Article (21/12/2009)

The economic impact of the Services directive

By the end of 2009, all Member States of the EU must have transposed the Services directive into national law. This will constitute a major step forward in the completion of the legal framework for the internal market, but its economic impact is expected to be relatively small. It may lead to double-digit export growth for certain services branches. The small scale of these exports, however, gives rise to a weak impact on turnover, value added and employment.

The Services directive is considered by the European Parliament and the European Council as an essential step in the creation of the internal market. After implementation of the directive it will be easier to supply services in other Member States or to set up a foreign subsidiary. The directive requires strongly simplified administrative procedures and bans discrimination between domestic and foreign service providers. Despite its importance for the internal market, however, the directive is not expected to have a significant impact upon the economy.

Starting from the empirical literature, this study confirms that the implementation of the directive should have a weakly positive impact on the Belgian economy. As concerns the macroeconomic impact, two leading European studies have been consulted. Both studies started from the obstacles that service providers have to surmount to sell or invest in foreign markets. The Services directive would lead to a significant decrease in these obstacles, the economic impact of which has been simulated by Computable General Equilibrium (CGE) models, viz. the CETM of Copenhagen Economics and WorldScan of the CPB Netherlands Bureau for Economic Policy Analysis. Since the studies refer to 2004 and the (then) proposal for the directive, a tentative update of the outcomes for Belgium has been made. As for the services within the scope of the directive, Belgian intra- EU trade could grow by, at most, about 37%, and the capital stock owned by foreigners by, at most, about 24%. As services represent only a small share of foreign trade and the net impact on the capital stock is also relatively small, the directive may lead to an impact upon Belgian GDP of between only 0.5% and 1.0%, and the creation of about 6 000 to 9 000 jobs.

The study proceeds with an econometric analysis of the factors that have an impact on the decisions to export, to import or to establish a foreign subsidiary. The analysis builds on a database of Belgian businesses. The estimations revealed that the regulation affected by the directive has a significant impact only on the decision to export, but not on either other type of decision (except for the import of construction services). Other factors that play a role are the size and efficiency of the company and obstacles that are not affected by the directive. From the outcomes of the estimations, a simulation of the directive’s impact at branch level has been made. Depending on the branch and the size of the company, exports may increase by some tens of percents or even double or triple. In particular, this would be the case for the real estate, construction, rental, automation and business services industries, and more so for small than for large enterprises. In no case, however, would the impact upon turnover be more than a few percent. The latter result again indicates that exports are relatively small for service providers. These microeconomic outcomes thus correspond to the outcomes of the CGE simulations.

As a case study, the impact upon wholesale and retail trade has been considered. This branch is hardly at all involved in international services trade. Yet the administrative simplification that springs from the directive may have an impact upon its performance, in particular for retail trade. There was, however, insufficient suitable data for a quantitative estimation. A qualitative analysis instead revealed that the deregulation of the past ten years has coincided with increasing productivity growth, and there is some indication that competition has also increased. After the implementation of the Services directive these trends might continue.

The study thus confirms the expectation that, although the cross-border activities of certain services branches may strongly grow, the aggregate impact should be relatively weak and concentrated on a limited number of enterprises. Nevertheless, the directive fits in with the European objective of creating an internal market with no distinction between domestic and foreign producers.




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