Economist Intelligence Unit: Country Profile: European Union Part 3

Economist Intelligence Unit: Country Profile:
European Union
Part 3

Economic sectors: Agriculture

Although the share of agriculture and fisheries in employment--including self-employment, which makes up over half of the agricultural labour force--is still about 4%, the sector (together with forestry) accounts for only 1.8% of GDP, with fishing providing another 0.1%. The EU is both a major food exporter and the world's largest food importer.

Agriculture absorbs large share of the EU budget

In terms of cost, the common agricultural policy (CAP) is the most expensive of all EU policies, taking up 44% of the total budget in 2007, although this is set to decline to about 32% by 2013. The objectives of the CAP, as set out in the Treaty of Rome, were to increase productivity, ensure a fair standard of living for farmers, stabilise markets and assure food supplies at reasonable prices for consumers. Until the McSharry reforms in the early 1990s, the CAP had two main aspects--a market policy and a structural policy--both funded by the European Agricultural Guidance and Guarantee Fund (EAGGF). The McSharry reforms transferred a substantial proportion of spending from price support to income support related to previous production levels, to compensate for price cuts. A second package of reforms agreed in 1999 included further sharp price cuts for cereals and beef.

Spending is now decoupled from production

In a further package agreed in June 2003, the major thrust was a "decoupling" of most CAP subsidies from production, giving farmers a flat-rate payment based on past, but not present or future production. The reforms are being phased in across the EU15 over 2005-07. The aim is to move European farming towards producing what consumers and non-farming citizens are thought to want--high standards of food safety, better animal welfare and better environmental management. To achieve this, the payments are conditional on the farmer respecting higher standards than the minimum provided for by law, monitored by an audit system.

The reform allowed the EU to make some concessions on export subsidies and market access in the Doha round of world trade talks. These concessions meant that the EU was not singled out as the main culprit for the collapse of the Doha round in mid-2006, although the protectionism of the agricultural policy was still a factor in the failure.

An additional challenge is EU enlargement to the east, which, with the entry of ten new states in 2004, plus Romania and Bulgaria in 2007, has broadly doubled the EU's farm population and increased its agricultural area by about 50%. No increase in the EU agricultural budget was provided for the new member states, so the gradual introduction of equivalent support to their farmers is coming out of the budget for the EU15.

At the same time, the EU is attempting to integrate agricultural policy into the broader context of environmental management and rural development, in an effort to stem the depopulation of parts of the countryside through diversification of the rural economy (by promoting tourism and crafts, for example), so as to maintain viable communities, while safeguarding the rural landscape and biodiversity and reducing pollution.

Fishing

Although fishing accounts for tiny fractions of EU GDP and employment, many coastal communities depend on the earnings of the EU's 250,000 fishermen and an equal number of onshore support workers. The common fisheries policy (CFP) uses some policy instruments similar to the CAP, with guide prices and import arrangements that give preference to EU production. Access to coastal waters is reserved for boats from local ports, but outside the 12-mile limit, access is granted to other EU countries. The major problem since the CFP was launched in 1983 has been the need to safeguard diminishing fish stocks through a quota system plus a gradual reduction of fleets. A temporary sop to long-distance fishing fleets, notably from Spain, has been found in the purchase of fishing rights from African governments and Argentina in return for financial compensation.




Economic sectors: Manufacturing

Manufacturing has fallen sharply as a share of value added since the 1960s, but although by 2005 it generated a modest 17.4% of EU25 GDP, it would be a mistake to draw the conclusion that it has ceased to be of importance. Manufactured products account for about 75% of extra-EU exports of goods and services and around 70% of intra-EU exports. Many services are related to the production and distribution of manufactured products.

A wide range of sectors exist

Most EU countries can boast a wide diversity of manufacturing sectors. Nevertheless, it is possible to point to some specialisations, such as that in industrial machinery in the Basque Country, Germany and Italy; clothing and related items in Italy; pharmaceuticals in Germany and the UK; public transport equipment in France; telecommunications equipment in France and the Nordic countries; and furniture in Italy and the Nordic countries. Some areas or countries have established themselves as focal points for foreign investment, such as Ireland and Scotland in computer hardware and software, or Portugal and Spain (and more recently Slovakia) for automotive vehicles and parts. In general, the EU is better at using advanced technologies to improve the productivity and quality of traditional goods than the development of the new technologies themselves, but transport technology (such as aircraft and high-speed trains) and telecoms are major exceptions.

In recent years a free-market, pro-competition approach to industrial policy has been adopted by the European Commission and most member states. The basic thrust is to create an environment conducive to the growth of EU firms without insulating them from competitive pressures or hindering the removal of excess capacity from the market. This approach emphasises "horizontal measures", designed to encourage research and innovation.




Economic sectors: Construction

The contribution of construction activities to overall value added has declined in Germany in recent years, but increased in many other EU countries and averaged 6% of GDP in 2005 (EU25), up from 5.4% of GDP (EU15) in 2001. There was massive overcapacity created during the construction boom following German reunification, and the sector there has been undergoing persistent contraction. In contrast, activity has been exceptionally strong in peripheral states such as Ireland and Spain.

Within the sector, the renovation of existing buildings accounts for an increasing proportion of activity. Civil-engineering activity, which accounted for about 19% of all construction, was reduced by public investment cuts in the mid-1990s and continues to be hampered by budget constraints. New residential activity has been relatively strong with the exception of Germany. New non-residential construction has been a little weaker overall, although varying considerably from region to region.




Economic sectors: Financial services

Financial services account for 5.3% of GDP. Only during the 1990s did financial services companies start carrying out activities across borders on a significant scale, following EU measures to liberalise trade as part of the internal market programme of the late 1980s and the simultaneous abolition of exchange controls. Even now, banks wanting to compete for retail services outside their home country usually can only do so by buying banks already present in the target country.

With the single currency in place, the EU is now moving belatedly to create an effective single European financial market. That was the idea behind a five-year action plan to overhaul the EU's banking, insurance and securities industries, which was launched by the Commission in 1999. Despite the liberalisation of capital movements and the adoption of specific sectoral directives for banks, insurance and investment firms in the early 1990s as part of the single market programme, the Commission conceded that "the Union's financial markets remain segmented, and business and consumers continue to be deprived of direct access to crossborder financial institutions". The action plan set forth an ambitious agenda for 2000-05, comprising 42 measures (of which 24 were legislative acts) focusing on wholesale and retail markets, as well as supervisory structures. With most of the regulatory framework now in place, in June 2005 the Commission presented a green paper on financial services policy for the next five years. The emphasis in this new phase will be on consolidation of existing legislation, with few new initiatives, and on ensuring the effective transposition into national legislation of rules agreed by the EU and their rigorous enforcement by national regulators.

Adopted measures

Distance marketing. A directive adopted in June 2002 regulates the distance marketing of retail financial services, complementing the 1997 directive on distance selling of all other products. It outlaws abusive marketing techniques such as "inertia selling" and imposes restrictions on unsolicited phone calls. It stipulates consumers' right to cancel most types of contract up to 14 days after they have been signed, or 30 days for life insurance and private pension schemes. This directive has caused some controversy within the industry, as a result of the apparently conflicting rules it imposes on the sector. Whereas the earlier distance marketing and e-commerce directives are based on the country-of-origin principle, the present directive makes banks and other financial institutions subject to the law of the country where their customer is based. Since the directive gives member states scope to set their own rules on several key points--the cooling-off period, for example--national law will continue to vary considerably.

Financial collateral. A directive also adopted in June 2002 is intended to simplify the law on the use of securities and cash as collateral for financial transactions. Collateral is used to manage and reduce the credit risks arising from all kinds of financial transactions, from derivatives to general bank lending. However, firms previously had to make difficult and expensive adjustments to accommodate variations in collateral requirements across the EU.

Financial conglomerates. A directive on the supervision of financial conglomerates, adopted in November 2002, calls for closer co-operation and information-sharing between supervisory authorities across the financial sector and brings the rules for conglomerates into line with those covering single-sector financial groups. The legislation was prompted by the ongoing consolidation within the financial services sector in Europe, which has given rise to financial groups operating in a range of different sectors, such as banking and insurance. The key objective is to ensure that cross-sector groups are adequately capitalised and supervised, and to avoid artificial capital being created in a financial group that inflates its balance sheet, as happened with an energy conglomerate, Enron, in the US.

Banking. The single market for banking was virtually complete--at least on paper--by the start of 1993, when the second banking directive came into force, with related measures on own funds and solvency ratios of credit institutions. The directive allows a credit institution licensed to act as a bank in any member state to do so in any other member state, establishing the principle of home-country control. Although the second banking directive has encouraged EU banks to move into neighbouring markets, it has not led to a true single market for banking services. One problem has been legal uncertainty surrounding the "general good" clause, which allows host countries to make foreign banks comply with extra local rules grounded on a public interest (for example, consumer protection, prevention of fraud or tax enforcement).

A 1989 directive sets rules for banks' financial reporting and, in particular, their consolidated accounts. A 1991 directive on the transparency of banking conditions relating to crossborder financial transactions aims to prevent money laundering; and this was extended by further directives in 2000 and 2005.

A 1994 directive requires member states to establish a deposit guarantee scheme, financed by the banks, to protect depositors in the event of a credit institution's financial collapse. The system covers depositors in any member state, up to [euro]20,000 each.

A directive adopted in June 2006 incorporates into EU law the Basel II rules agreed in 2004 on the minimum capital to be held by banks and investment firms to cover their risks. The new system is more flexible and refined than the Basel I regime, dating from 1988. In addition to credit and market risks, the new rules will also cover operational risks--that is, losses from system failure, human error or fraud. The powers of a bank's home-country regulator to exercise top-level supervision of its crossborder operations will also be enhanced. The new rules came into force at the start of 2007, with a one-year transition period for banks to adjust.

Insurance. The framework for an integrated EU insurance market was completed in 1992, with the adoption of directives on life and non-life insurance. As for banking, these provide for a single licence based on mutual recognition and home-country control, buttressed by strict prudential rules on reserves and solvency margins. The third non-life directive relates to direct insurance of "mass risks" (those incurred by individuals and small enterprises), as opposed to "large risks" (mainly industrial or commercial), which were covered by the second non-life directive (1988) and two directives on motor vehicle insurance (1990). In practice, most insurance companies prefer to establish a local presence (often through acquisition) because of the need for follow-up customer service and sales. Local rules on sales techniques and advertising still apply, but these cannot discriminate against foreign companies. In certain circumstances, host states can still exercise controls over particular products (for example, mandatory third-party motor cover), and individuals are protected by application of the domestic contract law.

As in the banking sector, some member states use idiosyncratic local rules, justified in terms of the "general good", as an obstacle to foreign insurers, which are forced to adapt their policies and products, although the Commission has tried to clarify the concept. A communication issued in February 2000 spells out the exact scope of the freedom to provide services and defines the legal framework within which a member state may invoke the general good in order to regulate the provision of services by insurers established in other member states, whether directly (via the Internet) or through a local agent or branch. Companies confronted by host-country rules that conflict with the principles set forth in the paper can lodge a complaint with the Commission.
A directive adopted in September 2002 harmonises national rules on insurance brokers and agents, thus creating a single market for this profession. Once registered in a member state, intermediaries are able to provide services or establish themselves elsewhere in the EU. The directive also provides a stringent framework of consumer protection rules.

Investment services. The cornerstone of EU legislation in this field is the 1993 investment services directive. Closely following the principles of the second banking directive, it enables investment services to be offered throughout the EU on the basis of a single licence and home-country control (again with exceptions for consumer protection). A major revision of the directive, adopted in April 2004, is intended to promote the creation of an integrated securities market by providing a "single passport" for investment firms and reduce the cost of trading by encouraging competition between traditional stock exchanges and other trading systems, such as online exchanges. One controversial feature of the directive is that banks will be allowed to compete with stock exchanges through "internalised" trading (a practice already permitted in the UK and Germany), but only if their prices are disclosed in advance for all but the largest transactions. Member states were expected to transpose the measure, known as the markets in financial instruments directive (MiFID), into national law by October 2005. This deadline was subsequently extended to January 2007, with firms required to comply from November. However, in April the Commission launched infringement proceedings against 24 of the 27 member states (all but the UK, Ireland and Romania) for not having implemented the measure on time.

A 1985 directive on "undertakings for collective investment in transferable securities (UCITS)" deals with crossborder sales of mutual funds or unit trusts. This measure was updated by a pair of directives adopted in December 2001. The first broadens the range of financial assets that may be offered throughout the EU by collective funds: in addition to listed shares and bonds, these now include cash and money market funds, futures and options, and shares in other funds. The second authorises fund managers to provide their services throughout the EU on the basis of a single passport, within a framework of general conditions relating to investor protection, information requirements, risk spreading and so on. In July 2005 the Commission published a green paper to stimulate discussion of possible adjustments to the UCITS legislation, which has been widely criticised as inadequate. It is expected to propose amendments in the near future.

Investor compensation schemes are the subject of a directive adopted in 1997. Designed to protect small investors from losing their savings through bankrupt or fraudulent investment firms, its terms closely parallel those for bank deposit guarantees, providing for a minimum compensation of [euro]20,000 per investor.

A directive adopted in May 2003 aims to ensure high levels of security for pension holders by requiring fund managers to observe common prudential rules, while enabling them to invest throughout the single market to get the best returns. The directive provides a single passport for pension funds, allowing them to offer their services throughout the EU on the basis of approval from their home state. The measure will also help large companies to cut their costs by offering employees a single pan-European pension scheme, although it does not address the tax obstacles to this.

Another directive adopted in July 2003 allows securities prospectuses approved in one EU member state to be accepted throughout the EU for public offers or admission to trading on regulated markets.

Speeding up financial regulation. A committee of "wise men" headed by a central banker, Alexandre Lamfalussy, put forward a number of proposals aimed at modernising and increasing the efficiency of Europe's fragmented capital markets in February 2001. Most importantly, the group called for the establishment of a new "fast-track" system that would enable financial regulations to be enacted more quickly, in order to keep pace with rapid developments in the financial markets. A first stage would see framework directives or regulations approved in the traditional way by the Commission, Council and Parliament. Detailed implementing rules would then be fleshed out by a new securities committee, comprising officials from member states and the Commission. A separate committee of national securities regulators would advise the Commission on technical issues and promote co-operation between regulators to ensure that EU rules are enforced consistently. The Commission has since set up the new committees, and several directives (including MiFID) have been dealt with under the Lamfalussy procedure. At end-2002 the Council of economy and finance ministers (Ecofin) agreed on arrangements to extend the Lamfalussy method--which at first applied only to transferable securities--to speed up the legislative process on banking and insurance as well.




Economic sectors: Other services

In 2006 service sectors normally provided commercially accounted for 49.2% of GDP in the EU25. Of these, 28% fell into a broad category of financial intermediation, real estate services renting and business activities; the other 21.2% were accounted for by wholesale and retail trade, repair of motor vehicles and personal and household goods, hotels and restaurants, and transport, storage and communication. Outside the commercial services sector, public administration and defence, social security, education, healthcare and other public services accounted for 22.7% of GDP.




The external sector: Trade in goods

EU15 exports grew strongly from 1996 to 2000 but less strongly in 2001-03, as a result of slower world trade growth and a strengthening of the euro. Imports also grew strongly between 1998 and 2000, and in 1999 the EU15 trade balance turned negative for the first time since 1993, with a deficit of [euro]21bn. The deficit widened to [euro]91bn (and [euro]138bn for the EU25) in 2000, but in 2001-02 the slowdown in EU domestic demand was more severe than the slowdown in export markets, which led to a fall in the EU25 trade deficit to [euro]39bn in 2002. Over the next four years the deficit widened again to [euro]112bn in 2005 and [euro]173bn in 2006. (When the trade deficits of Romania and Bulgaria are added in, the EU27 trade deficit becomes even larger). These figures refer to the normal way of measuring crossborder flows of goods, which adds the cost of insurance and freight to imports.

The US is the EU's largest single trading partner. It takes over three times more EU exports than the next country, Switzerland, but in 2006 China overtook the US as a source of imports and is now the EU's top supplier. In 2006 Russia was the EU's third-largest source of imports, followed by Norway, Japan and Switzerland. Imports from Turkey and South Korea, although lower than the aforementioned countries, have been increasing rapidly.

The EU is a major net exporter of chemicals, transport equipment and industrial machinery, while there are large deficits in raw materials and energy. There is also a significant deficit in food and beverages, despite the EU's image of running a protectionist agricultural policy.




The external sector: Invisibles and the current account

The EU15 ran rising current-account surpluses between 1993 and 1997, at which stage the surplus reached US$98bn (according to Economist Intelligence Unit aggregations that include transactions between member states). It then fell back and turned into a deficit of US$69bn in 2000 (the EU25 deficit was US$88bn). As the EU economy slowed, the EU25 current-account balance moved into a surplus in 2002-04, before falling back into a deficit of US$13.6bn in 2005, as oil and raw material prices increased. This deterioration continued in 2006, with the current-account deficit widening to US$60bn. There were surpluses on the services and income balances in 2006, offsetting the merchandise trade deficit, but current transfers were negative on balance.




The external sector: Foreign reserves and the exchange rate

Reserves

International reserves, excluding gold, of the European System of Central Banks (the European Central Bank and participating national banks) amounted to [euro]150bn at the end of 2006. Gold reserves were valued at [euro]176bn.

Exchange rates

On January 1st 1999 the euro was introduced at a value of Ecu1:[euro]1. (The Ecu was a currency basket made up of 12 currencies--those of all EU members except the three newest member states, Austria, Finland and Sweden.) At this point the currencies of the 11 states participating in economic and monetary union (EMU) were permanently frozen at their then market values; the same applied to Greece and Slovenia when they joined later (see Economic policy). The Danish krone and the currencies of Cyprus, Estonia, Latvia, Lithuania, Malta and Slovakia are linked to the euro through the revised exchange-rate mechanism (ERM2), with a fluctuation band of [+ or -]2.25%; Cyprus and Malta will join EMU in January 2008. The pound sterling and the Swedish krona still float freely against the euro. During the two-and-a-half years after its introduction, the euro depreciated substantially against the US dollar. It recovered in the middle of 2002 and again during 2003 to end the year at US$1.26:[euro]1. In 2004 it fluctuated around this value to average US$1.244:[euro]1 and then US$1.245 in 2005. During the course of 2006, the euro appreciated markedly against the US currency, averaging US$1.26:[euro]1, but ending the year at US$1.32:[euro]1. The euro continued its appreciation steadily in 2007 and more sharply from September onwards, reaching record highs late in the year of up to US$1.48:[euro]1.




Regional overview: Membership of organisations

The EU, as such, does not have legal personality and therefore cannot be a member of organisations, but it co-operates closely with the Organisation for Security and Co-operation in Europe (OSCE) and the Council of Europe, both of whose members include all EU member states.

The European Community, which excludes the Common Foreign and Security Policy and Co-operation in Justice and Home Affairs, is a member of the World Trade Organisation (WTO) and also of the Food and Agriculture Organisation (FAO) of the UN. It is not, however, a member of the UN itself. The European Community is also a member of the European Economic Area (EEA), which integrates three other countries, Norway, Iceland and Liechtenstein, into the internal market.

OSCE

Established in 1972, the Conference for Security and Co-operation in Europe (CSCE) was initially a non-institutionalised multilateral forum for East-West dialogue and served for almost 20 years as a convenient and flexible arrangement for easing cold war tensions. The organisation gradually expanded in aim and strengthened its organisational structure in the 1990s. After the end of the cold war the role of the body started to change quickly, and in December 1994 the conference was officially renamed the Organisation for Security and Co-operation in Europe (OSCE). With 55 member states, the OSCE is the only inclusive pan-European security organisation. Canada and the US are also members of the organisation.

The OSCE has played a major role in conflict prevention and resolution, as well as post-conflict reconstruction in Europe. Its activities embrace three dimensions: security, economy and human rights. The OSCE is engaged in preventive diplomacy, arms control and confidence-building activities. It undertakes fact-finding and conciliation missions and carries out crisis management. The organisation is a component of the European security architecture. It is a "regional arrangement" in the sense of Chapter VIII of the UN Charter, which gives it the authority to try to resolve a conflict in the region itself, before referring it to the UN Security Council. Since the early 1990s the OSCE has been heavily involved in the Balkans and the Transcaucasus.

The activities of the OSCE are performed by a web of specialised agencies. The High Commissioner on National Minorities, based in The Hague, is the primary source of "early warning", with responsibility for identifying ethnic tensions that might endanger peace. The Office for Democratic Institutions and Human Rights (ODIHR), based in Warsaw, focuses on promoting human rights, democracy and the rule of law. It monitors elections, assists in developing national electoral and legal institutions, promotes the development of non-governmental organisations and civil society, and conducts meetings, seminars and special projects. The Office of the Representative on Freedom of the Media, based in Vienna, assesses the implementation of member states' commitments concerning freedom of journalism, broadcasting and access to information.

The Council of Europe

The Council of Europe was established in 1949 with ten member states. The number gradually expanded up to 1989, and then nearly doubled in membership as central and east European states became democracies. There are now 47 member states, including the 27 members of the EU. Although it covers a number of fields of co-operation, its most important component is the European Convention of Human Rights and Fundamental Freedoms, which dates from 1950. A European Court of Human Rights adjudicates on cases that can be brought by any person in a member state. Although its verdicts are not binding on member states, they do carry considerable weight.




Appendices: The single market

Up until the mid-1980s the European Community's main contribution to market integration, other than agriculture, had been the establishment of a customs union, which was at that time being progressively undermined by the proliferation of non-tariff barriers. In 1985 this situation gave rise to a seminal Commission white paper, Completing the Internal Market, which outlined a detailed strategy to meet the Treaty of Rome's objectives of free movement of goods, services, capital and labour by the end of 1992. A crucial further development was the Single European Act of 1986, which provided for qualified majority voting (QMV) over a wide range of legislative topics linked to the achievement of these goals. Although many obstacles still remained, a substantial body of legislation that gave a notable stimulus to trade was in place by the end-1992 deadline. This has come to be known as the single market, or alternatively the internal market. At the start of 2003 the Commission celebrated the tenth anniversary of the single market. Increased competition has caused the prices of many goods, such as groceries, clothing and consumer electronics, to converge to lower levels, with improved quality and a wider choice of products. Liberalisation measures in markets for telecommunications and transport have contributed to dramatic price falls.

However, the Commission's semi-annual scoreboards, particularly on infringement proceedings, reveal that there is still a long way to go. It is true that in many sectors the single market is in place, with no real physical, fiscal or technical barriers to trade. Yet the scoreboard also spotlights areas in which member states' resistance to their EU obligations can be extremely strong, and companies can face severe difficulties when relying on their EU rights.
The scoreboards focus on three key features of the single market programme: the implementation of single-market directives; the number of infringement actions; and barriers to trade as perceived by companies.

Implementation has improved

Over the past 14 years the average "implementation gap"--the percentage of the 1,600-odd single-market directives not yet transposed into national law--has narrowed dramatically, from more than 20% for the EU12 in 1992 to 1.6% for the EU25 in July 2007, compared with a 1.5% target set by successive EU summits.

Another indicator is the so-called "fragmentation factor"--the proportion of directives not yet implemented in all 15 member states. This fell dramatically from 26.7% in 1997, when the first scoreboard was published, to just 7.7% in May 2002. In the wake of the 2004 enlargement it climbed back to 15%, but since then it has subsided to 8%, representing 129 directives not transposed on time in one or more member states. Although the average delay is now eight months, in 35 cases transposition is more than two years overdue.

Infringement actions: a slow process

The Commission has a critical role to play in ensuring that single-market legislation is implemented and enforced in the member states. Often accused of excessive leniency in the past, it is now committed to accelerating its investigation of complaints and the pursuit of formal infringement procedures.

The infringement procedure involves a dialogue between the Commission and the government concerned, starting with a "letter of formal notice" sent from the EU. If the government fails to give a satisfactory response, a further missive (a "reasoned opinion") will be dispatched. If the Commission is still not satisfied after the government's response to this, it may take the case to the European Court of Justice (ECJ). This drawn-out procedure, from issuance of a letter of notice to an ECJ judgment, can take up to eight years; less than half of all cases are settled in under two years. If the member state does not comply with the ruling (as sometimes happens), the Commission must retrace the entire procedure, leading ultimately to the possibility of fines. At last count, there were 27 such cases pending, with Belgium and France the most egregious foot-draggers; these cases had been running for an average of nine years since the initial letter of notice.

The improvement in the implementation of EU directives over the past ten years has not been matched in the infringements field. The number of open cases has soared from just under 700 in 1992 to 1,325 today. Italy and Spain are the worst offenders, with 153 and 108 open cases respectively. The Commission originally estimated that if the compliance rate of the new member states was no better nor worse than that of the old 15, the backlog of unresolved cases could swell by 300 within six years. However, after just three years they already account for 245 cases. The sectoral breakdown of infringement proceedings shows that the most problematical areas are environmental rules (21%), taxation and customs union (16%) and energy and transport (12%).
Unfinished business
For ten years or so after 1992, businesses were generally upbeat about the single market and its effects on their companies. Since then, however, discontent has increased, as the EU is seen as imposing too much regulation, with businesses forgetting how much more difficult it used to be when they had to tackle completely separate regulations in each member state. Moreover, there are still a number of major legislative gaps in the single market that were supposed to have been filled long ago. One is the failure to adopt a common EU patent regime. The most gaping hole in the single market is the failure so far fully to open up service markets--which now account for two-thirds of Europe's GDP and 60% of its employment--to crossborder trade. A directive adopted at the end of 2006 is aimed at remedying this situation.

The four freedoms

As defined by the Single European Act (SEA) of 1986, the EU's internal market is "an area without internal frontiers in which the free movement of goods, people, services and capital is ensured in accordance with the provisions of this treaty". The SEA formalised the deadline already set in the Commission's 1985 white paper of completing the internal market by December 31st 1992.

Goods. The free movement of goods within the Union is an essential component of the single market. Under the EU treaty (Article 28), this freedom derives from the elimination of quantitative restrictions on imports and all measures having equivalent effect, the so-called non-tariff barriers to trade. The ECJ has established extensive case law relating to the permissibility of national rules on advertising, size, weight or composition of goods that have been used to obstruct imports from other member states. However, national rules are exempt from the provisions of Article 28 if they are based on the protection of health and life of humans, animals or plants; of public morality, policy or security; of national treasures; or of industrial and commercial property (Article 30). The Cassis de Dijon case (1979) established the important principle of mutual recognition: that any product the sale of which was permitted in a member state should not be prohibited from sale in any other, unless the exclusion was on one of the grounds of Article 30. The court later added two other criteria as acceptable grounds for prohibition: the fairness of commercial transactions and the defence of consumers.
Under the single market programme, controls on goods crossing intra-EU frontiers were abolished on January 1st 1993. Controls within national territory must be carried out in such a way that there is no discrimination on the basis of the goods or the mode of transport. A regulation adopted at end-1998 empowers the Commission to intervene swiftly in disputes or protests that block crossborder routes and access to markets. A response from the member state is required within five working days.

Services. A wide range of services, from retailing to restaurants, can only be delivered to customers in situ. Some others, like financial services, are being traded to an increasing extent. Nevertheless, many other services that could be traded still face huge obstacles. The core of the difficulty is that unlike trade in goods, service provision is far more complex. For instance, it may involve the creation of a temporary or permanent establishment in another member state and the transfer of personnel to that state in which the service is to be provided. From arrival through to completion, a service provider faces a thicket of regulatory barriers. Barriers include heavy legal requirements or administrative red tape to gain operating licenses or authorisations to engage in a specific profession, as well as residence requirements and compulsory membership of national professional bodies.

In January 2004 the Commission tabled a proposed framework directive, designed to eliminate obstacles to the crossborder provision of services. It covered most types of services, other than telecommunications, transport and financial services, which are covered by specific EU rules. The proposal took an across-the-board approach to tackling the main barriers, based on a mix of recognition of other member states' laws and regulations, administrative co-operation, targeted harmonisation where necessary and encouragement of European codes of conduct or professional rules. This so-called "Bolkestein directive" (for the commissioner who proposed it) stirred much controversy, particularly in France and Germany, where it was seen as carrying the threat of "social dumping" through an influx of low-cost workers from the new member states. (Worries over the "Polish plumber" undercutting French workers figured largely in the negative French referendum on the proposed EU constitution in May 2005.) Partly as a result, the directive underwent deep and wide-ranging modifications in the European Parliament and Council of Ministers, and the final version, which was adopted in December 2006 and will come fully into effect by the end of 2009, will ensure that host country rules apply in areas such as employment conditions. However, it will do away with the need for special approvals simply in order to carry out the service.

Capital. Freedom of capital movements within the common market was enshrined in the Treaty of Rome, but this goal was in general terms only realised 33 years later (and there are still some restrictions on company acquisitions). As a result of the capital liberalisation directive adopted in 1988, the last barriers to capital movements had been removed among eight member states by mid-1990 and by the others a few years later.

In precedent-setting rulings, the ECJ in June 2002 struck down "golden share" ownership regimes in France and Portugal that gave their national governments exceptional powers to veto takeover bids for former state-owned companies, while upholding the more restrictive Belgian rules. The rulings encouraged the Commission to take action against other golden-share regimes, under which national governments retain a controlling share in formerly state-owned companies, thereby protecting them from hostile foreign takeover bids. The Commission argues that such arrangements breach European single-market rules on the free movement of capital, as they significantly restrict crossborder merger activity. In February 2003 it opened infringement proceedings against Denmark, Italy and the Netherlands, and in May the ECJ handed down further rulings against Spain and the UK. In September 2006 the court found that golden shares in two major Dutch companies were illegal.

People: frontier controls. Free movement of persons was to have come about at the start of 1993, but some checks remain in operation. Under the 1990 Schengen convention, all member states except the UK and Ireland (and initially Denmark) agreed to eliminate frontier formalities. The Schengen agreement also provided for the harmonisation of visa requirements and procedures (although not the criteria) for granting political asylum. The 1997 Treaty of Amsterdam transferred asylum and integration policy to the EU's "first pillar", that is, it became the responsibility of the main EU institutions, but progress in this sensitive policy area remains sluggish. The Schengen convention itself has been incorporated into the treaty, albeit with opt-outs enabling the UK and Ireland to maintain their border controls.

Individuals are no longer subject to value-added tax (VAT) on goods brought back from another member state, provided they have paid VAT (and excise duty) in the country of origin. Specific tax arrangements for new vehicles ensure that these are taxed in the country of destination, but without this giving rise to frontier controls or formalities. The Council agreed in 1991 on the abolition of duty-free shopping from mid-1999 for travellers within the EU.

Controls relating to drug trafficking, terrorism or clandestine immigration fall outside the purview of the internal-market programme; security checks may therefore continue. For the Schengen signatories, the requisite checks are carried out through increased co-operation between national authorities. The UK, however, insists that security considerations dictate that some frontier controls--however minimal--must be maintained.

People: free movement of labour and freedom of establishment. The Rome treaty lays down the absolute right, which has repeatedly been upheld by the ECJ, of a national of any member state to enter another member state for the purpose of working and doing business. Three linked directives in 1990 extended this right to students, retired people and others. However, for the 12 states that have joined since 2004, existing member states are allowed to impose restrictions for up to seven years.

In order for this right to be fully exercised, however, national legislation and administrative practices have had to be harmonised. Although the process is far from complete, a large number of directives have been adopted. The activities covered include agriculture, public-works contracts, some types of insurance, film production and some areas of commerce and industry. Under the current regulations and directives, EU workers who establishes themselves in another member state are entitled to have their immediate family admitted to that state. Nor is it necessary to have established an office in another member state to do business there.

People: professional qualifications. In practice, freedom to work in other member states was restricted in the past by differing professional qualifications, which obliged professionals from one state to requalify before becoming established in another. A number of sectoral directives since 1975 have harmonised the qualifications for specific professions, such as doctors or hairdressers, but progress was slow. To remedy this, a general directive providing for the mutual recognition of higher-education diplomas was adopted in 1989. It applies to any profession regulated in some way by the state and involving at least three years of higher education. Unlike the approach of the harmonisation directives, there are no minimum criteria for curriculums, but host states may require foreigners to complete an adaptation period or aptitude test. A second general directive, passed in 1992, covers workers with fewer than three years' vocational training. A directive adopted in June 2005 covers a wide range of professions--from doctors and lawyers through accountants, architects and engineers to tourist guides and hairdressers--replacing 15 "vertical" directives enacted over the past 40 years. The aim is to balance the right of qualified professionals to practice anywhere in the EU with the need to protect consumers.

Company law and accounting

The aims of EU company legislation are to facilitate co-operation between companies across Europe, while enabling them to operate in an environment free from legal and tax restrictions caused by differences in the laws of the member states. Over the years a series of numbered company law directives has been put forward by the Commission. Company law directives-----------------------------------------------------------------------Directive no. Adopted Subject matter1st(a) 1968 Formation and registration of limited companies2nd 1976 Financial structure of public companies3rd 1978 Domestic mergers between public companies4th(a) 1978 Annual accounts of limited companies5th(b) - Structure and management of public companies6th 1982 Demergers of public companies7th(a) 1983 Consolidated accounts8th(c) 1984 Qualification and regulation of auditors9th(b) - Conduct of corporate groups10th 2005 Crossborder mergers between public companies11th 1989 Disclosure requirements of branches12th 1989 Single-member private limited companies13th 2004 Conduct of public takeover bids (a) Updated in 2003 and 2006. (b) Directive yet to be adopted and unli-kely ever to be. (c) Updated in 2006.

A 1985 regulation on the European Economic Interest Grouping (EEIG) was the first instrument that directly encouraged co-operation between companies across internal borders. The EEIG is operated by a contract between two or more companies and, once registered, is subject to the internal laws of the state of registration. Each member has joint and several liability for debts incurred by the EEIG, and any profits are deemed to be those of the members and are apportioned among them (that is, it is fiscally transparent). Its purpose is to carry on a joint activity related to the participants' main business, for example, marketing, import/export or joint bidding for contracts. Over 1,000 EEIGs have been created so far.

Insolvency rules. In May 2000 justice and home affairs ministers adopted a regulation on insolvency proceedings. The aim is to improve and speed up insolvency proceedings with crossborder ramifications and thereby improve the functioning of the single market. In particular, it makes it easier for creditors in other member states to claim compensation when a company goes bankrupt. The regulation does not apply to banks and insurance companies, which are subject to special winding-up arrangements adopted in 2001.

The European Company Statute. After 31 years in the legislative pipeline, the European Company Statute was adopted in October 2001. The statute comprises two legal instruments: a regulation and a directive. The regulation provides that a Societas Europaea (SE) can be formed in several ways: through a crossborder merger, as a holding company, as a joint subsidiary, or through the conversion of an existing public company. Although designed to allow firms to organise their operations on an EU-wide scale, it provides that the SE will remain subject to the national laws in force in each of the countries in which it operates as regards taxation, intellectual property rights and insolvency.

The SE must also respect the worker participation rules outlined in the complementary directive, which leaves a good deal of flexibility over how to ensure such participation. The directive requires that as soon as there is a question of creating an SE, a special negotiating body must be formed with the task of determining by written agreement the arrangements for worker involvement. Lawyers and the employers' confederation, BusinessEurope, argue that the complexity of the statute and the exclusion of tax measures will undermine its usefulness for companies. The Commission is aware of the tax problem and is seeking to resolve it through the development of a common corporate tax base.

Employee consultation. A controversial directive adopted in February 2002 sets out minimum requirements regarding worker information and consultation for all companies employing 50 workers or more. The framework directive requires employers to inform and consult employees on all major decisions, especially those affecting jobs. In deference to the principle of subsidiarity, it leaves a considerable margin for member states and individual businesses to apply the rules in a way best suited to them. It also provides for a six-year transition period for those countries that do not have a formalised tradition of in-house worker information and consultation (the UK and Ireland).

The tenth company law directive on crossborder mergers, proposed in 1985, ran into immediate difficulties, mainly because of its provisions relating to worker participation. Like the third directive on domestic mergers, it would apply to legal mergers of the share-exchange type, rather than to the (far more common) acquisition by one company of another that remains in operation as a subsidiary. This proposal was withdrawn at end-2001, but a revised version was tabled in November 2003. This states that if one of the merging companies was previously subject to a participation system, but the merged company is to be established in a state that does not provide at least the same level of participation, the negotiation procedure provided for in the 2001 European Company Statute (ECS) would be invoked. This proposal was approved by the European Parliament in May 2005, clearing the way for adoption by the Council at first reading.

The 13th company law directive, first proposed in 1989 and amended in 1996, set forth some common principles for takeover bids, aimed at increasing the transparency of public offers while protecting the rights of minority shareholders. After 12 years of debate, the measure finally reached a Council of Ministers/European Parliament conciliation committee, where a tortuous compromise was hammered out in June 2001. However, when the agreed text went before Parliament for final approval, it ran into a blizzard of lobbying by German industry, worried about hostile takeovers. In the end the measure failed to pass by a single vote. In October 2002 the Commission tabled a revised proposal, but this was severely watered down by the Council with the acquiescence of the Parliament. In the version finally adopted in March 2004, the most contentious provisions--intended to promote more open takeover markets by restricting the use of poison pills and differential voting rights during a takeover offer--were reduced to mere options, which member states could choose to apply or not.

Accounting. Harmonisation of accounting standards and practices at the EU level lapsed after 1990, when the Commission decided not to issue more directives on the subject. The EU abandoned its efforts partly because of German resistance to proposed Anglo-Dutch open disclosure policies, accepted more and more by most other member states. The Commission also felt the International Accounting Standards Committee (IASC) was making more progress globally than its own efforts in Europe.
European companies seeking to broaden their access to global capital markets have had difficulties caused by the differences in accounting standards. Consolidated accounts prepared according to EU law (the fourth and seventh directives) are not accepted in major non-EU securities markets. In recent years a number of major companies have begun preparing financial statements based on US generally accepted accounting principles (GAAP) in order to gain a listing on the New York Stock Exchange. However, producing separate sets of accounts that do not match is costly, confusing and does not inspire confidence among shareholders and investors. In 1995 the Commission therefore proposed a new approach, linking the EU with the work of the International Accounting Standards Board (IASB, successor to the IASC), which produced 40 such standards (IAS) in 1998. Under a regulation adopted in June 2002, all listed EU companies are required to prepare their consolidated accounts in accordance with IAS from January 2005 (with an extra two years for those listed in the US and using that country's GAAP). At international level, the IASB and the US FASB (Financial Accounting Standards Board, responsible for formulating the GAAP) have agreed to seek convergence in their respective standards; the original deadline of 2005 has been set back to 2008.

Auditing. Although minimum requirements to be met by people carrying out statutory audits were set out in the eighth directive (1984), it provided no guidance on many questions relating to the audit function. A major revision of the directive was adopted in May 2006, expanding its scope to include provisions on public oversight, external quality assurance, disciplinary sanctions, auditing standards, and the ethics and independence of auditors. The Commission's proposal, among other things, would have required all listed companies to set up an audit committee of independent directors and would allow member states to require either that audit firms be replaced every seven years or that the partner in charge of the account be rotated every five years. However, the final version agreed by the Council and Parliament removes the requirement for firms to create an audit committee, leaving it up to individual member states to determine the manner in which firms should supervise their internal reporting. On the mandatory rotation of auditors, it omits the option to require rotation of audit firms, which was strongly opposed by the Federation of European Accountants (FEE), providing only that the key audit partner should be rotated every seven years.

Competition policy

Articles 81-82. The basis of EU competition law lies in Articles 81 and 82 (formerly 85-86) of the treaty, dealing respectively with anti-competitive agreements between companies and abuse of a dominant position. To enforce these rules, the Commission has wide powers of investigation and can declare an agreement or practice illegal at any time, require changes in agreements and impose fines on offending firms. In this sphere it can act without reference to the Council, although its decisions can be appealed to the Court of First Instance and ultimately (on points of law) to the ECJ. EU competition law takes precedence over national law and is directly applicable in the member states.

Over the years a number of block exemptions have been granted for specific types of agreements between companies, including purchasing and distribution (revised 1999), motor vehicle distribution (revised 2002), technology transfers (revised 1996 and 2004), specialisation and research and development (R&D) co-operation (both revised 2000), and franchising (1988). Provided an agreement does not include any restrictions or conditions that fall outside the terms of the block exemption, no individual exemption from the overall rules need be sought for it. However, the trend now is to limit this "safe harbour" to companies whose market share is below a certain threshold (30% for distributor contracts, 25% for R&D and 20% for specialisation agreements); above the threshold, agreements are not automatically prohibited, but must be self-assessed by the companies involved, with the help of guidelines issued by the Commission.
A regulation adopted in November 2002 introduced a fundamental reform of the 40-year-old rules for enforcement of Articles 81-82. The objectives were to simplify procedures and to pass some of the administrative burden to national competition authorities, thereby freeing the Commission to concentrate on serious infractions. To this end, the requirement that agreements be notified to the EU has been abolished, together with the Commission's monopoly on granting exemptions, while its powers of investigation are reinforced. The new system came into force on May 1st 2004.

Merger control. A 1989 regulation requires prior Commission authorisation for major mergers or joint ventures with a "Community dimension". This criterion is defined as referring to concentrations in which (a) the companies' combined turnover exceeds [euro]2.5bn, with over [euro]100m in each of at least three EU member states; and (b) at least two of them have individual EU-wide sales of over [euro]100m, with over [euro]25m each in the same three member states (unless more than two-thirds is within one and the same state).

At end-2002 the Commission presented a far-reaching package of proposals for overhauling the EU's system of merger controls. The core of the reform package is a series of key amendments to the 1989 merger regulation, introducing greater flexibility into the timetable for in-depth merger reviews, reinforcing the "one-stop shop" concept and clarifying the application of the rules to oligopoly situations. The proposals also include procedural reforms and a draft notice to provide guidance on so-called horizontal mergers (between competitors) and the controversial issue of collective dominance. After approval by the Council of Ministers in November 2003, the revised regulation came into force on May 1st 2004. Guidelines on vertical and conglomerate mergers are currently in the works.

The great majority of mergers notified to the Commission are cleared within one month, or an additional four months in more problematical cases. Of 3,503 proposed deals notified between 1990 and August 2007, only 167 went to a second-stage inquiry and just 20 were blocked, less than 1% of the total. In 227 other cases, or 6% of the total, approval was conditioned on commitments, usually to divest part of the acquired businesses. The blocking of a Portuguese energy merger at end-2004 was the first such prohibition since 2001, when the Commission vetoed a record five mergers. The following year it suffered a series of humiliating defeats at the hands of the Court of First Instance, which for the first time overruled the Commission's decisions to block three transactions: Airtours/First Choice (1999), Schneider/Legrand and Tetra Laval/Sidel (2001). In a rare move, in July 2006 the Court of First Instance also annulled the Commission's decision to approve a merger between the music divisions of two media giants, Bertelsmann of Germany and Sony of Japan. In July 2007 the Court of First Instance ruled that the Commission must pay damages to Schneider for having wrongly prohibited its takeover of Legrand.

International antitrust co-operation. Under a bilateral agreement dating from 1991, the EU and US competition watchdogs have exchanged information and worked together on certain investigations. The accord was reinforced in 1998 to allow each side to let the other take the lead role in cases where its market is the most affected. Similar agreements have been concluded with Canada and Japan, and talks are under way with Korea, Indonesia and Australia. At the multilateral level, the Commission works closely on competition matters with the OECD and was instrumental in setting up an International Competition Network of regulators, which has met annually since 2002.

Consumer policy

Council resolutions in 1975 and 1981 set out consumers' basic rights to health and safety, economic justice, redress for damages, information and education, and consultation. There is a health and consumer protection directorate-general in the Commission, together with a consumers' consultative council (CCC), which is consulted from the outset on legislative proposals that touch on consumer interests. The Treaty on European Union (Maastricht treaty) enshrined consumer protection as an EU policy goal in its own right.

Public health is also prioritised by the Amsterdam treaty, of which Article 152 permits the adoption of legislation on this subject by qualified majority voting and co-decision. In particular, measures may be adopted in the veterinary and phytosanitary fields that have the direct object of protecting human health.

Adopted directives. The 1984 directive on misleading advertising allows consumers to complain to the courts, which can require advertisers to prove the accuracy of their claims. The 1985 directive on product liability imposes strict liability on producers for damage caused by defects in their products, although that liability is more restricted than in the US; in 1999 the directive was extended to cover primary farm produce. The 1992 general product safety directive (updated in 2001) is designed to ensure the safety of products that are put on the market. Other early directives deal with consumer credit (currently under revision), doorstep selling, electronic payment systems, broadcasting, timeshare properties (currently under revision) and packaged tours.

A directive on distance selling (traditional mail order plus new forms of remote marketing, such as telephone and television sales or electronic commerce), adopted in 1997, is aimed at ensuring a single market with common rules for sellers, while protecting purchasers from unsolicited goods and services and from various high-pressure selling methods. Among other things, it gives purchasers the right to withdraw from a contract without penalty within seven working days. The directive does not cover financial services, which are dealt with separately.
A directive on unit price marking, also adopted in 1997, requires retailers to indicate clearly both the price of a specific product and its unit price, to enable consumers to compare the cost of goods more easily. The new measure swept away a series of directives issued over the previous 20 years that had never been effectively applied because of their complexity. Previously, only France and Sweden had had such legislation.

A 1998 directive grants consumer organisations in one member state the right to seek crossborder injunctions against suspect traders. This could be triggered by any act of a supplier that infringes existing EU laws on consumer protection.

A directive adopted in 1999 harmonises the duration and rights granted by legal product guarantees (those available to purchasers under national laws) and sets minimum standards for commercial guarantees (the extra protection offered voluntarily by the producer or seller), which are made legally binding.

A framework directive on unfair commercial practices, adopted in April 2005, will introduce a ban on all practices deemed unfair, so that consumers benefit from the same protection whether shopping at the local supermarket, across borders or buying on the Internet. The ban covers misleading or aggressive tactics in advertising, marketing and after-sales service. The Commission's proposal was intended to provide a high level of protection for consumers across Europe, while providing regulatory certainty for traders, who would have to comply with only one set of rules rather than 25. It thus called for full harmonisation of relevant national regulations and contained an "internal market clause" stating that traders have to comply only with the rules of their home country and preventing other member states from imposing additional requirements. The Council of Ministers, however, voted to delete this mutual recognition clause, on the grounds that other provisions of the directive already ensured "maximum" (rather than total) harmonisation. The Parliament and Council also introduced a six-year derogation period of "minimum" harmonisation, in which member states could maintain stricter national rules. Member states have two and a half years to transpose the directive into national law. Thereafter, the Commission will report within four years on implementation of the directive, with a proposal if necessary to revise it.

Responding to widespread public alarm over BSE (bovine spongiform encephalopathy, or "mad-cow" disease) and dioxin, in early 2000 the Commission produced a white paper on food safety. The cornerstone of the new approach outlined in the paper is a regulation adopted by EU farm ministers in January 2002, setting out the general principles and requirements of food law, establishing the European Food Safety Authority (EFSA, located in Parma, Italy) and laying down procedures in matters of food safety. The EFSA has a wide-ranging mandate: it provides scientific and technical advice on matters that have a direct impact on food safety, as well as related matters such as animal and plant health, genetically modified organisms (GMOs) and nutrition, and is responsible for public information on these issues.

A regulation adopted in October 2006 introduces tough new rules to protect consumers from false or misleading health and nutritional claims on foods. It seeks to ensure that claims made on food labels or in advertising are not misleading and are backed by scientific evidence. All new claims must be authorised by the EFSA.

New consumer strategy. In what is billed as the most fundamental overhaul of EU consumer policy since its inception in the 1980s, the Commission in March 2007 unveiled a new consumer strategy for 2007-13, aimed at "awakening a sleeping giant, the retail side of the single market". The EU's nearly 500m consumers, with total spending of [euro]6trn, represent collectively the largest retail market in the world. However, despite the advent of the Internet, which makes it easy to shop across borders, the EU-wide market still remains largely fragmented along national lines, forming 27 mini-markets instead. The legal cornerstone of the new policy is a streamlining of the current consumer legislative framework, which is seen as incomplete, outdated and increasingly ill-adapted to the digital revolution in products, services and retail channels. The approach followed by most of the existing directives in this field is "minimum harmonisation", allowing member states to adopt more stringent rules in their national laws in order to ensure a higher level of consumer protection. Many have done so, leading to a fragmentation of the single market. These local differences not only entail extra compliance costs for e-tailers, but undermine consumers' confidence in making online purchases from suppliers in other EU states. In the current review, the Commission is leaning towards full harmonisation wherever possible, so that traders could sell anywhere under a single, simple set of rules, while consumers would enjoy the same high level of protection wherever they buy from.

Intellectual property

The Commission has tried for many years to harmonise the various means of protection of intellectual property within the EU, but delays in enacting and implementing EU measures in this area make it one of the most significant remaining gaps in the single market.

Patents. In July 2000 the Commission tabled a long-awaited proposal for a regulation to create a unitary patent regime covering the whole of the EU. Firms would be able to make a single filing with the European Patent Office (EPO) in Munich and receive one Community patent, rather than the current bundle of national patents. An agreement reached in the Council of Ministers in March 2003, although somewhat watered down, still offers some potential benefits to business in terms of cost reduction (the major issue being translation costs) and improved legal certainty. After this agreement, it appeared that the measure was headed for early adoption, as only a few technical details remained to be cleared up. Thus far, however, the Council has been unable to resolve the remaining issues. Divergences focus on the deadline for translating the patent claims into all 22 EU official languages and the legal value of these translations.

In April 2007 Charlie McCreevy, the commissioner responsible for the single market, outlined a two-stage plan for improving the EU patent system. The first stage would involve a streamlining of the current jurisdictional patchwork, in which any disputes over validity or infringement of patents must be settled in national courts. The Commission believes agreement could be reached on a specific EU jurisdiction modelled on the proposed European Patent Litigation Agreement, which would establish regional patent courts and a central appeals court to deal with existing EPO patents. The second stage would focus on finding a cost-effective regime for the granting of the future Community patents.

A regulation granting up to five years' supplementary protection for pharmaceuticals, to compensate for the proportion of patent life expended on pre-market testing, was adopted in 1992. A similar measure for plant protection chemicals was adopted in 1996.
After intense lobbying, the European Parliament gave its approval to a directive introducing harmonised patent protection for biotechnology inventions, which was finally adopted in July 1998. In 2003, however, the Commission initiated infringement proceedings against nine member states for failure to transpose the 1998 directive into national legislation.

In February 2002 the Commission tabled a draft directive to harmonise national rules on the patentability of inventions that incorporate computer software. Since most aspects of software are covered by copyright protection (already harmonised by a 1991 directive), the patent would cover only the technical innovation element. The proposal became a battleground between big technology multinationals, which would like all their software to be patentable, and smaller software developers and supporters of "open source" software, who want to prevent any patents in this area. The fierce battle over the draft directive came to an end in July 2005, when the European Parliament voted by an overwhelming majority to throw the proposal out. As members of the European Parliament were split roughly 50-50 on the issue, rather than risk a result they could not accept, the major political groups reached an 11th-hour agreement to reject the text outright. During the debate, the Commission announced that if the common position were to be rejected, it would not come forward with a new proposal. As a result, the status quo will continue: patents on computerised inventions will continue to be granted by national offices and the EPO, with no harmonisation and thus allowing different interpretations of the rules.
Trademarks. In 1994 the Council approved a regulation on Community trademarks that established a unitary mark valid in all member states. The Community Trademark Office, which became fully operational in 1996, is part of the Office for Harmonisation in the Internal Market (OHIM), located in Alicante, Spain.

Copyright arises automatically on the creation of copyright materials. A directive on the legal protection of computer programmes was adopted in 1991, and a general directive to harmonise national laws on copyright and performers' rights was approved in 1993, together with a directive harmonising copyright protection available to satellite and cable television broadcasts. A 1996 directive provides 15 years' protection for databases, in the form of a new sui generis right covering the content of databases, both electronic and paper-based, that do not justify the application of copyright.

In April 2001 the Council of Ministers adopted a directive to adapt copyright protection to the digital age. It covers the printed media, film, music and software, harmonising reproduction and distribution rights, legal protection for mechanisms preventing copying and rights management systems. However, it leaves a large number of exceptions, allowing member states to decide whether or not to incorporate rules into national law.

Industrial designs. A harmonisation directive was finally adopted in October 1998, and a regulation to establish a Community design at end-2001. The regulation creates a unitary EU-wide design right, obtainable either through a cheap and simple registration with the Community Design Office (also part of OHIM) or simply by placing the design on the market. Registered rights have a five-year term, which can be renewed up to a maximum of 25 years; unregistered rights have a single three-year term. The directive does not cover visible auto spare parts, which are protected in some EU states (giving carmakers a lucrative monopoly) but not in others; this was the subject of a follow-up proposal that was tabled in September 2004.
Counterfeit goods. A 1988 regulation empowers customs authorities to seize and destroy counterfeit goods on import, export or in transit. In 1994 the regulation was extended to cover products infringing copyright and design protection, as well as trademarks, and in 1999 also to patents. A further amendment, strengthening the powers of customs officers to seize and destroy counterfeit goods, was adopted in July 2003. A directive harmonising member states' legislation on enforcement of intellectual property rights against counterfeiting and piracy was adopted in April 2004, and in July 2005 the Commission tabled proposals to harmonise criminal penalties against violators.

Public procurement

Public authorities and utilities in the EU15 spend in excess of [euro]1trn on goods and services, equivalent to 14% of GDP. Since the early 1970s the Commission has been working to open the procedures for public procurement, so as to permit greater competition for the supply of goods and services from any member state, rather than the favoured support of traditional domestic suppliers. It is obviously not possible to open all public contracts to competition across the EU, as many are too small or too specific. However, the Commission believes that contracts worth 80% of the total, or [euro]800bn, should be opened to non-discriminatory tendering.

The early directives covering public works (1971) and public supplies (1977) set strict limits on single-tender contracts, as opposed to open or restricted bidding; required calls for tenders to be published in the EU's Official Journal; and prohibited technical specifications or standards that discriminated in favour of particular suppliers. These measures were amended in the late 1980s. A crucial backup directive on compliance, adopted in 1989 and currently being strengthened, establishes review procedures and remedies for suppliers appealing against discrimination.
Public and private utilities (water, energy, transport and telecoms) were excluded until 1990, when the Council adopted the utilities directive. A directive relating to contracts for services--from transport to computer services and auditing--was adopted in 1992. In 1999 the Commission announced that telecoms operators in most member states would henceforth be excluded from the scope of the utilities directive, as they now operated in a competitive environment. The same will be done for other utilities (energy, transport and water) once their markets have been sufficiently liberalised.

A range of amendments adopted in early 2004 are intended to simplify and modernise the complex rules, making the tendering procedures more transparent and reducing red tape. The changes involve consolidation of the three separate directives on supplies, services and public works into one user-friendly text. The so-called utilities directive, governing procurement by non-liberalised public services, remains separate. Taking advantage of the information technology (IT) revolution, the use of electronic tendering will be encouraged.
Implementation. Despite the EU rules, many public administrations continue to award contracts without effective competition. On the ground, there is only scattered anecdotal evidence of changes in the buying habits of national administrations or utilities. Bidders hesitate to complain about infringements for fear of being blackballed. Obstacles to crossborder competition for public-sector orders include cumbersome tendering procedures and pre-qualification systems that handicap smaller suppliers.

State aids

Articles 87-88. Article 87 (formerly 92) of the treaty prohibits government subsidies to private or public enterprises that may distort competition, unless they can be justified for social or other reasons. Article 88 (formerly 93) requires member states to notify all new or modified aid schemes to the Commission, which assesses their compatibility with the common market. Responsibility for policing state aids lies mainly with the directorate-general for competition, but some cases are the responsibility of the directorates-general for transport, agriculture and fisheries.

Each year the Commission handles hundreds of cases of state aid, the great majority of which are waved through. In an effort to alleviate the load, it introduced a de minimis rule in 1992, under which governments do not have to notify aid not exceeding [euro]100,000 over three years (increased in December 2006 to [euro]200,000). The Commission takes a benevolent attitude to some categories of aid--for example, if it aims to promote regional development in backward or depressed areas, to execute projects of common European interest (those designated as part of the trans-European transport networks), to stimulate new high-tech industries or help reduce capacity in old ones, or to help small and medium-sized enterprises. However, it will take a different view if such aid distorts competition or is not cleared in advance. In the latter case, it usually requires the aid to be paid back (with interest).

The Commission has issued various guidelines, setting limits on the amount of aid that can be given for regional development, employment, R&D, environmental protection, rescue and restructuring operations, and support to specific industries (motor vehicles, shipbuilding, coal and steel, transport, textiles and synthetic fibres), as well as agriculture. Present rules for investment subsidies to large industrial projects date from February 2002, and those for rescue and restructuring aids from July 2004.

Rules on state aid are also applied to the public sector. Member governments must provide detailed information on all state companies with a turnover above [euro]250m. The test for whether capital injections and other funding constitute aid is the so-called private market economy principle: "Where the state provides finances to a company in circumstances that would not be acceptable to an investor operating under normal market economy conditions, state aid is involved".

Block exemptions. An enabling regulation adopted by the Council in 1998 gave the Commission the green light to adopt block exemptions in the field of state aids. The first three such measures (on aid to small and medium-sized enterprises, training aids and the de minimis rule) were finalised at the end of 2000, one on employment aids in November 2002 and one on regional aids in October 2006. Others still to come could cover aids for R&D, environmental protection, and export credit and insurance. Under these regulations, member states are exempt from notifying aid if it meets certain criteria.

Fiscal aids. The Commission in 1998 published guidelines on how it would apply the state aid rules to measures relating to business taxation. Under the guidelines, "specific" tax schemes are subject to the EU rules on state aids and can be banned as anti-competitive if they are an exception to the general tax rules, or a discretionary practice on the part of the tax authorities, that benefits certain enterprises over others. If such breaks are found to contravene rules on state aids, the member state can be ordered to recover the difference between taxes actually paid and those that would have been payable under the generally applicable tax rule.

Schemes are exempted if they apply across all industrial sectors and can be shown to be part of national economic policy objectives. For example, "general" tax breaks, aimed at supporting R&D efforts, environmental protection, training or employment, are allowed, as they create no competitive bias. Schemes designed to help a certain region, sector or corporate function may also be exempted if there is a particular economic rationale behind them, such as allowance for different accounting requirements in certain sectors. Fiscal aids aimed at boosting regional development can be permitted, provided they do not lead to "significant" tax losses in other EU countries. As an example, a landmark Commission decision in 1998 forced Ireland to phase out its 10% tax rate on manufacturing by 2010, replacing it with a uniform 12.5% rate for all companies. The policy on fiscal aids is part of the broader attempt to curb predatory tax competition through a code of conduct (see Taxation).

Trends in state aid. Since 2001, the Commission has published an annually updated scoreboard, providing details of the type of aid being granted and to which sectors. According to the latest scoreboard, the overall level of state aids in the EU15 fell sharply in 1997-99, from [euro]67bn to [euro]52bn; since then, it has stabilised, at [euro]53bn in 2003 (excluding aid to the railways). The addition of ten new member states raised the total in 2004 to [euro]62bn, representing 0.6% of GDP. However, this average masks significant disparities between member states, ranging from less than 0.2% in the Czech Republic, the Baltic states, Luxembourg and the Netherlands to 1% in Poland and Cyprus and 2.7% in Malta.

EU-wide, around 79% of total aid in 2003 was granted for horizontal objectives including R&D, small and medium-sized enterprises, environment and regional development. The remaining 21% was directed at specific sectors (mainly coal) and aid for rescue and restructuring, which is seen as the greatest source of competitive distortions. Here again, the pattern is markedly uneven: of 120 cases of rescue and restructuring aids to ailing firms in the manufacturing and service sectors approved by the Commission in 1990-2002, 35 were in Germany (not counting the much greater number in the former East Germany), 20 in France, 15 each in Spain and Italy, and between five and ten each in Austria, Belgium and Portugal.

The Commission's latest state aid scoreboard focuses on illegal aids--i.e., handouts that have not been notified to Brussels or have been implemented without awaiting its approval. Since 2000, the Commission has taken over 600 decisions on illegal aids, either prompted by a complaint or on its own initiative. Of these decisions, more than 25% were negative or conditional, compared with only 2.7% for notified aids. Over one-third of the illegal handouts were rescue and restructuring aids. Around three-quarters of all illegal aid cases concerned the five largest EU15 member states, with Germany (24%) and Italy (17%) the most frequent offenders. In Germany, much of the illegal aid was granted in the late 1990s to companies in the former East Germany.

Taxation

Taxation has been one of the most difficult areas for the Commission to devise policies. Differences in the national tax systems result in distortions of trade and the competitive ability of companies by, for example, influencing the location of investment or resulting in double taxation. However, direct and indirect taxes are the lifeblood of a state's revenue, and EU legislation in this area requires unanimity in the Council of Ministers. The UK, in particular, has firmly resisted any moves to allow majority voting on tax harmonisation.

Corporate tax. In 1990 the Council passed three measures: a directive granting tax relief on crossborder mergers (revised in 2005); another banning withholding tax on dividends received from a subsidiary in another EU country (revised in 2003); and a multilateral convention for the arbitration of transfer pricing disputes between member states (which proved unworkable in practice and was allowed to expire after a five-year trial period.) A further package of three measures was adopted in May 2003, including a code of conduct on harmful tax competition, a directive to eliminate double taxation of intra-group interest and royalty payments, and separately, a directive on the taxation of non-residents' savings.

In October 2001 the Commission outlined a two-track strategy for dealing with the difficulties caused for crossborder corporate operations. In the short term, the strategy set out specific solutions (both legislative and non-legislative) to deal with the issues of double taxation and transfer pricing. The longer-term aim is to work towards a common tax base, enabling a multinational group to compute its EU-wide taxable income according to a single set of rules and establish consolidated accounts for tax purposes, thus eliminating the need for transfer pricing. Specifically, the Commission plans to develop a pilot project of "home state taxation" as a way forward for smaller enterprises, while for larger ones, the international accounting standards (IAS), which all listed companies have adopted from 2005, could provide a starting point. The Commission has refused to link work on a common tax base with introduction of a minimum EU rate of corporate taxation--an idea put forward by Germany and France with an eye to protecting their own high tax rates against "fiscal dumping" by the new member states. (Whereas tax rates in the EU15 average around 30%, the average is closer to 20% in the new member states.)

Taxes on savings. Differences in the fiscal treatment of savings remain a major cause of distortions in the single market. For banks and other providers of finance, the main problem is the lack of harmonisation of withholding taxes collected on dividends and interest. For governments, it is the ease of avoiding income tax by placing savings in other countries where there is no tax on non-residents' savings.

After years of difficult negotiations between member states and with non-EU tax havens, especially Switzerland, an agreement was hammered out by EU ministers of finance in January 2003, in accordance with which all but three member states have adopted a system of information exchange. To preserve their banking secrecy, these three (Austria, Belgium and Luxembourg), instead impose a withholding tax on non-residents' savings interest, rising in stages from 15% in 2005 to 35% in 2010; Switzerland has done likewise. The revenue from these levies, which allow the identity of savers to remain undisclosed, is shared out, with the collecting state keeping 25%, while paying out 75% to the non-resident saver's home government. The new provisions came into force on July 1st 2005.

VAT and excise. Value-added tax (VAT), a French invention, was adopted throughout the Community in 1972, replacing a variety of indirect taxes in the other member states. All new members since then have had to introduce the system on entry.

Preparation for the border-free single market, in which VAT could no longer be collected at frontier customs posts, entailed both a new system of collection and a convergence of rates. The Commission also foresaw a need to harmonise excise duties levied on alcohol, tobacco and petroleum products, which differ widely from one EU country to another, but little has been done on the latter.

There is an agreed minimum standard VAT rate of 15%, but a number of lower rates, including zero-ratings of certain goods and services, are allowed. On excise duties, where the Commission had wanted full harmonisation, the Council settled for minimum rates that were generally below those actually charged in most member states, with no upper limit.

A directive adopted in 1999 (renewed in February 2006) provides for cuts in VAT on a range of labour-intensive local services such as bicycle and shoe repairs, repair and renovation of private homes (labour, not materials), window and household cleaning, home nursing and hairdressing, in a bid to boost job creation. Eleven member states have taken advantage of the measure. A directive adopted in May 2002 has extended VAT to Internet sales.

The present "transitional" VAT system came into force at the start of 1993, enabling EU internal border controls to be removed. Exporters and importers must record their own VAT information and compile detailed trading records, filing regular returns to their national authorities. Under this "destination-based" system, VAT is still payable in the country of final consumption (except for purchases by travellers and crossborder shoppers). According to the Commission, traders' costs under this complex system may be five or six times higher for crossborder than for domestic transactions. Some firms estimate that the administrative burden represents some 20% of their total tax costs.

Unsurprisingly, surveys carried out for the Commission have consistently shown that most companies regard the present transitional system with disfavour and want an origin-based system. A number of modest reforms have been made, but the basic problem remains unresolved.

Technical harmonisation

Each of the EU countries has thousands of technical standards and requirements imposed on goods by national legislation, and more are being created every day. These requirements are justified for many reasons--protection of safety, public health, the consumer, the environment and so on--but in practice, many of them have resulted in restriction or distortion of trade with other member states. Since the 1970s, the Commission has tried to overcome this with a systematic programme of harmonisation of technical measures. At first, progress was extremely slow, reflecting the reluctance of governments to compromise on specifications, the need for unanimity and the amount of detail required in any legislation. It took up to 15 years to work out a single Community standard, in the form of a lengthy document full of minute detail.
The new approach. The 1979 Cassis de Dijon ruling (see Freedom of movement) provided a basis for the development of the "new approach" to technical harmonisation and standards. This was agreed in a far-reaching Council resolution of 1985, which called for the mutual recognition of national standards, provided these conform to minimum requirements concerning safety and/or environmental performance, leaving it up to producers to choose the appropriate technical solution to meet these requirements. As long as products conform with these criteria and with the national laws of their state of origin, they can be sold freely in any member state.

Decisions on new-approach directives are taken by qualified majority voting in the Council. The task of elaborating standards to support the essential requirements of the directives is assigned to the European standards bodies--CEN (for non-electrical goods), CENELEC (for electrical goods) and ETSI (for telecommunications). The Euro-standards are then translated into national ones, and products conforming to them carry the stylised CE marking. A European organisation for testing and certification (EOTC) aims to establish mutual confidence between all parties concerned with conformity assessment.

A Council resolution in 1992 stressed the importance of co-operation with third countries to develop standards that are accepted worldwide and allay fears of a "fortress Europe". To this end, CEN and CENELEC work hand in hand with the corresponding UN bodies (ISO and IEC) and exchange early drafts for standards with the US national standards institution, ANSI. Around two-thirds of CEN/CENELEC standards are identical to or based on ISO/IEC standards, while the comparable figure for the US is only 20%.


Over 20 new-approach directives have been adopted since 1987, covering a wide range of products, including simple pressure vessels, toy safety, construction products, electromagnetic compatibility, machinery, personal protective equipment, non-automatic weighing instruments, gas appliances, active implantable medical devices, telecoms terminal equipment, lifts, electrical equipment for use in potentially explosive atmospheres, hot-water boilers and pleasure boats.
Apart from these, a great deal of technical harmonisation has taken place in recent years, covering such areas as motor vehicles, food, chemicals and pharmaceuticals. Indeed, 85% of the work of the European standardisation bodies is market-driven, with only 15% consisting of standards mandated by the Commission on the basis of new-approach directives or other EU legislation, such as the general product safety directive. And in view of the often protracted nature of the official standardisation process, private consortia have mushroomed to produce the specifications required by the market, especially in fast-moving sectors such as information and communications technology.

The number of harmonised European standards in place has risen steadily, from around 100 in 1991 to over 2,000 in 2002. Most of the standards have been adopted for pressure vessels, toys, weighing instruments, gas appliances, active implantable medical devices, electromagnetic compatibility and telecoms terminal equipment. However, overall, only just over half of the approximately 3,600 standards mandated so far in EU legislation have actually been delivered.
The principal reason for this shortfall is that the bodies responsible for adopting standards operate on a consensus basis. The result is extremely long lead times. A CEN standard now takes around eight years on average for final clearance (up from 4.5 years in 1995); CEN's objective is to reduce this to three years. CENELEC takes three to four years, and ETSI (which has been the leader in harnessing the Internet to speed its work) over two years. While industry would certainly not want to replace business self-regulation with state regulation, action is clearly needed to speed up the standard-making process.

The result is that the new-approach directives are not being enforced where the relevant standards do not yet exist--the most notorious example is construction products, where only 12% of the 600 harmonised standards needed for a genuine single market have been adopted to date. Although the relevant directive dates from 1989, the first standard agreed in this area, for cement, was not published until July 2000. Other problem areas are lifts, pressure equipment and machinery.

EU standards currently cover about one-half of intra-EU trade, notably in motor vehicles, chemicals and pharmaceuticals. Some 30% is subject to unharmonised national standards, where market access depends on mutual recognition, and the remaining 20% is not regulated at all.
The 1983 "standstill directive" (now codified and replaced by directive 98/34) requires member states to notify all proposed national technical regulations and to apply a standstill of up to 12 months if there are objections to the new measure or if the Commission is considering a directive on the same subject.




Appendices: Schengen

The Schengen accord came into effect in 1995, abolishing controls on internal borders between the signatory countries--France, Germany, the Benelux countries, Spain and Portugal, with Italy and Greece following after a short delay--and creating a single external frontier. Additional measures include a common visa regime; co-ordination between the countries' police, customs and the judiciary; and more recently, the development of the Schengen Information System (SIS), a computer system for law enforcement agencies to access data on criminals, missing persons or stolen goods.

Schengen has continued to attract new adherents, such as Austria and the five Nordic countries, Norway, Sweden, Finland, Iceland and Denmark. Ireland and the UK participate with limited membership. New member states to the EU have been required to sign up to the Schengen accord, although there is usually a gap between signing and full implementation. In particular, the new EU members from eastern Europe have had to convince the existing members that they are capable of controlling their eastern borders. Switzerland and Liechtenstein are to apply the accord fully from late 2008.




Appendices: Sources of information

Select bibliography and websites

The primary source for general information on the European Union is its website at http://europa.eu.

The website is available in all the official languages of the EU and is structured according to institutions (Commission, Parliament, Council), news, main activities and links to more detailed sites such as Eurostat and European Council presidency conclusions.

Each Commission directorate-general has its own website, and the website of the Parliament is also wide-ranging. There is a search engine that can be used to search the whole Europa site, but which does not usually produce what is being looked for. Commission publications include a regular compendium of articles, European Economy, and a newsletter, Single Market News.

The official statistical organisation of the European Union is called Eurostat (http://epp.eurostat.ec.europa.eu) and has its headquarters in Luxembourg. Its website has improved, but is still not easy to use, except for a select and slightly arbitrary choice of priority information. The other main sources used here are:

The OECD (http://www.oecd.org) also publishes useful information on the EU, some of which is clearer, and as reliable, as that provided by Eurostat. Useful publications include:

OECD, Main Economic Indicators (monthly)
OECD, Economic Outlook (twice yearly)
OECD, OECD in Figures (annual)
OECD, Employment Outlook (annual)
Other sources include:
Agence Europe (a daily bulletin), Brussels
Centre for European Policy Studies (CEPS; www.ceps.be)
Centre for European Reform (CER; www.cer.org.uk)
European Voice (weekly newspaper), Brussels
Journal of Common Market Studies (quarterly), by the University Association for Contemporary European Studies (UACES, London, Blackwell Synergy Publishers.
Europe Information Service (EIS), Brussels
Economist Intelligence Unit, European Union Country Report (quarterly); Business Europe (twice monthly); European Policy Analyst (quarterly); European Union Regional Overview (quarterly)







Source Citation: Economist Intelligence Unit: Country Profile: European Union. Economist Intelligence Unit N.A. Incorporated, 2007. NA. Academic OneFile. Gale. Montgomery County Public Library (MD). 12 Mar. 2008 .
Gale Document Number: A172029706, A172029707, A172029708, A172029709, A172029710, A172029711, A172029712, A172029713, A172029714, A172029715, A172029716, A172029717