EUROPEAN SEMESTER THEMATIC FACTSHEET SERVICES MARKETS 1. INTRODUCTION affordable services and greater choice for consumers. Increasing productivity in Services markets are central to the EU this growing sector is imperative to economy as they account for 71% of EU ensure quality jobs and high wages and value added and 68% of EU to give easier access to labour markets, 1 employment . Well-functioning and in particular to young people. competitive services markets are therefore essential for growth and jobs Productivity in the services sector has in the EU. important repercussions for Europe's manufacturing industry. Manufacturing In order to realise the significant growth industries are among the largest and jobs potential of services markets, consumers of services in Europe and regulation must keep up with the anti-competitive regulation in the digitisation of services and the increased services sector increases the cost of the integration of services and services they purchase2. manufacturing industries. The digitisation of services is both Several factors are holding back the changing the way they are delivered and performance of services markets in creating demand for new services, Europe today. These include low including in the collaborative economy. It competitive pressures, slow productivity has also made services more tradable as growth, a lack of cross-border it is easier to provide them at a distance. investments and trade and low labour mobility (see section 2). Regulation plays an important role in protecting public policy objectives, These challenges are partly due to consumer protection, public security and regulatory restrictions and costly the protection of health and the administrative procedures resulting from environment. Cross-country assessments the services policies and regulation of EU show that these objectives can be met Member States (see section 3). with different levels of regulation imposing fewer or more restrictions on Numerous analyses show that reforming service providers (see section 4). Member States' services regulation and Intelligent pro-growth regulation ensures administrative procedures leads to that policy objectives are met while positive economic outcomes. Reducing regulatory and administrative restrictions on services markets leads to stronger 2 The values of multipliers for services, competition, higher productivity, more ranging from 1.6 (real estate) to 2.5 (air transport), are considerable for the priority sectors of construction (2.3), business services 1 The countries covered by data in this (1.9) and retail services (1.8). Calculated for factsheet are the EU-28, unless otherwise 2011 for the EU-27. Data source: World Input- specified. Output Database (WIOD). Page 1 | keeping the economic costs of regulatory Around 22% of those employed in the EU restrictions to a minimum. work in a regulated profession6. The regulation of professional services exists Business services, construction and retail in all sectors of the economy. The health services are among the most and social service sector, including economically important in the EU. doctors and dentists, accounts for 40% of all regulated professions (by number Business services include a range of of professions). After that, business professional, scientific and technical services, such as lawyers, accountants, activities as well as administrative and 3 engineers and architects, account for support services . A major part of the EU 15% of that total, followed by the economy, they account for 12.8% of EU transport sector (close to 10%), the value added and 13.7% of total public service and education sector employment, representing 31 million (9%), and construction (7%)7. jobs. They constitute key inputs into the manufacturing sector. Today, 16% of the At EU level, the Services Directive average value of a good produced in the adopted in 2006, covering 47% of EU EU is generated from the activities of value added, provides a framework for 4 business services . Many of the high national services regulation. It resulted value-added business services are in the removal of many regulatory provided by regulated professions (see barriers by Member States, as well as below). simplified administrative procedures. The Professional Qualifications Directive, Construction services are vital for the revised in 2013, supports the mobility of EU economy. Construction works professionals by enabling the recognition undertaken by builders and developers of professional qualifications across account for 5.3% of EU value added and Member States and has set up a 6.3% of EU employment. The EU framework to ensure that national construction sector gives jobs to 14 regulation of professional services is million people. proportionate. Retail services represent 4.5% of total In January 2017, the Commission EU value added and employ 8.6% of the presented the Services Package that workforce with a significant included reform recommendations to representation of employees in the 15- Member States and three legislative 24 age range. Over 3.5 million retail proposals to improve the functioning of companies act as intermediaries between thousands of product suppliers and millions of consumers. Growing at 12% a year, e-commerce provides opportunities for traditional retail, but also some challenges. It has increased the potential 2010, when it stood at 11.7%. The value of market for retailers and the range of 5 online sales almost doubled between 2011 and products available to consumers . 2016, reaching EUR 204 billion in 2016. However e-commerce is still only a fraction of the retail market. The value of store-based sales in 2016 was close to EUR 2 300 billion, 11 3 Business services are defined as sectors M, times the value of online sales. Sources: N77-78, N80-82 and J62-63 using 'Nace Rev.2 Euromonitor and Eurostat. — Statistical classification of economic 6 TNS Opinion, 'Measuring the prevalence of activities in the European Community', occupational regulation: ad-hoc survey for the Eurostat, Luxembourg, 2008. European Commission', April 2015, publication 4 European Consortium for Sustainable forthcoming. As analysed in M. Koumenta and Industrial Policy (ECSIP), 'Study on the relation M. Pagliero, 'Measuring Prevalence and Labour between industry and services in terms of Market Impacts of Occupational Regulation in productivity and value creation', 2014. the EU', 2016. 5 In 2016, 22% of retail companies sold 7 European database of regulated professions online, against 18% for the EU economy as a (http://ec.europa.eu/growth/tools- whole. This has been steadily increasing since databases/regprof/). Page 2 | the services single market8. Other see a convergence of these indicators recently presented initiatives include a between Member States. communication on the development of the collaborative economy, a proposal For selected economic activities with for a regulation regarding geo-blocking, high level of regulatory restrictions, to which a forthcoming Commission Figure 1 shows the average business initiative setting out best practices churn rate at the EU level compared to facilitating the establishment and that of the total business economy. With operation of retail services should be the exception of construction and retail, added. all other services sectors have a lower business churn rate than the total 2. POLICY CHALLENGES: AN business economy, i.e. a lower turnover OVERVIEW OF PERFORMANCE IN EU of companies. This may indicate COUNTRIES relatively lower dynamism or lower competition in these sectors than in the EU services markets still face a number of rest of the economy. challenges that hinder the sector's growth. These include low competitive pressures, Figure 1 — Business churn rate in selected slow productivity growth, cross-border economic activities, EU-28, 2014 (%) services integration and low labour mobility for professionals. Business economy except activities of holding 2.1. Low competitive pressures companies Competitive pressures drive innovation Construction and performance, giving consumers access to a wider range of services at lower prices. Competition drives Retail trade productivity by ensuring that less productive firms are replaced by Travel agency, tour productive new ones over time, and by operator reservation creating incentives for firms to invest in service and related… reducing costs and in innovative productivity-boosting services and Engineering and related activities products. Among indicators that can be used as Architectural activities proxies for competition forces are market churn rates9 and gross operating rates10. Churn rates and profit rates Real estate activities disaggregated by service sectors vary significantly among Member States and Accounting and related services sectors. Large differences in activities churn rates or profit rates reflect varying degrees of competitive pressure. A more Legal activities integrated market would be expected to 10,0 15,0 20,0 8 European Commission, 'A services economy that works for Europeans', 2017, Source: Eurostat, own calculations. http://europa.eu/rapid/press-release_IP-17- 23_en.htm. 9 Market churn rates are defined as the sum of birth and death rates expressed as a percentage of the total number of active firms in an industry. 10 The gross operating rate is defined as the ratio of gross operating surplus to turnover and is a proxy for profits. Page 3 | Another indicator of competition intensity 2.2. Slow productivity growth is the profits generated at sector level.