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The following OECD assessment and recommendations summarise chapter 2 of the Economic survey of the European Union published on 20 September 2007.
The single market has delivered major benefits for EU citizens. It has given consumers access to a wider range of goods and services and has helped the business sector become more competitive. The stronger competition that it has brought about has lowered prices and lifted innovation, entrepreneurship and growth. But while the internal market process is moving forward, progress has slowed down recently. The lion’s share of the improvement in trade, investment and price convergence occurred in the 1990s, with less progress since then. A fresh impetus is needed. With this in mind, the Commission will publish a wide-ranging review of the single market in the second half of 2007. A competitive and dynamic internal market is necessary to foster prosperity and help achieve the objectives of the Lisbon strategy for growth and jobs. It is also important for the smooth functioning of the euro area.
The services directive will help but is only a step in the liberalisation process
The service sector is the main area that requires further progress in the internal market. Service markets are segmented, with trade among member countries amounting to less than 5% of GDP. This contributes to low productivity growth in the sector. The services directive will help by providing more legal certainty, reducing administrative barriers and boosting co-operation among member states. Certain entry barriers such as market demand tests are now outlawed (albeit with escape clauses) and the mutual screening process, where all national legislation must be vetted to see whether it meets the single market principles, should help chisel away some of the other barriers.
Internal trade in services is low
As a percentage of GDP
Source: Eurostat; UN, Comtrade database and OECD calculations.
Many of the regulatory barriers to cross-border trade in services come from national laws such as consumer protection standards or rules about how a company must be managed or structured. Most of these rules are in place, at least ostensibly, for genuine policy reasons such as public safety or consumer protection. However, they can be out of all proportion to their objective and have the effect of shielding local firms from competition. The country of origin principle in the Commission’s original proposal would have allowed service providers to jump over such restrictions when operating temporarily in another country. It was rejected for several reasons including concerns about possible abuses and monitoring problems. Under the directive that was finally adopted, the barriers that may remain after the screening process and the application of the freedom to provide services clause will still need to be challenged using the existing infringement procedures. Because the legal process is slow, the directive should be bolstered by quicker and cheaper remedies in order to get the greatest benefit from the reform. It will also help that the Commission is proactively making sure member states implement the directive properly and is putting a high priority on the mutual screening process. In the end however it is up to member states to back up their renewed commitment to the principles of the Treaty of Rome with serious efforts to eliminate unnecessary barriers. In this sense, the services directive should be seen as a step towards liberalisation, not the end of the process.
The internal market for goods works well but could be improved further
In goods markets, the mutual recognition principle has been a huge success at breaking through the vast number of product specifications that existed before the single market. But it could be applied better. The Commission has proposed a regulation that obliges member states to provide scientific and technical evidence to justify any restrictions they put on products entering their market. This should help, and it could be backed up by a fast-track mechanism. That way, the producer would have an effective way to challenge unreasonable barriers to market access and it then would be up to the member state to take an action through the full court system if it felt its restrictions were justified by the evidence.
Network industries need major reforms
Network industries are another priority. The sectors that have been liberalised the most, such as air transport and telecoms, have delivered substantial payoffs in terms of lower prices and better service for consumers and other firms alike. However, substantial barriers to competition remain in place. Further market opening is needed in electricity, gas, telecoms, transport, ports and postal services, while respecting universal services obligations. The potential welfare gains from network reform are estimated to be 1½ to 2% of GDP at least.
Network industries are still overly protected in the EU
Indicator of product market regulation 0 10, from least to most restrictive
Source: OECD, Product Market Regulation database.
Pan-European markets are the best way forward for the energy sector
Energy markets need to be linked together more tightly and opened up to competition. This would lower prices for consumers and make energy supplies more secure. The gas and electricity directives adopted in 2003 contained some important measures – for example, all customers will be free to choose their supplier by July this year – but they have not been implemented well by member states. An EC competition inquiry recently found serious malfunctions in energy markets. Vertically integrated energy giants can treat competitors unfairly and shut out potential entrants. Market concentration is high, with dominant firms often able to control wholesale prices. Competition from imports is weak because cross-border interconnections do not have enough capacity and the available links are not used efficiently or are tied up through historical contracts. Capacity is not expanding quickly enough because the financial incentives to do so are weak and the rules and responsibilities surrounding cross-border issues are unclear. Other problems include state ownership, which can distort competition, and wholesale markets that do not work well due to poor system information and a lack of transparency.
The priority should be to create integrated EU-wide or regional markets. The Nordic market provides a good role model. Achieving this will at least require greater co-operation among system operators, and possibly moving away from national operators towards cross-border ones. The reliance on national regulators will have to change, especially on issues affecting cross-border trade as existing co-operation is insufficient. The recent agreement by the European Council on the need to establish an independent mechanism for national regulators to co-operate and take decisions on important cross-border issues is a useful first step.
Separating the network, generation and supply activities of vertically integrated firms is needed to prevent abuse of power and create a level playing field for competition. The Commission recognised this in its Energy Policy Review when it proposed two options – full ownership unbundling or independent system operators (but where the network assets may remain owned by the incumbent). While both options would go a long way towards boosting competition, OECD experience, as reviewed by the International Energy Agency and supported by the Commission’s review, has shown that full ownership unbundling is more effective. The European Council recently agreed on the need for effective separation of supply and production activities from network operations (unbundling) based on independently run and adequately regulated network operation systems, but did not require ownership unbundling.
In telecoms, the regulatory framework is sound but some countries have been quicker than others at creating effective competition. Some national regulators may be too soft and competition problems are not always dealt with consistently across the Union. In 2006 the Commission made several proposals, including phasing out regulation in segments where competition was developing well, introducing a more market-based approach to spectrum management, enabling the pan-European provision of services and beefing up the regulators’ enforcement powers. All these suggestions should be pursued.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of the EU 2007 is available from:
For further information please contact the EU Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by David Rae, Boris Cournède and Marte Sollie under the supervision of Peter Hoeller.