companies


SMEs' may find the cost of cross-border expansion to be prohibitive. SMEs are predominant in the services industry, accounting for a far greater proportion of total output than in manufacturing i. However, they are more severely affected by compliance costs than larger companies. In addition, for those that nevertheless do enter new markets, the significant organisational compliance costs that result undermine the success of their cross-border strategies or put them at a clear competitive disadvantage compared with incumbents. i And since their scale of operations does not justify the recruitment of specialist compliance staff, their skills and capacity to work with different sets of regulations are very limited. i

SMEs are exposed to mergers and acquisitions. Medium-sized firms constrained from expanding abroad but often with significant local knowledge, experience and innovation potential, will be attractive targets for larger companies. The latter may be non-domestic entrants seeking to enter by acquisition or incumbents that wish to undertake pre-emptive acquisitions to dissuade entry by non-domestic rivals i.
[France, Italy and Germany] has always been made of a number of small and medium-sized family-run or independent businesses, or those belonging to purchasing groups or voluntary chains. These companies are the preferred targets of the large chains, which try to buy them out...]."

SMEs in small and peripheral Member States are particularly disadvantaged. On the one hand, SMEs in such Member States need to grow across borders because their home market has insufficient demand. On the other, they cannot benefit from the cross-border use of attractive business services. This is because their relatively low levels of potential demand make them the least attractive markets for providers of business services since expected returns on investment are not sufficient to cover high compliance costs.

75.

2. The users of services, in particular consumers


Service users, and in particular consumers, ultimately pay the price for the existence of Internal Market barriers in the services field. Citizens suffer directly when they are prevented from using services offered by suppliers in other Member States, or when regulatory and administrative fragmentation dissuades companies from offering their services to customers residing in other Member States. This situation also contributes to the lack of consumer confidence in services form other Member State. Moreover, companies are at times advised against selling to other Member States by their own government authorities while, equally, citizens are cautioned by their representative bodies not to risk buying from abroad. i In the same way as for SMEs, this particularly affects citizens in small Member States. Thus consumers generally cannot benefit from a wide variety of competitively priced services and thus the better quality of life that they might expect from a fully integrated Internal Market.

The Commission's 'Cardiff report' on the functioning of the Internal Market i has revealed that significant price differences remain within the Internal Market. The report has shown that certain retail prices can be up to 40% higher or lower compared with the European average and that the average price difference is 30%. The report concludes that these differences are due to 'economic' rather than 'geographic' factors and that 'economic reform and competition measures seem best to eliminate residual price dispersion in these markets' i.

European employees do not benefit from the job creation potential of the services industry. All businesses are affected by these barriers, since services are relied on by every single enterprise in the European Union. It follows that the higher costs, lost productivity gains and thus lower employment levels extend throughout the European Union. Given that services account for the major part of employment across the Union it is this lost potential that is the most concerning of all.

76.

C. The weak credibility of the internal market in services


The multiplication of legal barriers may lead European citizens and operators to consider that the internal market is a danger zone. For those who are not put off providing services across internal frontiers and who cannot afford to pay the costs generated by the latter i, there are two possible ways of tackling those risks: either to come to an arrangement with the authorities or local partners, or else to conduct their activity 'on the sly'.

77.

1. Perception of the internal market as a danger zone


As a consequence of the large number of difficulties reported, contacts with interested parties show that the recipients and providers of services often consider cross-border activities to be much more risky and costly than purely national activities. This is why businesses often choose to pursue their activities in a national or local context and, when they wish to extend their field of activity, they seem to favour direct investment abroad, mergers or acquisitions, rather than providing cross-border services.

In the same way, consumers feel less confident about undertaking transactions in another Member State. Indeed, the development of such transactions depends also on consumers' confidence and their perception of the market.

This perception that the internal market in services is more of a risk than an opportunity might partly explain why only 29% of undertakings have made use of cross-border professional services i, or why operators consider that they risk not being treated equitably by the courts in another Member State which might find out about a dispute involving them.

The credibility of the internal market in services thus depends largely on the effectiveness of the appeals and sanctions against a national authority which does not comply with the law of the internal market. In this respect, a survey reveals a degree of scepticism on the part of heads of undertakings: 'Where they do try to solve problems, businesses tend to use trade associations, chambers of commerce or their own networks. Use of administrations, national or at European level, as a form of recourse is not popular with most firms regardless of size. However, it is a means which larger companies will use more often than smaller ones. The findings underline the importance of making means of redress more accessible and effective, notably at the national level' i. The European Parliament i and the Economic and Social Committee i, in their opinions on 'An Internal Market Strategy for Services' placed particular emphasis on improving the effectiveness of infringement procedures in the field of services.

2. 'Arrangement' strategies

The absence of legal certainty in the exercise of the freedoms, and the lack of effective redress in the event of obstacles force providers to enter into negotiations with the national authorities or local operators in order to arrive at an 'arrangement'. Even if the obstacles are not legally justified and could be contested before a court or the Commission, the need to find a pragmatic and rapid solution in order not to delay access to the market in question leads many operators to embark on this type of strategy.

Contacts with interested circles confirm these arrangement practices, and in particular those involving the establishment of partnerships with local operators in order to 're-nationalise' the situation and thereby circumvent the reluctance of certain authorities to grant access to their national market i.

There are many drawbacks to this strategy:

- It tends to enshrine the legal barriers because it prevents legal action to abolish them and because the operator, once he has arrived at an arrangement, has no further interest in seeing the barriers in question disappear, since they are a barrier to the entry of competitors into the market (anti-competition effects);

- It involves additional costs for negotiations with the local authorities or for the partnership with a local operator (for example, the costs for using the services of local consultants or interpreters or counterparts, etc.).

3. 'Black market' strategies

An alternative to arrangement strategies is to provide a service without bothering about its legality, i.e. to start thinking in terms of the black market or the parallel economy. These terms must be understood in the broad sense, i.e. as covering not just activities which are illicit as regards the tax systems, but also those which are illegal as regards any other legal requirement whatsoever, or any activity whose legality the operator cannot ensure and deliberately does not bother about.

In the case of cross-border services, following the 'black market' strategy may be less the result of fraudulent intent than a consequence of the multiplication of legal barriers which make it particularly complex to assess the legality of cross-border services. As the Court recognised in a recent case i, a situation which a national authority might consider clandestine working might in fact be no more than the legitimate exercise of the freedoms of the internal market.

Pursuing black market strategies is a lose-lose situation for all parties:

- The recipient and the provider of the service expose themselves to the risk of heavy penalties and deprive themselves of the means of defence and official appeal in the event of a dispute;

- The provider must keep a low profile, will lose opportunities because he can never openly promote his services and, in the long term, will not be able to ensure the competitiveness of his undertaking. Moreover, a black market strategy may serve as an alibi for certain national authorities to strengthen the legal barriers in the name of combating the black market, instead of abolishing them so as to promote the lawful exercise of cross-border services i;

- The public authorities are deprived of tax revenue and faced with the complexity and cost of the fight against the black market because they are not sufficiently able to distinguish between cases of legitimate activities under Community law and cases of deliberate fraud.

In line with the Commission Communication 'New European Labour Markets, Open to All, with Access for All' i, the abolition of the legal barriers so as to promote the assessment and monitoring of the legality of cross-border activities thus appears to be one of the key instruments in combating the black market.

78.

Conclusions


A decade after the envisaged completion of the Internal Market, there is a huge gap between the vision of an integrated EU economy and the reality as experienced by European citizens and European service providers. The complexity and severity of legal barriers, which have replaced physical and technical ones for a large variety of services, is far more wide-ranging than was expected when the new Strategy for Services was launched.

The loss to the competitiveness of European economy as a whole cannot be underestimated. At this point it is already obvious that the goal set by the Lisbon Council to make the European economy the most competitive in the world cannot be met unless sweeping changes are made to the functioning of the Internal Market for services in the near future.

The nature and scope of the problems to be addressed require a major effort and a clear political commitment by all European institutions and the Member States to give high priority both to the removal of existing barriers and to the avoidance of new ones, while taking care to maintain a high level of protection of objectives of general interest. Candidate countries should as far as possible be involved in this process.

As already explained, this report does not seek to take a position either on the compatibility with Community law of national measures which are at the root of the difficulties described here, or on possible proposals to improve the functioning of the Internal Market for services. This report will serve as the basis of work for actions to be launched as a second stage of the Services Strategy in 2003 following discussions with the European Parliament, Member States and interested parties. These discussions need to cover the barriers to the cross-border provision and consumption of services, as well as obstacles to cross-border establishment, encountered in a wide variety of service activities.

Cross-border establishment, which plays an important role for service providers, needs to be facilitated by removing unnecessary administrative burdens and reducing red tape. However, SMEs are predominant in the services industry and for them cross-border service provision, rather than establishment, remains the principal way to exploit new markets, thanks in particular to the information technologies which overcome many of the reasons for permanent physical presence. It is therefore important to encourage cross-border service provision and make this as easy as it would be to provide services within a single Member State.

To achieve these objectives the Commission will, as outlined as part of the second stage of the Internal Market Strategy for Services, propose the necessary legislative actions, the scope and content of which require further analysis. In this respect a careful balance will have to be found between the need to avoid too detailed and wide-ranging regulation at the EU level and the need to protect the general interest objectives concerned. This requires more detailed analysis of areas for additional harmonisation that will be carried out in close co-operation with the European Parliament, Member States and other stakeholders. Particular attention will be given to barriers directly affecting the freedom to receive services by European citizens. In this context there will be close examination of demand-side issues, particularly the situation of consumers in the Internal Market for services. Work in progress aiming to ensure a high level of consumer protection i will serve to reinforce the conditions necessary for consumer confidence in cross-border transactions.

To address non-regulatory barriers, the Commission will, as outlined in the Strategy, propose appropriate measures of a non-legislative nature. In this respect, the Commission will in the first instance tackle the need for information and assistance for citizens and companies wanting to use or provide cross-border services.


79.

ANNEX


Method used for the consultation

Background

The Commission's Communication on an Internal Market Strategy for Services was issued in December 2000 and Member States, other Community Institutions and interested parties were asked for their views. Given the complexity and the extremely wide scope of the issue, it was decided to extend the consultation and run it throughout 2001 and early 2002 in order to give sufficient time for all the parties concerned to provide their contributions.

80.

Purpose of the consultation


The consultation was launched in order to gather first-hand information on the barriers which may hinder the development of the Internal Market in services in the EU. The existence of barriers to free movement of services and freedom of establishment was already recognised, but the precise nature and scope of those barriers was not well understood. For this reason, and for the first time since the presentation of the 'General Programmes' for the suppression of restrictions to the freedom of establishment and the free provision of services in 1962 i, the Commission has compiled an inventory of the existing barriers in the Internal Market for services based largely on the contributions of providers and users of the services, although information was also drawn from other sources, as is explained below.

81.

What kind of services were covered-


The objective of the consultation was to collect information on problems encountered by providers and users engaged in any sort of economic services activity in the EU. The services did not need to be recognised in statistical terms or defined by any type of regulation. For example, many services are provided by manufacturers of goods (e.g. a furniture-maker might also carry out design, installation and maintenance services). All different forms of cross-border services were covered as well as establishment.

The consultation covered difficulties which service providers encounter throughout the entire business process - establishment, use of inputs (factors of production) necessary for the service provision, promotion, distribution, sales and after sales services. At each stage obstacles might be encountered. It is clear that an obstacle in one of the stages of the process might have an impact on the entire business process and force the service provider to change its business model.

82.

What kind of barriers were covered-


The starting point for the identification of the barriers was the jurisprudence of the Court, from which it is clear that any measure which is liable to prohibit, impede or otherwise render less advantageous service provision between Member States constitutes a barrier. Barriers are thus not only discriminatory measures, i.e. where an incoming service provider faces restrictions on the grounds of nationality or residence. Non-discriminatory measures, i.e. those which apply equally to service providers established in the country of the service provision and those established in other Member States, can also be barriers to trade.

Barriers arising from regulatory or administrative action i.e. those which are due to requirements in legislation, self-regulation systems, or to the practices of public authorities (administration or courts) and other regulatory bodies (such as professional bodies or, regional chambers) were covered. This included, for example, rules or procedures relating to authorisation, advertising, taxation and employment law in the case of the posting of workers. It also included circumstances where delays, fees or other problems made service provision unattractive or impossible. Some barriers might be due to complex, burdensome or non-transparent regulation or practices; most are just due to the wide divergence of national rules.

The Court has also made clear that there are circumstances where, subject to certain conditions, it is possible to justify restrictions, for instance to protect public health or consumers. However, the aim of the first stage of the strategy was to find out from the viewpoint of business and citizens what barriers were faced, rather than to make a judgement as to the whether or not they were justified. Therefore, areas which are subject to Community instruments or proposals were covered. Furthermore, barriers faced by EU service providers in the Candidate Countries were also taken into account.

83.

How was the consultation carried out-


First, an independent survey of over 6000 companies of all sizes in 14 EU Member States was carried out on behalf of the Commission by a market research company i. This survey provided a valuable overview of the scope of the problem as it confirmed that more than one in three of the companies interviewed had direct experience of problems in relation to the free provision of services or freedom of establishment. The problems encountered were spread across all industry sectors, affected all sizes and types of companies and occurred at all stages of the business process (from establishment, use of inputs via promotion, distribution and sale of services, to after-sales activities).

Second, an open consultation was carried out through a number of mechanisms and channels in order to maximise participation. Several separate mailings were carried out to European and national level associations. Individual service providers and users were contacted either directly or through national associations. Bilateral meetings were organised in order to follow up issues and participation in conferences and workshops was ensured in order to raise awareness of the consultation process. Where necessary, the Commission developed more detailed informal questionnaires aimed at particular audiences (for instance, SMEs). All this resulted in responses from more than 668 different sources, who provided a total of 698 separate contributions.

84.

Other sources used


In order to complement the open consultation and the survey and provide as full a picture as possible of the reality of the Internal Market in services today, information was also drawn from other sources.

First, the Commission examined the questions and petitions put to the Commission by the European Parliament. The Commission has received a significant number since the launch of the strategy and they provide a very useful source of information about the preoccupations of European businesses and consumers. Second, formal complaints to the Commission and infringement cases, of which a significant number has also been received since the launch of the strategy, have provided an important source of information. These sources were particularly helpful in identifying cases where individual citizens were finding it difficult to use services because of Member States practices.

Third, information received from consultation and problem solving mechanisms, such as the Commission's Dialogue with Citizens and Business and the Member States' internal market co-ordination centres and contact points for citizens and business, was examined.

Finally, the Commission used economic and statistical studies from established sources and its own services, from Member States and other bodies.

85.

Member State contributions


In addition to the call for contributions made in the Communication of December 2000 on the Internal Market Strategy for Services, the Commission wrote to Member States in September 2001 with a more detailed request for responses, including any economic or statistical data on national and European services markets. A further request was addressed to Member States in the first quarter of 2002 concerning the organisation at the national level of the follow-up to the Court judgements. Most Member States have replied to these requests and their contributions also reflect consultations which they have held at national level with interested parties.

In November 2001, the Commission established an expert group of Member States to advise it on the strategy. The group has met twice so far and it is anticipated that the group will meet 3-4 times per year. A number of Member States organised workshops on the strategy and the Commission services participated in some of these. The workshops were particularly helpful in explaining the aims of the strategy, establishing a dialogue with service providers and users, and in comparing and refining information already received on types of barriers.