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Internal Market in Services (EUC Report)

My Lords, this has been an interesting debate. The European sub-committee’s report on the proposed EU Directive on Services in the Internal Market is excellent, and I am pleased to have the opportunity to respond to some of the thoughtful speeches made this morning. It is notable that debates in which there is complete unanimity are rare in this House: in my experience, to have complete unanimity on a debate on Europe is unheard of. We should not be surprised that there is considerable opposition across Europe to the services directive. After all, as a whole it is true that people do not like competition—particularly competition which is likely to produce great change. Equally, we should not be surprised that the passage of the services directive raises considerable difficulties. It is right to approach this matter on a horizontal rather than a vertical basis. The latter would take years and years to put through, but doing so on a horizontal basis raises some difficult issues and those need to be carefully worked through. Noble Lords may recall that the Government’s response to the committee’s report confirmed our strong support for the aims of the proposed directive. Quite simply, the Government believe that an internal market in services is essential for growth, competitiveness, employment and better regulation across the EU. I very much agree with the noble Lord, Lord Inglewood, that bringing the trading of services in Europe in line with market economics is the challenge. Dropping out is in no way an answer to these issues. As has been pointed out, the services sector is the largest part of the UK economy and accounts for 70 per cent of EU GDP. Many providers in the UK naturally look to Europe as a market for their services. But, as things stand, when a company embarks on cross-border trade it can encounter numerous obstacles that seem to serve no useful purpose. These barriers hinder service sector growth and job creation; companies and individuals bear unnecessary costs; and consumers get less choice and lower quality services at inflated prices. The Government believe that, were this situation to remain as it is, it would seriously hinder competition and innovation within the EU. Although the Government strongly support the proposed services directive, we have always wanted to see certain changes to the proposal in a number of areas. In order to reap the benefits of the directive, we must ensure that the right balance is struck between vital areas of protection and its potential to open up markets. In particular, the scope of the directive and the application of the country of origin principle should be kept as wide as possible, while ensuring that UK health and safety standards are upheld. In its report, the committee raised a number of points, which have also been raised during the debate, and I would like to discuss those further. One concern, shared by the UK and other member states, is the distinction between ““establishment”” and ““temporary”” service provision. The Government agree with the committee that many of the uncertainties around the definition of ““establishment”” can be answered by technical amendments to the text of the directive. In providing a legal definition, however, we need to ensure that it works for all service providers. Inevitably, firms of certain sizes and in certain sectors will need longer than others to test the market. We must therefore take a flexible approach. I should like to assure noble Lords that work to that end is continuing in the Council working groups under the UK presidency. Another issue raised in the report, and in the debate by my noble friend Lord Woolmer, is the concern about the country of origin principle and its effects on the rights and protections of consumers and employees. The Government support the committee’s view and that expressed by my noble friend Lady Cohen of Pimlico this morning that this component of the directive will not lead to a ““race to the bottom”” in terms of regulatory or protective standards. Consumers will still be able to rely on the fact that contracts that they enter into with service providers from other member states will be drawn up in accordance with their own laws. Furthermore, key provisions of national law to protect workers will be maintained. We are grateful to the committee for its investigation on health and safety concerns. As my noble friend Lord Woolmer stated, one of the Government’s top negotiating priorities is that our standards on health and safety are upheld in all circumstances. Our concern is that the current threshold of ““indispensable”” may be too high. We are working with the Health and Safety Executive and other stakeholders on amendments to protect the central health and safety rules without—and I make this point very strongly—allowing other member states to implement protectionist rules under the guise of health and safety legislation. This is a typical case where we must get the balance right between protecting what we think is essential health and safety legislation, but not allowing protectionism by other countries. The committee has, quite rightly, highlighted the challenges of implementing the mutual assistant framework proposed in Chapter 5 of the directive. This is critical for ensuring trust and confidence in cross-border services and delivering the proper functioning of the country of origin principle. The UK continues to work with stakeholders on provisions in this area to ensure that they are workable and practical. My noble friend Lord Woolmer also asked about the European Commission’s sub-group on mutual assistance. Its role is to develop the mechanism to allow for mutual assistance between member states. The Commission aims to have a prototype system developed by early 2006. My noble friend also asked what work we are doing on this. We recently commissioned a study to investigate how best to implement these provisions in the UK and the likely costs of doing so. Detica, a consultancy with a strong background in this area, is undertaking the study. It will be speaking to UK government departments, agencies, regulators, local authorities and business representatives in order to build as complete a picture as possible. We hope to receive its final report in the first quarter of 2006. Another issue raised was services of general economic interest. The UK Government agree with the committee that these should not be excluded from the scope of the directive. Past liberalisation of services such as telecoms and transport has produced huge benefits. We can see those. On that basis, we think that we should not allow other areas of exclusion to take place. As my noble friend Lord Woolmer said, the Government support the exclusion of publicly funded healthcare from the scope of the directive. Publicly funded healthcare is not a normal market. It aims for financial efficiency while providing optimal medical care, rather than being a profit-making enterprise. Therefore, we believe that it is inappropriate for this sector to be covered by the directive. We do not believe that that will open the door for widespread exclusion of services of general economic interest, as a carve-out for publicly funded healthcare will not exclude non healthcare ancillary services that are purchased by the NHS from buyers in the marketplace. I shall now respond to a couple of further points made in the debate. I say to my noble friend Lord Haskel that I do not think we should try to bring in the service directive part by part. We need to work through these difficult issues that apply across the board and then get on with it. If we start trying to produce this part by part, we will be back in the position that nothing will happen for a very long time. I assure my noble friend Lord Haskel that we are committed to addressing the competitiveness of the UK service sector. Skills, innovation, enterprise, competition and investment are key drivers of productivity and central to the UK’s competitiveness. These issues are central to what the DTI is trying to do. I should add that technological innovation in services is a very important but difficult area, mainly because so very little is known of this. It is not an area which has been much studied. Therefore, it is not easy to see how we can intervene on those issues. The noble Lord, Lord Roper, asked what will happen next. As noble Lords will be aware, since the House of Lords inquiry took place, the UK has taken over the presidency of the Council of the European Union. Our aim continues to be to make real progress towards agreeing the directive. In the Council working group we have continued the excellent work of the preceding Netherlands and Luxembourg presidencies in making technical improvements to the directive, and we are now moving into discussions on some of the weightier issues, such as the scope of the proposal, the protection of workers and the country of origin principle. As mentioned by my noble friend Lord Woolmer and other speakers in this debate, progress in the European Parliament on the directive has been delayed, with the vote in the Internal Market and Consumer Protection Committee having been put back to November. This will allow committee members more time to reach agreement on compromise amendments. It means that the First Reading in the European Parliament will not now take place until January 2006. The position of the Commission and Commissioner McCreevy is that they do not intend to produce any further ideas on the proposal until the Parliament has considered it. The European Parliament has an important role in shaping the directive, and we look forward to seeing its proposals. During our presidency we have set ourselves the goal of making solid progress at working level on the services directive by the end of year so that we can leave it in good shape for the Austrian presidency. There are still a number of key issues to be resolved, but it looks like we will be able to achieve the progress we want on the directive, which is of such central importance to the UK.