Freeing up services

The Council and the European Parliament have begun consideration of the Commission proposal for a framework directive designed to promote a significant increase in cross-border trade in services. The public and private service sectors account for almost 70% of EU15 employment and just over 70% of gross value added, but just 20% of intra-EU trade. The aim of the directive is to cut excessive red tape that prevents businesses from offering their services or opening premises in other member states. This is a high priority measure for the EU in its aim to boost competitiveness and we can expect negotiations to proceed with a high degree of political commitment, even if there are some major issues to resolve on the way.

The Commission has identified a number of significant barriers to growth, including the complexity of administrative formalities for establishment in another member state, and restrictions on posting workers and using equipment abroad. Its proposal would cover most traditional services such as employment and advertising agencies, security services, retail, hotels and regulated professions, but also manufacturers that provide services, such as car makers. In all the directive would cover services representing 50% of EU GDP and some 60% of employment. Only areas where there is already extensive EU legislation (e.g. financial services, electronic communications and transport), and services provided free by public authorities, would be exempt.

Ruled from home?

The key elements of the directive would be simplification of the procedures required to establish a service operation in another member state; application of the principle of mutual recognition on the basis of country of origin, allowing a business based in one member state to provide services in another on the basis of the regulations of its home country; and promotion of EU-wide codes of conduct to complement national codes.

Provisions are already in place concerning mutual recognition of professional qualifications, the Rome Convention on applicable law, and (in article 21 of the Treaty) discrimination based on country of residence. But the Commission sees significant benefits in this framework approach, especially in respect of a coherent approach to simplification and the application of ECJ judgments, and placing the onus on member states to co-operate on the basis of best practice. At the same time existing professional rules would still apply as long as they are consistent with ECJ decisions.

The first serious discussion of the proposal in the Competitiveness Council was on 25 and 26 November. The focus was on the country of origin principle. On one hand member states recognised that application of the principle had in practice been essential in promoting an effective internal market in goods, and a similar approach was necessary for services. On the other there were significant concerns, prompted by consultation with interested parties, that the country of origin principle would severely undermine regulatory regimes in member states. Particular concerns were expressed about the impact on health and safety regimes and consumer protection, as well as maintenance of the European social model. These issues are being addressed in parallel preparation by European Parliament committees of its draft first reading opinion: amendments are being prepared which would clarify the purpose of the directive and where derogations would be allowed.

Implications for Scotland

There are clear and wide implications for service providers in Scotland. The UK regulatory regime is among the most liberal in the EU, but there is significant potential for the existing system to be affected by the directive in many areas – the Scotch Whisky Association for example has expressed concerns about the application of the directive in the retail and distribution field in respect of prohibitions and obligations with regard to selling below cost and to sales, and argued that national provisions should continue to apply.

For the legal profession, the directive also has implications – while the draft is designed to be complementary with existing measures such as the provisions for regulating registered European lawyers under the EC Establishment Directive, thus limiting the impact of the country of origin principle, there is also a clear expectation that existing regulation be reviewed to ensure that it is compatible with ECJ judgments. The Law Society of Scotland has for example welcomed the legislative restatement in article 30 of the Wouters judgment concerning professional ethics and conduct in the regulated professions. Given the fact that intra-UK legal regulation is affected by EC law as well as UK and Scots law (the recent Scottish Executive regulations on multinational practices were enacted under section 2(2) of the European Communities Act 1972), it will be important for the work prompted by the Executive working party on competition in the legal profession, and of course the Scottish follow-up to the Clementi review, to bear the EU dimension firmly in mind as the work moves from the evidence gathering to the policy development stage.

Colin Imrie is a former diplomat and Commission official and is now Director of EUsolution.com Ltd, an Edinburgh-based consultancy services firm working on EU matters.