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Internal Market in Services (EUC Report)

rose to move, That this House takes note of the Report of the European Union Committee on Completing the Internal Market in Services (6th Report, HL Paper 23). The noble Lord said: My Lords, first, I must extend my thanks to all those who gave oral and written evidence to Sub-Committee B, to our Clerk, Anna Murphy, to our adviser, Professor Mike Waterson and to the members of the Sub-Committee for the enormous amount of time and careful reflection they gave to this important inquiry. Last, but not least, I thank the Minister of State for Trade and Investment and Foreign Affairs at the DTI for the written and oral evidence that we received and for the positive and helpful government response to our report. Our report concerns the proposed EU directive on services and the internal market, published in early 2004. There appeared at the time to be broad agreement that more vigorous moves were needed to ensure that and internal market in services really works within the Union. Yet, there has been considerable controversy over the proposal, which has been especially marked in France and Germany—and in the European Parliament. The European Union constitution referendum campaign in France, as noble Lords will recall, notably featured alleged threats to the French economy and interests posed by Polish plumbers. The European Parliament itself has come near to deadlock on the issue. Its single market committee failed last week to make progress on some 1,500 amendments to the draft and will try again on 22 and 23 November. The Parliament now hopes to have its First Reading debate and vote in January next year, two years after the draft was published. It would be helpful to hear from my noble friend the Minister what progress is being made in the European Council on the directive and what he now expects to achieve, if anything, under the UK presidency. Given that background, noble Lords will understand that we approached our inquiry with care and sensitivity, aware that feelings run deep on some elements of the proposal. Nevertheless, members of your Lordships’ committee felt that they should come to firm judgments and conclusions and I was pleased that the committee was unanimous in approving its report. Services cover a wide variety of constantly changing activities. Paragraph 21 of the report gives a range of concrete examples. Crucially, services are purchased by businesses, as well as by individual consumers. But despite the dominance of services in the EU economies, they account for only 20 per cent of intra-EU trade. Although the treaty sets out the central principles of the single market, including the right of establishment and the right to provide services within the Union, a single market in services is much less developed and has greater obstacles at member state level than that in manufactured goods. The Commission has, therefore, proposed the directive to provide a framework that will eliminate obstacles to the freedom for service providers to establish their businesses in any member state and the free movement of services between member states. It seeks to give both providers and recipients of services the legal certainty that they need to exercise those two fundamental freedoms established in the treaty. Your Lordships’ report concentrates on the free movement of services between member states as we judged—rightly, as it turns out—that this raised the most disagreement. It does not mean of course that we believe that the freedom of establishment is unimportant. The principle of free movement of services has been clarified and developed over time through case law of the European Court of Justice. In paragraph 186 of our report, we say that nothing should be done through this directive, as eventually amended and agreed, that diminishes the existing legal freedom to provide services. The aim should be to simplify and strengthen that freedom and not to reduce it. The draft directive proposes different rules of the game for the temporary provision of services, and it is those that raise most controversy. The committee spent some time seeking to clarify the distinction between providing a service in another member state by becoming established there and providing a service on a non-established or temporary basis. It is the latter that concerns the freedom to provide services and is of particular interest to small and medium-sized enterprises which want to explore entry into new markets without the full costs of first becoming established in each potential market. Chapter 3 of our report discusses the distinction. We agree that there is some uncertainty in the meaning and practical application of the temporary provision of a service, and we note that both supporters and opponents of the draft directive suggest the need for more certainty. We concluded, however, that there is a fine balance to strike in this, as attempts to define ““temporary”” service provision could lead to a more restrictive interpretation than is currently supported by European Court of Justice case law. The draft directive proposes a horizontal approach covering all services unless specifically exempted rather than a vertical, detailed service-by-service directive. Many critics of the proposal argued that the vertical service-by-service approach harmonising rules for individual services was needed because every service differs. We discuss the issues in Chapter 4 of our report. We conclude in paragraph 75 that the Commission’s approach is right and that there is a danger that sector-by-sector harmonisation of regulations would become bogged down for many years. I turn now to the matter that has caused most controversy—the country of origin principle. Chapter 5 of our report introduces this, and Chapters 6, 7 and 8 consider important related details. The country of origin is the member state in which a business is originally based as its ““home”” country. A business might also provide services in another member state and this is referred to as the ““host”” country. A business that operates in a host country on an established basis must do so in conformity with the regulations of the host country. As paragraphs 76 and 77 of our report explain, the draft directive proposes that a business seeking to offer its services in a host country on a temporary basis under the ““freedom to provide services”” should be able to do so,"““subject only to the national provisions of their Member State of origin which fall within the co-ordinated field””." That is really quite important. The latter means,"““provisions relating to access to and the exercise of a service activity, in particular those requirements governing the behaviour of the provider, the quality or content of service, advertising, contracts and the provider’s liability””." The CBI saw the country of origin principle as a ““core component”” of the draft directive, and that failure to achieve agreement on it would be,"““a lack of confidence by Member States . . . in the fundamental rationale of the European Union, namely that of trust between Member States fostering economic and social progress””." However, opponents of the draft directive effectively reject the country of origin principle. The main concerns that they raise explicitly are perceived threats that this brings to health and safety and environmental standards, employee rights and consumer protection. There may also be unspoken concerns regarding wage levels, labour agreements and threats to established businesses and practices. Those concerns are summed up in the allegation that the country of origin principle would encourage a ““race to the bottom”” or alternatively that the principle poses a threat to the European social model. Chapters 5, 6 and 7 set out the different viewpoints and our conclusion on these issues. There is no doubting the strength of feeling among opponents and proponents of the country of origin principle. At a time of modest or weak economic performance, high unemployment in some member states, especially France and Germany and the accession of 10 new member states from eastern Europe with generally lower wages and costs, it is understandable that organised labour, left of centre politicians and businesses which fear competition, might find common cause against the drive for greater market flexibility. Equally, it is understandable that the 10 new member states should feel aggrieved that, having entered into Europe by abiding by the various requirements of the acquis, their businesses might then be denied free access to the service markets of the wealthiest states. The debate on the services directive has resulted in some substantial tensions within Europe. We listened to and considered the different views and viewpoints with great care during our inquiry and in our discussions leading up to our report. In summary, we were not convinced that health and safety should be exempt from the country of origin principle as even temporary service suppliers must meet the agreed standards in the acquis. I note that the government response to our report says that a top negotiating priority for the Government is to ensure that UK standards of health and safety are upheld in all circumstances, but that they wish to ensure that any drafting changes are limited to those strictly necessary. Can the Minister tell your Lordships what specific areas of health and safety cause him concern under the country of origin principle? We are also not convinced that the draft directive threatens employee rights, public healthcare or consumer rights. There are specific derogations included in the draft directive which address those concerns. We do not agree that there will be ““a race to the bottom””. The proposed application of the country of origin principle is accompanied by proposals for measures to improve consumer confidence when buying services from providers operating on that basis; that is, on home country regulations within the co-ordinated field. Of course no one is forced to buy services from businesses and reputation and consumer choice will always be, and should be, a powerful force in the marketplace. But the draft directive proposes confidence-building measures to reduce consumer concerns and increase trust. These measures include voluntary codes to ensure the quality of service provision. They also propose the establishment of mutual assistance between member states on the operations and standing of businesses established within their borders. In our report, we were doubtful that the changes needed in the UK to make this system work had been fully grasped and we felt that greater attention needed to be given to this. The Government’s response to the report informs us that they have commissioned a study of implementation costs associated with the mutual assistance provisions but that the costs of such a system are likely to be significant. Can the Minister tell your Lordships who is conducting this study; which stakeholders are being consulted; and when the study is expected to report? I turn finally to the scope of the draft directive, the second major area of contention. A number of services are already exempt from much of the draft directive because they are already covered by other service-specific directives, as explained in paragraph 11 of our report—financial services is but one example. The disagreements about scope now centre on the extent to which services of general interest should be covered by the directive. These are essentially public services of various kinds where strong non-market and public policy considerations exist. What falls under this designation differs from country to country and we agree that this is a matter for each member state to decide. The problem arises with those services of general interest where the end user receives the service free, or substantially free, of charge but the service itself in whole or in part is delivered by the private sector for remuneration by the public authorities. These are so-called services of general economic interest as opposed to services of general non-economic interest which are exempt. In paragraphs 22 to 28 of our report we discuss that point, which is a very important point in the discussions in Europe. Moves in the European Parliament to exempt all services of general interest are a key divisive issue there. We conclude in our report that services of general economic interest should be included in the directive, so that provision of such services on behalf of public authorities is transparent and open to the widest competition by service suppliers from throughout the European Union unless there are overriding and justifiable reasons of national interest. The Government’s response to our report says that certain public services are not suited to be covered by the directive; for example, public-funded health services, for which they are seeking exclusion from the directive. Will the Minister tell your Lordships what the principle is behind that stance? How then do the Government intend to resist the blanket exclusion of services of general economic interest? The draft services directive is an important proposal that some see as a touchstone of how the European Union responds to the challenges of the Lisbon Agenda and market flexibility, and, more widely, to global competition. I hope that I have indicated some of the issues your Lordships may wish to address today, and I look forward to the debate to come. I beg to move. Moved, That this House takes note of the Report of the European Union Committee on Completing the Internal Market in Services (6th Report, HL Paper 23).—(Lord Woolmer of Leeds.)