After the deep recession caused by the global financial crisis and the slow recovery in the aftermath of it, the EU needs a new driver of economic growth and that could be the services sector, provided that the bloc pursued reforms that removed some of the barriers in the way of the exchange of services across borders, the World Bank said in its latest EU Regular Economic report.
According to the World Bank, EU growth was projected to remain low and become increasingly dependent on productivity growth because of the aging populations and sluggish investment in its member states. For now, the rebound in the labour market has fuelled consumption, but economic growth in the EU is expected to decline to 1.8 per cent in 2016 and 1.4 per cent in 2017.
Service industries – ranging from finance and accounting to transportation, communications and legal – were key drivers of growth in advanced economies. In the EU, services already accounted for three quarters of GDP and two-thirds of employment, despite being more regulated than in non-EU OECD countries, the report said.
Despite the free movement of goods across EU borders, there were many barriers to the exchange of services, as providers were often not allowed to offer their services in other EU member states. “Even when they are allowed, they may face the need for structural changes to areas of their business such as residency or nationality, ownership structure, professional association membership, insurance, worker qualifications, or advertising restrictions,” the report said.
The EU has taken steps to facilitate improved service provision in the EU, but service sector reforms face many political constraints. The EU services directive was adopted in 2006 with the aim of creating a single market for services, but its implementation has been difficult.
“The EU needs a clear roadmap to accelerate the implementation of service sector reforms. The EU has prioritized the removal of barriers such as fee scales and advertising prohibitions, but there is an urgent need to move to the next phase of reforms. Given the current political environment, governments could focus their attention on reforms that yield the greatest economic benefits and that are politically feasible,” the report said.
Such a roadmap would have to consider several criteria – reform of conduct regulations, which constrict how firms operate; avoiding complex regulations, which may create uncertainty and invite discriminatory practices in countries with a weak regulatory environment or an ineffective judiciary; focusing on the economic payoff of reducing regulation across sectors, which is especially important in countries that have heavily-regulated sectors that are economically important, such as the energy sector in Bulgaria.
“A European passport for service providers and fewer barriers for professional services could yield the largest productivity dividend in many EU countries. Professional services form a sub-set of the larger business services sector, which tends to be the most dynamic part of the entire service sector. Our empirical analysis suggests that the impact of reducing regulation of professional services on firm-level productivity is very large: only reforming professional services would yield large productivity gains,” the report said.
(The full report is available on the World Bank website here. Photo of World Bank headquarters in Washington: Shiny Things/flickr.com)