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Internal Market in Services (EUC Report)

My Lords, I, too, found it a pleasure to work on this report, not only because of the privilege of working with an interesting and stimulating team—our colleagues, our chairman, our clerk and our specialist adviser, but also because the matter of the single market in services seems to have touched a nerve and ““drawn an emotional response””, as my noble friend Lord Giddens put it. The nerve that it has touched is fundamental to the whole European project and is connected to the social, political and economic make-up of the European Union. We learned that when we went to Brussels in March. The UK representative there, Mr Anthony Vinall, described the directive as a ““political hot potato””. So why should this directive be a hot potato? After all, the Union guarantees four fundamental liberties—free movement of people, goods, capital and services—and this directive would seem a logical directive towards completing the single market. We are told that 70 per cent of European jobs are in the services sector. My noble friend Lord Giddens put it at 85 per cent and my noble friend Lady Cohen at 54 per cent, but whatever the figure, it is a major step in securing the single market. As the noble Lord, Lord St. John, put it, economic studies indicate that 600,000 new jobs would be created through the increased efficiency of the services sector caused by greater competition in the market. Consumers would benefit through greater choice and lower costs. All that is acknowledged in the Government’s response dated 3 October, and I thank the Minister for that response. However, when the European Commission issued its draft services directive in 2004, the reaction was more hostile. My noble friend Lord Woolmer spoke of controversy. Certainly some member states welcomed the directive as an opportunity for economic development and growth, but other members complained that it would force cuts in social standards—social dumping they called it. The noble Lord, Lord Inglewood, explained that rather well, I thought. As my noble friend Lord Woolmer said, it is generally the older member states such as France, Germany and Belgium that are concerned about social dumping. The newer member states see this directive as an economic opportunity. I think the problem lies in the difference in labour costs, and perhaps the numbers here are very significant. In Belgium, Sweden and Germany, the total financial burden of employing a worker including benefit costs is more than €50,000 a year. That compares with about €5,000 in Latvia, the same in Lithuania, and €8,000 in Poland; and it is that even after adding social security and other mandatory benefits such as pensions, medical payments and so on. And so cutting wages in Germany, Sweden and Belgium would mean cutting those benefits, and hence the phrase social dumping. As my noble friend Lady Cohen reminded us, we point out in our report that the Posting of Workers Directive means that you cannot pay Latvian wages and benefits to a Latvian working in Belgium. But the politicians we met chose to ignore that or maintain that the Posting of Workers Directive is badly enforced. Either way it would result in a cut in wages—perhaps not all the way, but the social dumpers say that the gap would be too large even after a partial closing. That is why the services directive is a political hot potato. I agree with other speakers. It is a hot potato because it means facing up to the realities of enlargement and, beyond that, globalisation. The recent voting on the constitution has shown that that is just not welcome and is something to be treated with suspicion. As a result, there is now a mood of emphasising self-interest and protectionism among some member states, replacing the earlier mood of integration. This directive is a victim of that. When we argue that increasing prosperity in the new member states would raise wages and raise social standards, as has happened in Portugal and in Greece, we were told by the trade unions and others that that was not relevant to the services sector: services are not like manufacturing. My noble friend Lord Giddens gave rather a trenchant response to that. The older members, too, were sceptical of the forecasts in job growth and investment in the services sector as a result of this directive. I think the scepticism arose not because they were doubtful about the economic possibilities but because they were concerned about the ability of their own labour markets to allow workers to move from declining service sectors to expanding ones. They were worried about their ability to increase productivity and reduce bureaucracy without political cost. They were nervous of the politics of cutting excessive employment protection laws and dealing with the social consequences which result from that, particularly with the current change in mood. This is particularly difficult for Germany where there is 22 per cent unemployment in the old East Germany which, in turn, borders on Poland, and we have yet to see how effective the new coalition government will be. I agree with my noble friend Lady Cohen that we have to take into consideration the problems which countries face with their own political situations. The other great matter is that there is a great variation in professional standards and qualifications in each member state. Cross border trade in services lags far behind trade in goods because each member state has its own formalities, professional requirements, rules of entry into the professions and delivery standards and requirements. The Commission suggests that this is dealt with by the country of origin principle, but some member states, generally those with the high labour costs, want harmonisation first—harmonisation in the same way that 200-odd directives worked out over the past 20 years lay down common standards for goods. The evidence that we received also showed that the professional organisations with high and difficult entry barriers were in favour of harmonisation before liberalisation. The Commission argues that harmonisation would be long, complicated and would miss out on new and rapidly developing services. I believe that it is right. It believes that its country of origin principle avoids all of that, and in their response to our report so do the Government. Quite rightly the British Government support the directive because we have already started to tackle these difficulties. Here in Britain self-employment is far easier than in many other member states, which particularly helps the services industry. However, if we support this directive, we must also set about preparing for it. I see that individual traders and service providers are now required to register. Certainly that will help administratively. However, the productivity of our service sector seems low compared with our European competitors. I say ““seems”” because it is difficult to agree on the outputs. Also the research into new technologies for our service sector is virtually nil. My noble friend Lord Giddens spoke of the importance of modern ICT in the services industry. Therefore, I hope that my noble friend the Minister will be able to assure us that the skills training, research and knowledge transfer required to make our service sector much more competitive in future will strongly feature in the work of his department. What will happen with this directive? I believe that its introduction is urgent. I agree with most speakers that a free market in services will encourage the enterprise, innovation and performance which the service sector needs to face up to globalisation. Europe has to raise its game and face up to outsourcing. The Chancellor made that point yesterday in his Treasury pamphlet. However, as I said earlier, the mood is wrong and the Government will have to acknowledge that. After all, you cannot force economic reform without democratic legitimacy—progress on one requires progress on the other. As the noble Lord, Lord Inglewood, implied, the European Parliament may well water down the directive and insist on a degree of harmonisation which will make the directive more palatable politically but less effective economically. It is, of course, impossible to have a single market in services and allow member states to opt in and out at will. Such a market would be unfair and impossible to regulate. So perhaps the answer is to create the market gradually, not by harmonisation but by introducing early the easier parts, such as construction or retail services, and giving time for the harder parts to be introduced later. When the mood changes and integration is back on the agenda, the process can be speeded up. Regarding the country of origin principle, I am glad that the Government say in their response that they are sorting out the issues of temporary or established service providers. My noble friend Lord Woolmer explained that. But more will have to be done to prevent a significant watering down. Perhaps a strict and informative labelling regime would make it more acceptable. I realise that this will be met with cries of, ““Yet more red tape!””, but it would help consumers by making them better informed. They can then decide whether they want a German or an Italian translator to translate their sales literature into Italian, or if they want a temporarily established British company to install their IT system in Poland. Those compromises could be acceptable, not only because they would assist the Government in upholding the standards to which we are all committed, but because this is not a single, isolated reform. It is an overall massive change, which will alter the supply of services in the Community for ever. It is a change that will make our services sector more competitive with the rest of the world. The era of global sourcing and services is fast approaching.