Brussels, 23rd December 2002
Functioning of EU product and capital markets - summary of European Commission report (see also IP/02/1969)
The European Commission has adopted its latest report on the functioning of the EU's product and capital markets. The report provides additional evidence that the Internal Market has delivered significant benefits for Europeans, not least lower prices for many consumer products. But there is still much untapped potential for gains in several areas of the economy, especially services (in particular financial services) and public procurement. The full text will be available on the Europa website: http://www.europa.eu.int/comm/internal_market/en/update/economicreform/index.htm
Pace of implementation of reforms
Based on analysis of the 60 main policy orientations issued in Council conclusions since the 1998 Cardiff European Council first requested the Commission to publish annual progress reports on the functioning of the EU's product and capital markets, the report concludes that there is still a wide gap between policy intentions and achievements. Reforms will need to be speeded up through swift adoption and in particular through much improved performance in implementing EU law at national level.
The report shows that the major reason for the late introduction in practice of previous Internal Market Directives has been delays in implementation at national level. On average, previous Internal Market Directives have taken 1.18 years to adopt. The deadline agreed by Member States for implementation has been an average of 1.10 years after adoption. But delays in implementing Directives into national law have further extended that time by an average of 2.21 years.
Untapped potential of the services sector
A Commission report published in July 2002 (see IP/02/1180) concluded that there are many remaining barriers which still prevent the proper functioning of the Internal Market in services, that services are much more prone to being hindered than goods and that this holds back the European economy as a whole, not least because many producers of goods are also significant buyers of services such as distribution, advertising, transport and financial services.
This verdict is endorsed by today's report, which shows that price convergence (see below) has been limited in service sectors. Europe's relatively poor progress in services sectors using new technologies (for example, securities trading and wholesale and retail distribution) is key factor in Europe's poor competitiveness performance compared to the USA.
Trade in services has almost doubled since 1993 (from €194 billion to €362 billion) but is still far behind trade in manufactures, which has risen from €670 billion to well over €1 000 billion.
There are numerous barriers affecting services which could best be removed by action at EU level. The Commission will focus on this in the second stage of its Services Strategy and intends to bring forward before the end of 2003 a proposal for a framework Directive.
But action at Member State level will also be required. The report concludes, on the basis of the questionnaire sent to Member States by the current Danish Presidency of the EU's Council of Ministers, that while Member States efforts so far have achieved some successes, they are generally fragmented and not systematic.
Significant progress has been made in the integration of financial markets. But EU financial markets are for now still fragmented, though the Financial Services Action Plan (FSAP) (see IP/02/1785) has addressed some of the obstacles to integration and more measures are in the pipeline.
The full integration of financial services markets will boost all other sectors of the economy. Recent research (see IP/02/1649) estimated the macroeconomic impact of financial integration at 1.1 % of EU GDP at 2002 prices, with a rise in employment of 0.5 %. In addition, the knock on effects of cheaper finance would boost growth by a further 0.74 % and 0.92 % of the value added of manufacturing industry.
There is huge potential for consumer gain in retail financial markets, for example for mortgages, insurance and pensions, though little of this has yet been realised. The December 2001 Regulation setting domestic and cross border payments at the same level is an important beginning.
Despite the introduction of the euro, consumer interest rates continue to vary widely between Member States, even within the eurozone. Little cross-border activity is reported in retail markets, largely because of regulatory differences and lack of harmonised financial products and of comparable information the European code of conduct for mortgage lenders, to which over 3600 lenders have adhered (see IP/02/1397) and the proposed Consumer Credit Directive (see IP/02/1289) will partly address this.
Improving the regulatory environment
The report looks from an Internal Market perspective at Member States' efforts to improve the quality of regulation, particularly with respect to small businesses and to start-ups. It takes into account responses to a questionnaire sent to all Member States by the Danish Presidency.
It concludes that Member States have had striking success, largely through electronic means, in improving the provision of information to companies and in simplifying business start-ups. However, the amount of time and money needed to set up a business continues to vary widely between Member States.
Member States hardly take aspects of the Internal Market into account when trying to improve their administration and regulation. Seemingly only a few Member States systematically collect information about problems foreign firms face when trying to do business in their country or even about the problems domestic firms are confronted with abroad.
If better regulation initiatives are too narrowly focused at national level they risk increasing the 'divide' between domestic and "foreign" enterprises instead of contributing to the functioning of the Internal Market.
Across the EU, price convergence remains stagnant
Price convergence is a good indicator of market integration. During the 1990s, prices across the EU clearly converged. However, recently the progress has run out of steam and in 1999 and 2000 had gone into reverse.
Early indications are that, in 2001, the negative trend was turned around but that price variations between EU Member States remain similar to those in 1998.
Note: The table shows the co-efficient of variation in selected years for private consumption including indirect taxes. The co-efficient of variation measures the degree of variation around the average. The figure for 2001 is an estimate. There is a break in the data series in 1992 and 1999.
The report has good news for consumers on prices. It shows that where prices for particular items including most fresh foods, beverages and consumer electronics - have converged, they have generally done so at lower levels as increased competition has prevented overcharging.
However, the report identifies cars, glassware and books as goods where more integration of markets and more competition could increase price convergence to the benefit of consumers. On the services side, it shows that price convergence so far has been very limited. For example, the variation between EU average prices and prices in the cheapest or most expensive Member States for car insurance, car hire, taxi fares and dry cleaning is over 30 %.
The report shows that price convergence between the EU 6 founding Member States (Belgium, Germany, France, Italy, Luxembourg, Netherlands) and between those countries and Austria is very tight. Italy has the lowest prices of that group at 92 % of the EU average and Germany the highest at 102 %. Prices in Spain (83 % of the EU average for private final consumption, Portugal (74%) and Greece (82%) have also converged with each other, but remain well below the EU average. Finland (117 %) and the three non-eurozone countries - Denmark (126 %), Sweden (122%) and the UK (116 %) - show prices above EU averages. In Ireland (113 %) increasing prosperity has recently pushed prices significantly above the EU average, though they remain lower than in the four countries above.
The report also identifies ways to boost price convergence, including:
Trade within the EU
Cross-border manufacturing trade between EU countries consistently grew faster than GDP between 1995 and 2000. However, in 2001, intra-EU trade fell from 17.4 % of EU GDP to 17 %. This may be an isolated event as 2001 was an exceptional year and world trade also stopped growing for the first time in two decades. However, it emphasises the need to reinforce the Internal Market to ensure that the EU fully exploits its growth and job creation potential.
Trade in the services sector remains disappointingly low. Remaining technical barriers to trade continue in some goods sectors to create unnecessary costs, reduce trade and increase prices to end consumers. For example, in the lorry sector, the additional cost for exporters to adapt new lorries to national requirements ranges from € 1785 to € 2500 per vehicle
The report concludes that trade between EU countries could be further increased by better application of the mutual recognition principle whereby goods or services legally sold in one Member State can be sold in all the rest. A third of infringement proceedings between 1998 and 2001 involved issues of mutual recognition.
However, it is encouraging that since the mid-1990s trade between EU countries has increased so much without a corresponding increase in infringement procedures.
The EU's external trade
Until 2001, world trade as a whole and the EU's trade with third countries had been growing faster than trade flows within the EU. The value of manufacturing imports to the EU nearly doubled from 1994 to 2001 from € 139 billion to € 276 billion. This shows that:
Cross-border direct investment
Foreign direct investment (FDI) by EU based companies in other Member States grew rapidly between 1995 and 2000. FDI as a proportion of GDP had been growing much faster than trade during that period. But in 2001 FDI within the EU was hit hard by the economic downturn and fell sharply to below 1999 levels.
Further integration in public procurement is a priority
Public procurement's share of GDP declined from 17.5 % in 1995 to 16.2 % in 2001. However, integration of these markets could still yield enormous benefits. The percentage of public procurement published in the EU Official Journal (OJ) grew from 11 % to 15 % in 2000, but stayed the same in 2001.
While the number of invitations to tender published in the OJ has risen by 80 % since 1995, only just over half of these result in a contract award notice being published, which points to lack of transparency over the results of many competitions. The number of award notices indicating direct cross-border procurement remains tiny at 1.26 % of the total number in 2001. The real level of cross-border procurement is significantly higher it has been estimated at 10 % - if one includes indirect procurement through affiliates in other Member States. But it is likely that the full potential of an integrated public procurement market is far from being reached.
Implementing the proposed package of Public Procurement Directives (see IP/02/1391) is a high priority. These will streamline award procedures and increase e-procurement, which should increase transparency and open up markets.