TCS Daily

Europe's Not Being Served

By Jeremy Slater - March 1, 2006 12:00 AM

Pity poor Jose Manuel Barroso. The European Commission president has set himself out to be Europe's economic modernizer - the man from Lisbon who would finally make the EU's Lisbon Agenda become reality. But as each month passes Barroso and his fellow reformers at the Commission seem to be taking two giant leaps back for every small step forward.

Consider their recent, humiliating defeat at the hands of the European Parliament on the much-needed services directive. After a frenetic and flailing period of policy announcements and initiatives to cut red tape, encourage the entrepreneurial spirit and create jobs, Barroso must have felt truly stabbed in the back by MEPs last month as they voted to water down an already weak version of the services directive. The proposed legislation was meant to open up national markets to competition from other European businesses in this growing area of the economy.

The change that the reformers least wanted was the striking of the country of origin principle from the proposal. This would have allowed workers such as solicitors and hairdressers to have started businesses elsewhere in the EU, but still operate under the laws of their own country.

European business organization Unice was obviously disappointed and said the compromise "has deprived the directive of most of its capacity to create growth and jobs in Europe. The goal must be to remove obstacles and to create new activities. Between 600,000 and 800,000 new jobs are at stake."

However, the deal was celebrated by many MEPs, including German socialist Norbert Glante, who gloated, "The services directive took off as a tiger and landed as a fireside rug."

Others from the newer member states felt that "old Europe" had shut them out. "Our entrepreneurs are not welcome in old member states," commented Valdis Dombrovskis, a Latvian member of the centre right European People's Party.

It seems a majority of MEPs across the two main parties in the parliament simply want liberalization and globalization to go away. They want to return to a more closed economy such as the one that existed during the Cold War and before the oil crises of the 1970s put an end to a cozy period of economic growth. The French call it nostalgically les Trentes Gloires and hanker for its stability and its ability to afford them a high level of government spending that insures their beloved social model.

Unfortunately, the wheels have been coming off this model for nearly 25 years. Germany was once considered the driver and inspiration for other European economies, with its strong manufacturing base and cushy social net. But now its economy is living on borrowed time; it still relies on big industry when other western economies have made the switch to services.

So, in their yearning for a supposedly glorious past, MEPs amended out of existence the Commission's original proposal for legislation to create a true single market in services across the Union. Their votes have filleted a directive that would have created many new jobs. It would have established the right to employment in services as part of the four freedoms established in the Treaty of Rome and would have allowed small businesses to set up shop throughout the rest of the EU.

However, a majority of parliamentarians have instead have decided to establish an "old fortress Europe" to halt the tide of globalization. The market for services already represents 70 percent of the European economy and this is expected to grow in the future.

Although parliament has done its hardest to destroy the services directive, fortunately it is not the only arbiter in the process. National governments will also have their say at the Council of Ministers, but it is unlikely that they will undo much of the work done by MEPs as France and Germany supported their moves. President Jacques Chirac announced a year ago that he was going to "kill" the directive and Chancellor Angela Merkel is unlikely to want to rile the SPD members of her grand coalition.

Sadly people who fret about social justice and social dumping - the idea that companies from countries with fewer social laws will drag the standards of others down - must be unaware that countries with a higher proportion of service industries employ more women and older workers. Those who scoff at services consisting mainly of hairdressers and Polish plumbers miss the point. Not only do those kinds of businesses help to create jobs - as do all small businesses -- but also service companies are big investors in high technology, which helps boost productivity.

The eurozone growth rate needs all the help it can get if it wants to emerge from a half-decade of underperformance. In fact, a boost in growth would help Europe reduce it unemployment queue of 19 million and bring many nations' budgets back into line. But how is Barroso going to make this great leap forward when short-sighted politicians keep dragging him down?


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