Goods can be traded freely across the EU, but the same cannot, in practice, be said of services. Less restrictions in the sector would yield enormous economic benefits, argue Arup Banerij, Doerte Doemeland and Sanja Madžarević Šujster.
Arup Banerji is the World Bank’s EU regional director; Doerte Doemeland is its lead economist and main author of the EU Regular Economic Report; and Sanja Madžarević Šujster is the same organisation’s senior country economist for Croatia.
To reinvigorate growth in Europe, European Central Bank President Mario Draghi called for more common projects in the EU, emphasising that these efforts need to meet a set of minimum standards. They should “focus on those actions that deliver tangible and immediately recognisable results”, “complement the actions of governments”, “be clearly linked to people’s immediate concerns” and “unequivocally concern matters of European or global significance”.
We couldn’t agree more. But how can these high standards set by Mr Draghi be met? We would argue that what is needed is a determined and organised effort to better integrate the services provided in Europe.
This would build on the now completed free movement of goods – and, if well-executed, it has enormous potential to deliver growth and jobs. And not incidentally, this could help reinvigorate the European project as a whole.
Consumers in Germany can easily buy French wine and Italian cars, but they cannot employ Italian architects and Polish lawyers with the same ease. Less than 2% of accountants applied to establish an office or to work temporarily across EU borders in 2014.
Only 3% of architects worked in other EU member states in 2012. A similar pattern exists in other regulated professions, depriving many Europeans of opportunities: engineers in Italy, Finland, Spain and Portugal struggle to find work, while firms in Germany and the Benelux cannot find enough of them.
The benefits of economic integration are undeniable. The creation of the EU has supported the longest period of peace in Western Europe since the Pax Romana, nearly two millennia years ago. The EU convergence machine has pulled millions of people out of poverty and improved living standards – in old and new EU member states.
Yet, reform fatigue and anxiety are holding sway in Europe. Deep and prolonged recessions in the wake of the global financial crisis and the subsequent slow recovery of jobs have eroded the trust of many EU citizens in the ability of established national and EU-wide institutions to provide stability, protection, and opportunities.
Brexit added to this erosion of confidence.
Traditional economic indicators, such as unemployment or wages, have become a weak predictor of policy perceptions, making it more difficult to anticipate the political consequences of reforms and adding to a reluctance to take decisive actions.
Services can come to rescue.
Services are a key driver of growth in all advanced economies. Service sector reforms can yield particularly large growth gains in the EU, where some service regulations are quite restrictive in some member states.
If these countries were to reduce their restrictions to the level of the least regulated EU member states, productivity gains would be large. This is not surprising: services sector reforms cannot only improve the performance of service providers but also of all manufacturing firms which use these services.
In fact, new estimates presented in the World Bank’s latest EU Regular Economic Report (EU RER), show that EU-wide firm-level productivity could increase by around 5%, corresponding to a huge benefit – a roughly 6.5% increase in EU-wide GDP per capita.
The overall effect is likely to be even larger for the least well-off in the EU. Service reform would reinvigorate convergence: the RER shows that Central and Southern Europe stand to gain most from these reforms. A deepening of EU integration in services would also encourage innovation and stimulate much-needed investment – at a time when investment is at a historical low. Most importantly, it would offer EU citizens new opportunities.
Service sector reforms are, of course, not going to be easy – either in their politics or in their execution. The freedom to establish a company in another EU country and the freedom to provide or receive services in another EU country are already established for many services through the EU Services Directive – but implementation has been weak.
Why? First, in many EU member states, services regulations are complex and highly decentralised. Second, and related, reforms are often implemented by regulatory bodies or associations, who may have a bias against reforms or even a conflict of interest. Many professions and industries thrive on the rents that regulatory constraints generate – and you and I, as service users, are rarely aware of the costs that these regulations impose on us.
Yet, we believe that this is the exact time when this challenge of creating and implementing a new roadmap for service integration is well worth taking – because hanging in the balance is reinvigorated growth, convergence and opportunities for EU citizens.