While the single market has largely been achieved for the EU market for goods, the services sector has lagged behind. This has resulted in sluggish activity, low productivity growth, high prices, that show a wide dispersion and relatively high inflation in this sector. Both the OECD product market regulation study and the European Commission study on internal market barriers conclude that there are large barriers to trade between the EU countries. Since two-thirds of total output in the EU comes from the services sector it is crucial for the EU to pursue reforms of this sector. The proposed Directive on services in the internal market, also called the services directive, will be a helpful tool towards establishing a single market for services if it is implemented as proposed. The European citizens will gain from large welfare effects associated with the convergence of prices towards the best performers and faster trend economic growth. A watering down of the directive will however reduce the beneficial effects and should be avoided. This Working Paper expands on material presented in the 2005 OECD Economic Survey of the Euro Area (www.oecd.org/eco/surveys/eu).