Creating a single market for the service sector could boost growth and create jobs. So why are so many people against it?
Why is Europe having such a hard time creating jobs? Ask Svatoslav Kodytek and Tomas Lenc, two florists from southern Bohemia in the Czech Republic. Soon after their country joined the European Union last May, they tried to open two shops across the Austrian border, in the quaint medieval townlet of Gmόnd and in nearby Waidhofen. They planned to hire locals, but ran into roadblocks from the very start. First, Gmόnd's labor office told them bluntly that no more flower shops were needed in the area. Undeterred, they set up their stores. Authorities then took two months to register their firm - compared with three days on the Czech side - and refused to license Lenc for flower arranging, despite his 15 years of experience.
Staffing was the final straw. Nobody replied to their ads for Austrian flower arrangers so they brought in Czech ones instead, making them partners in the business to circumvent a vetting process for foreign workers that can take six months. The authorities quickly swooped in and fined them €1,500 for illegally employing the florists. Enough was enough. At the end of last year, the two men shut down their Austrian operation just five months after opening the first store. "We were treated like interlopers," says Kodytek, 54, who, with Lenc, lost about €27,000 in the failed venture. The authorities "were not looking for a way to make it possible for us to function. They were looking for a way to stop us functioning."
The E.U. likes to boast about its internal market of 450 million consumers, but when it comes to the service sector - which accounts for 70% of the European economy - life is anything but a bed of roses. More than a decade ago, the E.U. knocked down the major barriers impeding the free movement of goods, but a patchwork of local legislation and practices continues to hinder the movement of services. From accountants, lawyers and realtors to hairdressers, midwives and plumbers, those who try to offer services outside their home country risk being strangled by red tape.
Some rules make sense. In Britain, for example, people installing gas boilers are required to undergo special safety training. But dozens of other regulations seem arbitrary or archaic. Several countries will only grant telecommunications service licenses to residents, for example. Belgium, for one, requires many types of service companies, including advertising agencies, to notify authorities any time they send people to Brussels to work for a client there, giving details of their names and how long they'll be working in the country. "You have to jump through all these hoops," complains Phil Murphy of Britain's Advertising Association.
Many rules were first drawn up for health-and-safety reasons. But now they're costing jobs - as many as 600,000 across the E.U., according to a study carried out earlier this year by analysts Copenhagen Economics for the European Commission. The study argued that removing the barriers would give a big boost to productivity and wages as well as increasing employment. Consumers would also benefit from lower prices as a result of greater competition. It's a grand vision, but putting it into practice is tricky.
Why so much hostility to such a potentially productive idea? The directive tried to enshrine two key principles. The first would make it far easier and quicker to set up shop in another country. The second would allow companies registered and regulated in one country to offer their services in any of the E.U.'s 25 member states. This "country of origin" principle would explode most cozy national professional arrangements in the E.U. by allowing direct outside competition, but it also could mean that companies established in countries with little regulation would be able to do business throughout Europe.
And that's why the directive has such powerful opponents. Professionals ranging from British midwives to French interior decorators are wary of unfair competition from foreign rivals who may not be subject to the same stringent national rules. "The major problem is that it will create unfair competition," says Agnθs Thibault, secretary-general of the European Builders Confederation, which is seeking an exemption from the directive. Unions across Western Europe have raised the specter of an army of low-paid service workers without social benefits arriving from Central and Eastern Europe, undercutting prices and destroying local jobs. Some government heads agree. Luxembourg's Jean-Claude Juncker, who currently holds the E.U.'s rotating presidency, said last week that "we must remove any proposals that open us up to the danger of social dumping, tax dumping or regulatory dumping."
Last March, German Chancellor Gerhard Schrφder publicly expressed his opposition after media reports that 26,000 German butchers had lost their jobs when Polish subcontractors imported East Europeans to work for a fraction of German butchers' wages. The numbers may have been exaggerated, but the issue came up again last week, just before Schrφder met political opponents at a "jobs summit" in Berlin. "We cannot allow service freedom if this leads to social dumping, and if it disregards the protection standards of employees," Schrφder thundered.
While some companies may find themselves losing out to new competition, advocates of the directive say it will create far more jobs than it eliminates. But with many countries preparing to hold a referendum this year on the new E.U. constitution, politicians fear that any controversial proposals coming out of Brussels could jeopardize a yes vote. French President Jacques Chirac last week phoned European Commission President Josι Manuel Barroso to chastise him about the "unacceptable" services directive and his continuing public support of it.
Yet with so much at stake economically, blocking any change could backfire. Powerful lobbies like the German Federal Association of Industry, and Eurocommerce, which represents French and other European retailers, are pressing for liberalization. Even German Economics Minister Wolfgang Clement says he's in favor. "We need more competition in Europe, also in the service sector and that's a fact," Clement told the Tagesspiegel daily newspaper.
Back in the Czech Republic, florists Kodytek and Lenc are nursing their wounds. Lenc is still fuming over a six-page letter from the Austrian Labor Ministry explaining why it is refusing his request for a florist's license - and informing him that he can appeal the decision for a fee of €180. The mayor of Gmόnd, Otto Opelka, who says his town is keen for new business blood, blames teething troubles; this was the first time a Czech firm had opened in the area. "In the future, things will run more smoothly," he says. "I think it will be much easier for the next people who come here." Perhaps, but until a true pan-European market for services is created, setting up shop outside your own borders will remain a thorny business.
By: N. Peter Kramer
