Many European Parliament members were mortified last year when voters in France and the Netherlands deep-sixed a European Union Constitution long sought by the region's political leadership. But now the Parliament has done something that could hurt Europe even more.
On Feb. 16, the lawmakers voted on a proposal to liberalize Europe's service sector. The measure, known as the Bolkestein Directive, was originally intended to make it easier for service providers -- from hairdressers to plumbers to accountants -- to expand their businesses into neighboring EU countries.
LOCAL LAWS. But by the time the Parliament voted, the directive had been so watered down that it is unlikely to achieve that goal.
Service businesses account for two-thirds of the EU's economic output and employment. Yet few of them venture outside their home countries. Cross-border trade in services totals only 4.5% of the region's economy. By contrast, goods bought and sold across EU borders account for 20% of the economy.
Why the discrepancy? EU member countries long ago abolished tariffs and other barriers to internal trade in goods. But most countries still maintain regulations that make it devilishly hard for outside service companies to move in.
COUNTRY-OF-ORIGIN RULE. The chief difficulty is that small businesses, which make up most of the service sector, usually can't afford the costs of cutting through regulatory red tape in more than one country at a time. A 2001 study by the Organization for Economic Cooperation & Development estimated that European businesses spend an average 4% of their revenues on regulatory compliance. For small businesses, the average rises to 9%.
The Bolkestein Directive, named after former EU Internal Markets Commissioner Frits Bolkestein, would have taken direct aim at this problem. As originally drafted, it would have allowed, say, a Spanish bricklayer to build a house across the border in France, so long as his business complied with Spanish regulations.
EU economists have predicted that this so-called country-of-origin rule would lead to the creation of 2.5 million jobs. That would make a significant dent in the ranks of Europe's 19 million unemployed.
"A TREND TOWARD PROTECTIONISM." But the Parliament jettisoned the country-of-origin rule after fierce lobbying, mainly by labor unions fearful that their members' jobs would be threatened by the arrival of foreign competitors. Some other provisions were left intact, such as a requirement that each country establish an agency to help service companies from other EU countries surmount regulatory hurdles.
But for practical purposes, the Bolkestein directive has been gutted. That, in turn, is a huge setback for the EU's Lisbon agenda of reforms intended to restore the region's economic competitiveness, says Ann Mettler, executive director of the Lisbon Council, a Brussels-based advocacy group that pushes for the reform agenda. Instead of moving toward competitiveness, Mettler says, "Sadly we are dealing with a trend toward protectionism and nationalism."
For advocates of the Bolkestein directive, one of the most distressing features of the debate was that businesses didn't move aggressively to counter organized labor's lobbying. Charlie McCreevy, the current EU Internal Markets Commissioner, has said he tried to rally employers' groups to support the directive, but few did.
IRELAND'S EXAMPLE. Why not? Most European business-lobby groups are dominated by large companies, which can more easily afford to comply with country-by-country regulations. The region's small businesses, by contrast, have little organized representation in Brussels.
Despite the gloom over the Bolkestein Directive, there are signs that Europe's more affluent economies are softening their resistance to immigrant workers from new EU member countries in Central and Eastern Europe. Under the agreement for the EU's eastward expansion, Western European countries were allowed to keep restrictions on immigrant labor in place for up to seven years. But a study released on Feb. 8 by the European Commission found that countries such as Britain, Ireland, and Sweden, which have lifted most of their restrictions, have reaped strong economic benefits.
Rather than taking jobs away from local workers, immigrants from the East have helped fill labor shortages, and are paying taxes that swell government coffers, the study found.
SLOW GROWTH. Now, Spain and Finland say they may follow suit. Even France, which traditionally has resisted such moves because of its high unemployment rate, says it may soften restrictions in some categories of employment.
But while a freer flow of labor across Europe's borders is a welcome development, it won't compensate for the damage done to the Bolkestein directive. Productivity growth in Europe's service sector has averaged well below 1% in recent years, vs. 3% in the U.S. Burdensome regulation is a big part of the problem, Mettler and other business advocates say. Sadly, the Lisbon agenda's goal of making Europe "the most competitive and dynamic knowledge-based economy in the world" by 2010 seems more elusive than ever.
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