1

THE INTERNAL MARKET & THE 4 FREEDOMS

D. JANSSENS

CONTENTS

I. The problem: loss of competitiveness and non tariff barriersII. The internal market: concept & programIII. Free movement of persons & workersIV. Free movement of goodsV. Free movement of servicesVI. Free movement of capitalVII. Evaluation & Issues

3

Gains (+) and losses (-) of market share by the Community in third countries over the period 1979-85* (in descending order)

I. THE PROBLEM: Loss of Competitiveness

Branch Loss Branch Gains

Electrical goods

Motor vehicles

Rubber and plastic products

Industrial and agricultural machinery

Other transport equipment

Office and data-processing machines,

precision and optical instruments

Other manufactured products

Metal products, except machinery and

transport equipment

– 4,39

– 4,25

– 2,53

– 2,49

– 2,27

– 2,23

– 0,84

– 0,65

Leather and footwear

Timber, furniture

Textiles and clothing

Non-metallic minerals and mineral

products

Food, beverages, tobacco

Paper and printing products

Ferrous and non-ferrous ores and

metals, other than radioactive

Chemical products

+ 5,45

+ 4,86

+ 3,87

+ 2,47

+ 2,03

+ 1,25

+ 1,23

+ 0,51

* Market share is defined as the exports of the USA, Japan or EUR 10 to the rest of the world compared with exports of OECD countries to the rest of the world.

Source: Volimex, Commission Services

4

Level of productivity in the United Kingdom, France, Germany, the United States and Japan (value-added per employee in specific purchasing power parities) - 1985 (USA = 100)

I. THE PROBLEM: Loss of Competitiveness

UK F D USA Japan

Strong demand sectorsElectrical and electronic goodsOffice and data-processing

machinesChemical and pharmaceutical

products

Moderate demand sectorsTransport equipmentFood, beverages, tobaccoPaper and printing productsIndustrial and agricultural

machinery

Weak demand sectorsMetal productsFerrous and non-ferrous ores and

metals (steel)Textiles, leather, clothingNon-metallic minerals

(construction materials)

283754

23564320

38665940

474379

54736749

60726264

434575

60477646

54927171

100100 100

100 100 100 100

100 100 100 100

23694

119

95 3789

103

143 149

5343

Total 42 65 65 100 100

Source: CEPII, Commission services

5

I. THE PROBLEM: Non Tariff barriersRanking of market barriers by business*Total industry B DK D GR E F IRL I L NL P UK EUR

12

1. National standards and regulations (b)

2. Publicprocurement (b)

3. Administrative barriers (a)

4. Physical frontier delays and costs (a)

5. Differences in VAT and excise duties (c)

6. Regulations of freight transport (b)

7. Restrictions in capital market (b)

8. Company law (b)

2

6

1

3

8

5

4

7

1

8

2

3

7

4/5

6

4/5

1

8

2

4

5/6

5/6

7

3

7

8

1

3

4/5

4/5

2

6

6

8

1

2

7

3

5

4

1

7/8

2

4

3

5

7/8

6

2

7

1

3

6

4

5

8

4

2

1

3

7

8

5

6

2

8

1

3

7

5

4

6

3

7

1

2

8

4

6

5

4

3

1

2

8

5

6

7

1

4

2

3

8

5

7

6

2

8

1

3

6/7

6/7

5

4

Ranks are based on the answers to the question: “How important do you consider this barrier to be removed?” Range of ranks: 1 (most important) to 8 (least important)

a = physical barriers; b = technical barriers; c = fiscal barriers

B = BelgiumDK = DenmarkD = Germany

GR = GreeceE = SpainF = France

IRL = IrelandI = ItalyL = Luxemburg

NL = NetherlandsP = PortugalUK = United Kingdom

* Source: Survey of the EC Commission (Nerb, forthcoming)

6

I. THE PROBLEM: Non Tariff barriers – Fiscal barriers

- Different types and rates of VAT and excise duties (see tables) leading to artificial price differences

- Before 1992: frontier controls to ensure collection of taxes

• Exporter: tax free

• Importer: VAT and excise duties

7

VAT rates in the Community(Rates applicable at 1 April 1987)

Reduced rate Standard rate Higher rate

BelgiumDenmarkFrance

GermanyGreeceIrelandItalyLuxemburgNetherlandsPortugalSpainUnited Kingdom

1 and 6-

2,1 and 45,5 and 7

76

2,4 and 102 and 93 and 6

686-

1922

18,6

141825181220161215

25 and 25 + 8-

33 1/3

-36-

38--

3033-

Commission proposal 4 to 9* 14 to 20 abolished

* Taking account of the division by products and services existing at the present time in the majority of Member States, the Commission proposed that the reduced rate should be applied to the following categories of goods or services:(i) foodstuffs (except alcoholic beverages); (ii) energy products for heating and lighting; (iii) water supplies; (iv) pharmaceutical products; (v) books, newspapers and periodicals; (vi) passenger transport. Altogether, these goods and services represent about one third of the common tax base.(N.B.: All Member States’ zero-rate exports and similar transactions)

8

Excise duty rates: situation (1 April 1987)

Pure alcohol (ECU per hl)

Wine (ECU per hl)

Beer (ECU per hl)

Cigarettes*Petrol (ECU per 1000 l)(ECU per

1000)(ad valorem %)

BDKDGREFIRLILNLPUK

1 2523 4991 174

48309

1 1492 722

230842

1 298248

2 483

33157

20003

2790

1333

0154

1056

710

33

8217

520

949

2,577,527,3

0,60,71,3

48,91,81,7

26,02,2

42,8

66,439,343,860,451,971,133,668,663,635,764,834,0

261473256349254369362557209340352271

Rates proposed 1 271 17 17 19,5 52-54 340

* The taxes on cigarettes comprise a specific excise duty, the rate of which is given here for 1000 cigarettes, an ad valorem duty and VAT, the rate being shown here as a percentage of the retail price. The proposals of the Commission, referred to above, also comprise a specific as well as an ad valorem element (the sum of the ad valorem duty and of the VAT). The latter could be between 52 and 54% of the retail price according to the level retained in each country for the normal rate of VAT taken from the range 14 to 20%.Sources: Commission Services

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I. THE PROBLEM: Non Tariff barriers – Physical barriers

- Intra-EU border stoppages

- Customs / immigration controls and associated paperwork

- Costs 2% of trade volume Especially for SME’s (≤ 250 persons): + 30 – 45%

10

I. THE PROBLEM: Non Tariff barriers – Technical barriers

• Barriers as a result of law, norms or practices which inhibit / prevent:

- intra-community trade in goods / services- freedom of business to set up in another member state

• Examples:

- divergent standards and regulations(see table: typology of costs)

- restrictions on provision of cross border services

- non recognition of academic qualifications

- restrictive public procurement rules

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A typology of costs resulting fromdivergent standards and regulations

• For companies- duplication of product development

- loss of potential economies of manufacturing scale

- competitive weakness on world markets and vulnerability on European markets as companies operate from a narrow national base

• For public authorities- duplication of certification and testing costs

- not getting value for money in public purchasing, whose non-competitive nature is often reinforced by national standards and certification

• For consumers- direct costs borne by companies and governments

means higher prices

- direct and larger losses due to industry’s competitive weakness and inefficient structure

12

II. Internal Market: Concept & Program

- Concept: “in an internal market it should be as easy to do business between countries as within one country”

- White book on Internal Market (1985): doing away with non tariff barriers in order to arrive at

- free movement of persons and workers- free movement of goods- free movement of services- free movement of capital

- establishing the internal market: an unfinished and ongoing business

13

II. White Book on Internal Market =The Internal Market – Program (1992)

• Before

Non-Europe

physical barriers

technical barriers

fiscal barriers

• After

The internal market

Free movement of PERSONS

Free movement of GOODS

Free movement of SERVICES

Free movement of CAPITAL

280 measures

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II. White paper on internal market: overview of measures

Category of measures Number of measures

Category of measures Number of measures

• Removal of physical barriers 91– Control of goods– Control of individuals

• Removal of fiscal barriers 27– VAT– Excise duties

8011

1710

• Removal of technical barriers182

– Free movement of goods• Generic harmonization• Motor vehicles• Tractors and agricultural

machine• Food law• Pharmaceuticals• Chemical products• Construction (products)• Other sectors

– Public procurement– Free movement of labor– Free movement of services

• Financial services• Transport• New technologies and

services– Free movement of capital– Industrial cooperation– Company law

9076

22612111016

81935

2195

3234

Sources: European Commission

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II. IMPACT ON EUROPEAN BUSINESS & CONSUMERS1) LOWER INPUT COSTS

- Removal of barriers- Economies of scale- Learning effects

2) IMPROVED EFFICIENCY

- (Profits squeezed) P – C- Reorganization / Concentration- Cost Controls

-Overheads

+‘Best Practice’ production

+Quality of Management

3) INCREASED INNOVATION

- Market Liberalization and Growth- Removal of Market Entry Barriers (e.g. Standards)- Creation of New Companies4) NEW PATTERNS OF COMPETITION BASED ON REAL COMPARATIVE ADVANTAGES

RESULT: * IMPROVED COMPETITIVITY* SUBSTANTIAL

CONSUMER SURPLUS:-

LOWER PRICES-

GREATER CHOICE

BARRIERS

+ INTRA EC TRADE+ COMPETITION

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III. Free movement of persons and workers• Measures and achievements on free movement of workers need to be seen within a

more general framework of the free movement of persons:

- Free movement of persons:

1. Schengen area2. EU nationals3. Third country nationals: pm

- Free movement of workers:

1. Basic principle2. Right to free movement, residence and work3. Social protection4. Mobility & Skills5. Third Country Nationals: pm

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III. A. Free movement of persons: 1. Schengen AreaAbolition of frontier controls at borders inside Schengenland

No checks at airports for flights between Schengen countries

Right of hot pursuit across frontiers

Police co-operation and shared computerised information on potential criminals

More moves towards a common policy on visas

Free circulation for foreigners within Schengenland

Common rules on which country should deal with an asylum request

18

III. A. Free movement of persons: EU Nationals and their families (Directive 2004/38/EU)

• EU-27 nationals and their families have the right to move and reside freely within the M.S.Conditions:

– to have adequate resources– be covered by health insurance

• Restrictions on freedom of movement– possible grounds: public policy, public security or public health– exercise and scope limited by: principle of non-discrimination,

proportionality and protection of fundamental rights

19

III. B. Free movement of workers:Basic principle and overview of

measures

– Basic principle:“Every EU citizen and his family have the right to live and work in

another Member State without being discriminated against on the ground of his nationality”

– Overview of strands of measures1. Right to free movement, residence and

work2. Social protection3. Mobility and skills(4. Nationals of Third Countries: p.m)

20

III. B. Free movement of workers:Right to enter, reside and work in

another M.S.

A. Movement and residence (Directive 2004/38)

• Entry and stays < 3 months– identity card / passport

• Residence > 3 months: subject to conditions economic activity sufficient resources and sickness insurance vocational training family member

– M.S. may request registration after > 3 months– equal treatment as host country nationals

• Permanent residence: after > 5 years

• Restrictions: public policy, public security and public health

21

III. B. Free movement of workers:Right to enter, reside and work in

another M.S. (cont’d)

B. Work (Regulations 1612/68, 492/2011)

• Basic principle: migrant workers equal treatment as national workers– access to employment– excercising an occupation– stay in host country after stopping work (conditions)

• Restrictions– posts in public service entailing the exercise of official authority;– Enlargement: transitional measures: 2 + 3 + 2

22

III. B. Free movement of workers:Social protection of Migrant

Workers

– Basic principle: migrant community nationals must not suffer disadvantages in terms of social security rights

– Regulation: 883/2004• Co-ordinate, not harmonise• main principles: - equal treatment

- aggregation of periods- prevention of overlapping benefits- exportation of benefits

• persons covered: all M.S. nationals who are/have been covered by the social security legislation of one M.S.

• benefits covered: - all traditional branches of social security

- only rights acquired under statutory social

protection- European health insurance card- not covered: rights from

supplementary schemes or from schemes linked to occupational activity

23

III. B. Free movement of workers: Mobility and skills

1. EURES: the European Employment and Job Mobility Network

2. Recognition of professional qualifications (Directive 2005/36/EC)

• regulated professions

• freedom to provide services (i.e. on a temporary/occasional basis): no need for applications of recognition and use original professional title

• freedom of establishment (i.e. professional activity in other M.S. on stable basis)

24

III. B. Free movement of workers:Mobility and skills (cont’d)

• freedom of establishment– General system for the recognition of professional qualifications (the fall back):

based on mutual recognition with adaptation period (max 3 years) or an aptitude test if substantial difference in training

regulated professions in host/home M.S.: access under same conditions as for nationals if training similar

non regulated profession in home M.S. and regulated in host M.S.: provide proof of two years of professional experience on top of qualifications

– System of automatic recognition of qualifications attested by professional experience: for industrial, craft an commercial activities listed in the Directive

– System of automatic recognition of qualifications for specific professions: doctors, nurses for general care, dental practitioners, veterinary surgeons,

midwives, pharmacists, architects sets minimum training conditions for the above professions

• procedure for the mutual recognition of professional qualifications:– host M.S.: 1 month of acknowledge receipt of application; decision within 3 months

– if rejection: reasons to be given

– knowledge of language: if necessary for practising the profession

25

IV. Free movement of goods: Legal basis

Art. 34: Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between M.S.

Art 35: Quantitative restrictions on exports and all measures having equivalent effect shall be prohibited between M.S.

Art 36: The provisions of Articles 34 and 35 shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of

public morality, public policy or public security; the protection of health and life of humans, animals or plants; the protection of national treasures

possessing artistic, historic or archaeological value; or the protection of industrial and commercial property. Such prohibitions or restrictions shall

not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States.

26

IV. Free movement of goods: Overview of Measures1. Elimination of customs checks formalities and border controls at

internal borders(i.e. physical barriers)

2. Elimination of restrictions due to differing standards, technical regulations, etc.

(i.e. technical barriers)

- restrictions remain only in exceptional cases e.g. when there a risk to public health, the environment or consumer protection

2.1.

2.2. Prevention of new technical barriers: The 98/34 notification procedure and TBT

(Technical Barriers to Trade) – regulation

2.3 General Product Safety directive and Liability for Defective products

3. Elimination of fiscal barriers (VAT, excise duties): see infra

high(er) risk sectors vs low(er) risk sectors

EU legislation harmonisingtechnical regulations:

“New or Global Approach”

no specific EU harmonisation legislationbut

principle of mutual recognition

27

IV. Free movement of goods:EU Legislation to harmonise technical

regulations

1. Traditional approach- legislation obliges product type produced in EU

to have the same specifications- Commission proposal often consists of very

detailed technical specifications- used in cars, foodstuff, bicycles, etc.- unanimity needed

2. New or global approach- Commission proposal limited to

ESSENTIAL REQUIREMENTS (hazards, product performance, principal protection objective) and needs qualified

majority -harmonised European standards

- conformity assessment- 8 basic

modules: A to G- conformity

assessment bodies (“notified bodies”)- CE marking- Market surveillance

28

IV. Free movement of goods: New or Global Approach

Directive Subject

2006/95/EC Low Voltage

87/404/EEC Simple pressure vessels

88/378/EEC Safety of toys

89/106/EEC Construction products

98/336/EEC Electromagnetic compatiblity (EMG)

98/37/EC Machinery

89/686/EEC Personal protective equipment (PPE)

90/384/EEC Non-automatic weighing instruments

90/385/EEC Active implantable medical devices

90/396/EEC Appliances burning gaseous fuels

92/42/EEC Efficiency requirements for new hot-water boilers fired with liquid or gaseous fuels

93/15/EEC Explosives for civil uses

93/42/EEC Medical devices

29

IV. Free movement of goods: New or Global Approach (cont’d)

Directive Subject

94/9/EC Equipment explosive atmospheres (ATEX)

95/16/EC Lifts

97/23/EC Pressure equipment

98/79/EC In vitro diagnostic medical devices

1989/5/CE Radio equipment and telecommunications Terminal equipment and the mutual recognition of their confirmity

2000/9/EC Cableway installations designed to carry persons

2004/22/EC Measuring instruments

30

IV. Free movement of goods: Directives based on the principles of New Approach or Global Approach, but which do not provide for CE marking

Directive Subject

94/82/EC Packaging and packaging waste

96/48/EC Interoperability of trans-European high-speed rail system

96/98/CE Marine equipment

2001/16/CE Interoperability of trans-European conventional rail system

96/57/CE Energy efficiency requirements for household electric refrigerators, freezers and combinations thereof

1999/36/CE Transportable pressure equipment

2000/14/EC Noise emission in the environment by equipment for use outdoors

2000/55/EC Energy efficiency requirements for ballasts for fluorescent lighting

31

IV. Free movement of goods: Overview of regulated sectors

1. Automotives2. Chemicals3. Construction products*4. Cosmetics5. (Return of) cultural goods6. Defense related products7. Electrical equipment*8. Equipment intended for use in Potentially Explosive Atmospheres (ATEX)*9. Footwear10. Gas Appliances*11. Medical devices*12. Mechanical equipment (machinery, lifts)*13. Metrology and pre-packaging*14. Pharmaceuticals15. Pressure equipment*16. Rail*17. Radio and telecommunications terminal equipment (R&TTE)*18. Textiles19. Toys*20. Weapons

*: using the New Approach

32

IV. Free movement of goods: Prevention of technical barriers to trade

1. The 98/34 notification procedure

- need to notify to Commission all technical regulations/standards related to products and information society services at a draft stage

- “standstill period” of 3 months to 18 months

2. Technical Barriers to Trade (TBT) - notification procedure

- Members of WTO to notify, at draft stage, technical regulations and conformity assessment procedures - when they are not in accordance

with technical content of relevant international standards or if such standards do not exist.

- other WTO Members, and economic operators can comment in case the measure is discriminatory, not justified or more trade-restrictive than necessary.

33

IV. Free movement of goods: Value Added Tax (VAT)

- Initial White Book proposals

- harmonisation of rates within a defined band- standard rate: 14 – 20%- reduced rate: 4 - 9%

- “origin principle” with clearing house

- Council Directive 92/77 (currently the “VAT Directive 2006/112”)

- Substantial administrative simplification for business

- VAT rates- a minimum standard rate > 15%- option of one / two reduced rates >

5%

- transitional / hybrid system- “origin principle” for sales to

consumers- “destination principle” for crossborder

sales to business

34

IV. Free movement of goods: Value Added Tax (VAT)

THE TRANSITIONAL / HYBRID SYSTEM

BELGIUM FRANCE

1. Private Citizen

A. Within the same country

Brussels (seller)

(VAT paid in Brussels)Leuven (buyer)

B. Across countries

Brussels (seller)(VAT paid in Brussels)

2. Business Brussels (seller)

TAX FREE

Paris (buyer)

VAT PAIDIN FRANCE

Paris (buyer)

35

V. Free movement of services:Importance and overview of measures

– Services:

- 75% of GDP; 70% Total Employment

- 9 out of 10 new jobs

- crossborder services: 5% of EU GDP; goods intra EU traded: 17% of EU GDP

– Heavily regulated and differing in various Member States

- initially ”companies must meet rules of Host Country”

– Measures

- 1992-package

- New approach “Home country rules” - Especially for financial services (banking, insurance, securities)

- 2006: The services directive

36

V. Free movement of services:The Services Directive (Directive 2006/123/EC)

coverage: all sectors except those explicitly excluded

“freedom of establishment” and “freedom to provide

services” instead of “home country”-principle

4 main strands of measures

deadline for transposition: 27/12/2009

37

V. The Services Directive: Examples of sectors covered• Activities of (most) regulated professions (such as legal and tax advisors, architects,

engineers, accountants, etc.)• Business related services (e.g. facilities management and office maintenance, management

consultancy, organisations of events, recovery of debts, advertising and recruitment services)• Distributive trades (incl. retail and wholesale of goods & services)• Tourism services• Leisure services (e.g. sports centres, amusement parks)• Construction services and crafts(men)• Information services (e.g. publishing, print and web news agencies, computer programming)• Accommodation and food services (e.g. hotels, restaurants, caterers)• Training and education services• Rental (including car rental) and leasing services• Real estate services• Certification and testing services• Household support services (e.g. cleaning, gardening)

Basic rule : The Services Directive applies to all sectors not explicitly excluded

38

V. The Services Directive: Sectors excluded• Non-economic services of general interest• Financial services• Electronic communication services and networks and associated facilities and

services• Services in the field of transport, including port services• Services of temporary work agencies• Healthcare and pharmaceutical services provided by health care professionals to

patients• Audiovisual and radio-broadcasting services• Gambling activities• Activities connected with the exercise of official authority• Services provided by notaries and bailiffs• Social services related to social housing, childcare and persons in need• Private security services• Taxation• Temporary work agencies’ services

39

V. The Services Directive: Main strands of measures1. Administrative simplification

– “points of single contact”– all procedures and formalities can be completed electronically

2. Facilitate Establishment abroad– M.S. to screen all their authorisation schemes concerning access to or the exercise a service activity

and abolish or replace them by less restrictive means where they are unnecessary or otherwise disproportionate.

– M.S. to abolish descriminatory requirements (eg. nationality or residence requirements, “economic needs” tests.

3. Foster cross border provision of servicesMember States are in general prohibited from imposing restrictions upon incoming service providers. National requirements only under very limited circumstances, i.e. when they are non-discriminatory, justified for reasons of public policy, public security, public health or the protection of the environment and are proportional (i.e. do not go beyond what is necessary in order to achieve their objective).

4. Administrative co-operation and mutual assistance between regulatory bodies in M.S.– to limit “rogue traders”– the Internal Market Information System

40

VI. Free Movement of Capital

- TREATY PROVISIONS

- BASIC PRINCIPLE:

“All restrictions on the free movement of capital and on payments between M.S. and between M.S. and 3rd countries are prohibited”

- EXCEPTIONS:

- Confined to 3rd countries- Controls to:

-avoid tax evasion

-monitor suspicious transactions (terrorism, drug trafficking)

41

VI. Free Movement of Capital

- CAPITAL MOVEMENTS

- INCLUDE: - FOREIGN DIRECT INVESTMENT- REAL

ESTATE INVESTMENT/PURCHASES- SECURITIES

INVESTMENT- GRANTING

LOANS AND CREDITS- CROSS BORDER

- TRANSITIONAL MEASURES NEW M.S.: purchase real estate

- COURT OF JUSTICE: “GOLDEN SHARES”

- PAYMENTS

- PAYMENT SERVICES DIRECTIVE (2007):“Crossborder payments as easy, efficient and secure as

national payments”- SINGLE EURO PAYMENTS AREA (SEPA)

42

VII. Evaluation & Issues

“Significant progress has been made towards achieving a Single Market, but more remains to be done, especially in services” (OECD, 2012)

1. PROGRESS

- Legal framework Single Market in place- Integration in goods and service activities : up- Framework conditions “Doing Business in Europe” improved

2. ISSUES

- Chequered implementation of Single Market requirements- Nationalism, protectionism national product market

requirements too restrictive- Evolving business environment (e.g. globalisation, ICT)

3. STEPS TO COMPLETE SINGLE MARKET

43

3. STEPS TO COMPLETE SINGLE MARKET

- FREE MOVEMENT OF WORKERS- Reduce number of regulated professions

- Simplify procedures recognition of professional qualifications

- Improve portability of pensions

- FREE MOVEMENT OF GOODS- Improve application of rules

- Monitor proper application of mutual recognition principle

- Improve VAT system

- FREE MOVEMENT OF SERVICES- Fully implement Services Directive

- FREE MOVEMENT OF CAPITAL- European framework for financial services

- Improve functioning of SEPA

44

3. STEPS TO COMPLETE SINGLE MARKET (cont’d)

- OVERALL- Improve implementation, enforcement and monitor correct

application of single market requirements

- Improve consumer protection for cross border transactions

- KEY AREAS- Public procurement

- Transport infrastructure

- Road (Transeuropean networks)- Sky (“Single European Sky”)

- Network industries (Energy, telecom, … )