Economic growth in the European Union has been low for more than a decade now. While some of the poor performance can be explained by the crisis, the sustained low growth is to a very large extent the consequence of sluggish productivity performance. Productivity is above all an indicator of a society’s long-term welfare and measures how effective we are at using our scarce resources in the economy. Therefore, it is critically important – and any reform effort should focus on boosting growth through higher productivity growth.
The recent Services Package – a set of proposals to support Europe’s services sector – is a case in point. It has long been established that rates of productivity growth in Europe’s services sector trails the rates in the United States and other comparable economies. As the economy increasingly gets dependent on services, the risk for Europe is that the natural economic transformation will weigh down our productivity growth.
Obviously, any services reform aiming at delivering growth should start from the policy barriers that hold back growth and a greater degree of economic dynamism. Few, however, do. The type of restrictive policy measures in the EU vary across different services sectors – and, hence, what is the right policy priority for one country may not be right for the other. Yet, when looking at some services policy developments in Europe more closely, some patterns do become clear. Those should now be the focus of policy reform.
Going for Growth – Necessary Policy Reforms
What does this mean for the Services Package? The Services Package is a set of measures that aims at making it easier for companies and professionals to start and expand their services, particularly in professional services such as lawyers, accountants and engineers. The EU does not de- or re-regulate existing rules in these services but ensures that these rules are applied in a good way through better regulatory practices that are not overly burdensome or out-of-date.
One of the instruments the EU announced in the Services Package is the proportionality test for (professional) services. This test assesses precisely whether new legislations and changes to existing rules in services are adhering to these conditions of not being overly burdensome or outdated. For professional services, this test should therefore specifically pay attention to barriers to entry for outsiders willing to come into the market. The European Commission is aware of that aspect since the long list of restrictions that it takes up in the mutual evaluation process has many entry restrictions.
However, the EU should not lose sight of conduct barriers or the de facto barriers to firm growth. Although they seem to be less prevalent in professional services than other services (as Figure 1 shows), some services professions such as legal services still have many conduct barriers in place. It is important to tackle these restrictions as barriers to firm growth form a set of second-generation barriers that over time reduces the long-term dynamic effects of creative destruction and prevents the EU to raise its productivity.
Moreover, as the focus in the Services Package is mostly on entry barriers, the EU should be attentive to Member States that are substituting entry barriers with other murky rules and regulations, outside the scope of the proportionality test. They may just be another form of barriers of conduct – leading to a shift from entry to post-entry barriers. This is important because the rate of regulatory change in professional services is high, creating many opportunities for the regulations to move in the wrong direction. Without a strong proportionality test, there is a risk of regulations sliding into new “hidden” barriers that cover operational restrictions and preventing long-term productivity effects even if entry barriers are lowered.
On top of that, the EU has introduced an improved notification procedure and a guidance report on specific reforms that Member States need to implement for each profession. These efforts are laudable as they provide transparency and pressure on governments to continue their reform process, which the previous notification procedure did not – or, in the words of the Commission, “did not adequately contributed to a correct and full implementation of the Services Directive” (European Commission, 2017a; 2017b).
This is an issue of concern. Although some Member States do not want to reform, there are countries that simply have limited regulatory capacity and are not capable of organizing regulation in a way that reinforces the benefits from reforming services markets. That is, governments and regulators need expertise, resources and the right governance structure to undertake regulatory changes in their systems, for example by fine-tuning complementary rules in competition policy, providing adjustment mechanisms to compensate losers, or monitoring firm behavior in services markets and the economic impact of reforms.
This goes well-beyond any Directive and rather focuses on how well-equipped regulatory bodies and governments are in terms of monetary resources, regulatory expertise and overall regulatory management practices. These items are complementary to reducing or reforming regulatory barriers. If the Services Package aims at creating good and better regulatory practices, the EU needs to take this aspect seriously.
Some Member States will not be able to reform services markets because of these limitations. While the European Commission observes that the new notification procedure does not create any disproportionate new costs for Member States – they are already obliged to notify measures under the Services Directive – it neglects the question of how public authorities have to deal with post-services market reforms when knowledge, expertise and regulatory management are required rather than new rules.
An OECD indicator on regulatory management in services – that measures the governance of the bodies that design, implement and enforce these regulations in services – provides further insights. It shows that some countries such as Italy, the UK and Germany have good performance. Other countries such as Austria, Denmark and Estonia score well below the OECD average. Scores vary according to sectors and sub-components, but an interesting fact is that some EU countries that otherwise score well in their regulatory policies score bad in their regulatory governance.
Yet, there is generally a systematic relationship between regulatory policies and regulatory governance as shown in the left-hand panel of Figure 3. The vertical axis shows the score of regulatory management from 0 (the most effective governance structure) to 6 (the least effective governance structure) in services. The horizonal axis illustrates the level or regulatory restrictions in services. The figure shows indeed that countries with higher regulatory barriers in services are also the ones with least effective governance structures to tackle services reforms.
Figure 3: Regulatory governance policies in services and services reforms (2013)
Source: OECD; author’s calculations.
Another indicator, from the World Bank, showing the economy-wide regulatory quality and government effectiveness of countries, exhibits a performance where the Northern EU block scores well whilst the Southern and Eastern blocks together score lower than expected. Whatever the right ranking, the main point is that countries vary in their ability to govern regulations for services markets.
This governance factor is not restricted to regulatory management or regulatory quality in services alone. There are other governance policies for how services markets are organized that are important. One is related to competition policy. It is necessarily not about the competition rules per se, but – again – how policies are pursued within the framework, for example the effectiveness, soundness and transparency of competition-policy institutions, and the strength and scope of competition regimes.
Another indicator from the OECD precisely measures this aspect of competition governance and is used in the right-hand panel of Figure 3. This score is shown on the vertical axis and varies between a scale of 0 and 6 (from the most to the least effective competition regime). On the horizontal axis, the level or regulatory restrictions in services is shown. Here, too, the panel points out that there are complementarities between the governance of competition regimes, i.e. the institutional set-up of effective competition structures, and services barriers reform. Countries which have less effective competition regimes also show higher regulatory barriers in services.
 High conduct barriers for the legal profession also became visible in its EU Regulated Professions Database.
 A study by the World Bank (2016) and van der Marel et al. (2016) pointed out that precisely in the EU barriers on the conduct of the firms have strongest and most important economic impact on services generally, including non-professional services.
 As European Commission (2017b) states: “The [previous] mutual evolution process revealed that regulatory decisions are currently not always based on sound and objective analysis or carried out in an open and transparent matter”.
 Professional services are excluded from this indicator but nonetheless provides a good state of regulatory play of the institutional setting for each country regarding the entire services sector.
 See Koske et al. (2016) for further explanations on this indicator.
 See Alemani et al. (2013) for further explanations of this indicator.