A. THE CURRENT STATE OF THE SINGLE MARKET

What has the impact of the recent enlargements of the European Union been on the single market?

  The recent enlargements substantially increased the size of the single market, providing firms with additional opportunities to draw on a wider range of comparative advantages characterising the different Member States. This is a source of further dynamism and efficiency. On the other hand, while the economic changes induced by this enlargement have been absorbed quite smoothly and there is no evidence of disruptive impacts on the product and labour markets, the increased divergence among the 27 members constitutes a challenge to its proper functioning. The enlarged single is an important source of growth and jobs. The estimated "gains" from the single market amount to 2.2% of EU value added and 1.4% of total employment (or 2.75 million jobs) over the period 1992-2006. While the single market and EMU have been associated with trade boosting effects and the EU27 has managed to maintain its share of world exports and imports over the last decade, the EU27 continues to reveal a comparative disadvantage in high tech sectors including ICT. The lag of the EU in developing ICT industries can be partly explained by a lack of progress in the creation of a competitive single market for services and to a European innovation deficit.

Are there significant barriers to firms seeking to offer their goods or services, or to consumers accessing these goods or services, in other Member States of the European Union? If so, what are the most important of those barriers? What measures are needed to overcome those barriers?

  The EC Treaty upholds the free provision of goods and services throughout the Union and the freedom for operators to establish in any Member State. Notwithstanding these basic freedoms, the degree of integration and trade in services markets lags behind that observed in goods markets. This reflects the low tradability of services and the continued existence of regulatory barriers.[1] The Services Directive (2006/123/EC), adopted at the end of last year aims to remove legal and administrative barriers to the development of service activities, to facilitate growth in cross-border service provision, and enhance consumer confidence. The key will be thorough implementation and enforcement of the Directive's provisions. The Commission is making every effort to assist the Member States in ensuring successful transposition ahead of the deadline of end 2009.

Do you consider further legislative measures by the Commission to be necessary for the completion of the single market? If so, what measures would you consider appropriate?

  In whole swathes of economic activity, the single market has been achieved and the legislative framework is in place. On the whole, the single market therefore can be said to move from the legislative phase into the implementation phase. However, the single market is an ongoing process rather than a fixed state and further legislative measures by the Commission, may still prove necessary for a variety of reasons, though legislative measures need not be the only instruments to be used. Administrative cooperation or self-regulation may be useful and effective alternatives. Impact assessments usually guide the decision on whether to propose legislation in these cases.

  Further legislative measures may prove necessary in areas where the single market has not yet been achieved or is not yet completed. This may be because certain fields of activity have been kept out of the single market up to now, but the political vision on this may change (eg certain services), or because the process of creating the single market in a particular area has started later and is still ongoing (eg postal services, rail transport). Further legislative measures may prove necessary because circumstances change (eg because of technology) and existing legislation, though in itself functioning and complete, needs to be updated or modernised. Also in this category should be considered, legislative measures intended to consolidate or simplify existing legislation. Further legislative measures may prove appropriate where experience with existing legislation or alternatives such as self regulation, as well as the Commission's monitoring of market effects demonstrates that the hoped for results have not been fully achieved.

Are the current provisions for monitoring market functioning and performance effective?

  Better single market regulation depends on a better understanding of the obstacles preventing markets from functioning well. This would imply moving from a largely legalistic approach to a more economic approach based on the monitoring of markets. The Commission has wide experience with market and sector monitoring that has been used as a basis for policy shaping and policy implementation. In the framework of the single market review, the Commission is considering a more systematic and integrated approach to monitoring the functioning of key goods and services markets. It is expected that a good understanding of markets resulting from closer monitoring of product markets and sectors will foster policies that would create more open, competitive and innovative markets generating concrete benefits for citizens.

  Monitoring is also essential for bringing the single market and its governance close to the citizen. Deepening the single market implies the opening up to competition of sectors (such as the services sector) that are politically sensitive, because it directly affects the employment of a large number of people. In order to increase acceptability, it is crucial to provide evidence illustrating the overall benefits of reforms proposed; to consider the most appropriate sequencing of reforms; and to facilitate the process of adjustment particularly for those most directly affected. Once the reforms are implemented it is important to ensure a close monitoring of the effects of the reforms undertaken.

Is there a need for greater cooperation between National Regulatory Authorities?

  A greater cooperation between National Regulatory authorities is all the more important when the single market moves from the legislative phase to the implementation phase. Such cooperation gives expression to the principle of subsidiarity by putting supervision close to the market and the citizen. Good administrative cooperation will also foster the finding of solutions for citizens' concrete problems (eg. through the SOLVIT system). However, in practice a number of problems are encountered. National regulatory authorities do not always have the same competencies (eg to investigate or to sanction) or level of independence, both from national authorities or from national operators and the application of the principle of mutual recognition leaves to be desired. Continued cooperation and exchange of good practice will increase coherence and trust.

Are the current remedies available to the Commission to enforce single market legislation adequate; and are they used effectively?

  It is necessary to give some background on the procedure that the Commission follows in the case of late transposition by a Member State. Such cases follow the strict procedure prescribed in Article 226 of the EC Treaty. In the first instance, the Commission sends a letter of formal notice to the Member State concerned, drawing its attention to the fact that the deadline for transposition of a directive has elapsed. The Member State then has two months to reply. If the Member State's reply is not satisfactory or if the Member State does not react at all, the Commission will send a reasoned opinion. The Member State then has approximately two months to comply with Community law. In the case the Member State persists in its non-compliance, the Commission may bring the case before the European Court of Justice ("ECJ") in Luxembourg. If a Member State still won't comply after having been condemned by the ECJ, the Commission may bring that Member State before the ECJ under Article 228 of the EC Treaty which essentially provides for the same steps to be taken (letter of formal notice followed by reasoned opinion) and which ultimately may lead the ECJ to impose fines (periodic fines and/or penalty payments) on the Member State concerned. In practice, many cases get solved before the Commission brings the case to the ECJ.

  The primary responsibility for ensuring the correct application of single market rules lies with the Member States. It is in their common interest to ensure that the single market functions properly for the benefit of their businesses and citizens. As the guardian of the Treaty, the European Commission is looking more critically at non-timely transposition and is starting procedures for non-transposition more quickly than in the past. On 23 March 2005, the European Council called on Member States to spare no effort in honouring the commitments given in Barcelona in March 2002 as regards the transposition of directives. The Heads of State and Government have decided that a policy of "zero tolerance" is to be adopted as regards directives overdue by two years or more. The results show that to date the track-record of the Member States has never been better when it comes to timely transposition of EU directives into national law. That is an achievement to be acknowledged. The good result is partly due to the exchange of best practices.

  When directives are not applied correctly by Member States, EU citizens and businesses are deprived of their rights. This self-inflicted damage causes harm to the European economy and undermines the confidence that citizens and businesses have in the single market and the EU in general. Where the Commission considers that single market rules are not properly applied, it may take infringement action against the Member State in question, as set out above. Clearly, every infringement case is one too many. Infringement cases are costly and can take a long time to resolve. The Internal Market Strategy therefore called on Member States to reduce the number of infringements against them by at least 50% by 2006. Whereas the record as regards the transposition of single market directives has improved dramatically overall, the situation is not so good insofar as the correct application of EU law is concerned. No Member State has achieved the aim of a 50% reduction of infringement proceedings by the year 2006, compared with 2003.

What is your view of the Country of Origin Principle, whereby a company registered to provide services in one Member State is automatically qualified to provide those services in any other Member State on the basis of home country regulation? Does this Principle constitute the best basis for single market measures?

  The Country of Origin principle is a specific legislative technique based on a long line of cases of the Court of Justice. It is enshrined in specific EU laws, such as the eCommerce Directive and the Television without Frontiers Directive. It enables economic operators complying with rules applicable in their home states, to provide a service throughout the EU without having to comply with additional regulatory requirements. Country of Origin has in some areas proved a useful instrument for bringing down unjustified barriers to trade. In line with better regulation principles, the Commission must assess, when considering new draft legislation, whether Country of Origin is the right approach to market regulation, or whether other approaches—for instance, harmonisation—are to be preferred. When carrying out this assessment, it takes account of the specific situation of the markets concerned and of all interests at stake.

Do the concepts of the "national champion" and "economic nationalism" pose a threat to the single market?

  This depends largely on the definition and meaning given to these concepts. In general, however, they tend to refer to preferential treatments or positions given to certain operators on the basis of nationality. In as far as this conduct infringes on the rights and the ability to exercise these of other operators within the single market, there would be a threat to the single market in the sense that this market would no longer be a single space, with a level playing field for all operators. The growing reality of the internal market has brought the economies of Member States much closer together and has encouraged European undertakings to grow across national borders. Sectors which were once closed for competition, like telecoms and transport, have been progressively liberalised. A number of undertakings in these sectors in Member States have been privatised. This trend is at least partly also a proactive response by European undertakings to the challenges and opportunities of globalisation. Recent responses by some Member States against proposed operations of concentration seem to be a reaction to this rapid business-need driven movement towards corporate cross-border integration. While EU competition rules do not prevent Member States from protecting legitimate general interests. such as for example public security—including security of energy supplies—or guaranteeing adequate prudential control, it would appear that in some instances the overriding interest that Member States have wanted to defend has been to guarantee continued national ownership of companies for which a cross-border bid has been made. The Commission, as the guardian of the Treaties and therefore of a level playing field for all, has always kept a watchful eye on such developments and has intervened whenever necessary.

Should there be a greater role for technology and research in facilitating the single market?

  Technology and research and development can play a larger role—both in terms of the governance of the single market and its economic development. In terms of governance, new IT tools will enable Member State authorities to cooperate efficiently in applying single market rules; for example using the Internal Market Information system (IMI) to ensure compliance with the provisions of the Services Directive or to enable recognition of professional qualifications. In terms of the economic development of the single market, the Commission has already identified the advance of Europe's knowledge economy as the central aim of the Lisbon strategy. The Commission seeks to build a single market for knowledge and intellectual property in order to stimulate greater innovation, growth and job creation. In this contest, it recently presented its views on the way forward to enhancing patent systems in Europe, including through the establishment of the Community patent. The use of Information and Communications Technologies (ICT) by enterprises, citizens and government has the potential to reinforce the internal market, blurring geographical boundaries and helping to overcome obstacles to trade in products and services. At the same time, a properly functioning single market will stimulate the uptake of ICT and the diffusion of innovative technologies and business practices, with positive consequences on the competitiveness of the whole European economy.

What is the significance of the single currency to the operation of the single market?

  The creation of the EMU has reinforced the integration and the competition effects of the single market by reducing the costs of cross-border activities (costs of managing multiple currencies and of exchange rate risks) and by increasing the transparency of prices.

  In turn, well functioning markets are also crucial to improve the adjustment capacity of the EMU to changing demand and supply conditions. Therefore, there is significant scope for structural polices aiming at creating a better integrated single market to influence the adjustment process:

—    internal market policies, aiming at increasing competition on the markets increase price flexibility. The price and wage setting behaviour of companies are indeed important instruments of adjustment to asymmetric shocks;

—    a more integrated single market facilitates the reallocation of production factors from declining sectors to sectors where the economy has a comparative advantage; and

—    competitiveness improving policies and policies fostering integration have to be accompanied by policies aiming at increasing flexibility of labour markets.

B.  SECTOR-SPECIFIC QUESTIONS

Energy

Has there been sufficient unbundling of gas and electricity markets in all Member States?

  The Commission recently completed a detailed sector inquiry into gas and electricity markets.[2] This demonstrated significant shortcomings in the functioning of those markets. Many of these problems can be traced back to insufficient unbundling of gas and electricity networks from the production or supply parts of the business. The inquiry found that companies that own and operate the networks which are needed by their competitors, have an incentive to distort the level playing field in their own favour. Similarly, investment incentives are distorted, creating risks to security of supply, with decisions not necessarily taken in the interest of the network users as a whole but instead on the basis of the supply interests of the integrated company. Finally, it is clear that vertically integrated companies have little incentive or inclination to co-operate with each other to build an integrated market since this will mean more vigorous competition. It is much easier for them to segment markets into smaller areas where each maintains a high degree of dominance. The Commission considers that the most effective way to remove the incentives for network companies to favour their own commercial activities is to remove the ownership link. Other models such as the establishment of separate "independent system operators" (where the vertically integrated company remains owner of the network assets and receives a regulated return on them, but is not responsible for their operation, maintenance or development) at national or regional level have also been put forward. The Commission is currently examining all of these with a view to putting forward proposals in the second half of 2007.

Is there agreement on the fundamental importance of a genuine single market to support a Common European strategy for energy?

  The Commission considers that a real Internal Energy Market is essential to meet all three of Europe's energy challenges:

(i)  Competitiveness: a competitive market will cut costs for citizens and companies and stimulate energy efficiency and investment;

(ii)  Sustainability: a competitive market is vital to allow for the effective application of economic instruments, including the emissions trading mechanism to work properly. Furthermore, transmission system operators must have an interest in promoting connection by renewable, combined heat and power and micro generation, stimulating innovation and encouraging smaller companies and individuals to consider non-conventional supply;

(iii)  Security of supply: an effectively functioning and competitive Internal Energy Market can provide major advantages in terms of security of supply and high standards of public service. The effective separation of networks from the competitive parts of the electricity and gas business results in real incentives for companies to invest in new infrastructure, inter-connection capacity and new generation capacity, thereby avoiding black-outs and unnecessary price surges. A true single market promotes diversity.

  In its Spring Summit conclusions of 9 March, the European Council endorsed this approach, "pressing for the EU to put in place an integrated policy on energy" fighting global warming, ensuring security of supply and enhancing business competitiveness.

Should there be a single EU energy regulator?

  With respect to gas and electricity, there are several barriers to cross-border exchanges. The first of these is, fundamentally, the lack of interconnection capacity that has been constructed. Although this is partly due to the difficulty in obtaining building permits, it is also apparent that the vertically integrated companies have little incentive in this respect. However, even when capacity exists, it is often used ineffectively. Often different operating rules on each side of the border or different tariff systems prevent exchange taking place. There is also a tendency for all constraints in the system to be superimposed at the borders, even if the main infrastructure restrictions are internal. As well as ownership unbundling, there is also a need for different Member States to adopt consistent trading and operational rules to ensure that the maximum possible use of the network can be achieved. At present, for example, the nomination timetables and balancing rules differ substantially, even for different networks in the same Member State. A common regulatory framework will help in this respect and the Commission is looking at ways to improve co-operation between national energy regulators. The creation of the European Regulators' Group for Electricity and Gas (ERGEG) has not provided the governance required, The role of ERGEG would need to be formalised, and it would be given the task to structure binding decisions for regulators and relevant market players on certain precisely defined technical issues and mechanisms relating to cross border issues. This should not replace national regulators but strengthen them. In its Spring Summit conclusions of 9 March, the European Council endorsed this approach calling for "the establishment of an independent mechanism for national regulators to cooperate and take decisions on important cross-border issues."

Telecommunications

Is the EU telecommunications market genuinely cross-border at present?

  While the existing regulatory framework has led to significant benefits for citizens and enterprises, a single market for e-communications is not yet a reality. The EU telecoms market is still regulated as 27 national markets, albeit under a common framework. As long as spectrum, numbers and rights of way are administered nationally, there will be differences between Member States which make the deployment of cross-border services more difficult than they would be in a genuine single market. Nevertheless, the harmonised approach on market definition and market powers assessment—alongside the Commission's role in reviewing the regulatory measures imposed by National Regulatory Authorities—has already proved its worth in consolidating the single market. But market players regard the current variation of regulatory approaches as an obstacle to the single market, More consistency in the imposition of remedies is needed. Regulatory tools for harmonising spectrum allocation exist and have contributed to strengthening the internal market, but overall the European market for wireless services is still hampered by fragmented spectrum regulation, while wireless equipment markets are very often global, but the free circulation/operation of such equipment throughout the EU is often hampered by regulation on spectrum usage.

Is the current EU regulatory framework for telecommunications sufficiently technology neutral?

  The current framework is in principle technologically neutral, but this does not rule out the possibility of having some regulation that is specific to certain technologies. The EU framework is about regulation of markets, and to the extent that specific markets are linked to specific technologies, some regulation will also be linked to specific technologies. Although the current regulatory framework includes the principle of technology neutrality, in some cases (eg from a spectrum perspective), its implementation may not be defined precisely enough. These issues are being addressed in the ongoing review of the EU regulatory framework for telecommunications.

Does this regulatory framework require modernisation?

  The current regulatory framework has produced considerable benefits, but given the fast developments in the underlying markets and technologies, it needs attention in a number of areas in order to remain effective for the coming decade. For instance, important spectrum aspects are not addressed to the same extent as other regulatory aspects (authorisations, access to infrastructure, market dominance etc). In the context of the fore-mentioned ongoing review, other potential changes have been identified, which would seek to consolidate the single market, strengthen consumers and user interests, improve security, deregulate certain markets, remove outdated provisions and simplify processes in line with the Commission's better regulation agenda.

Financial Services

What has been the impact of the implementation of the Financial Services Action Plan as a whole, and in particular the Markets in Financial Instruments Directive?

  The deadline for implementation of the Markets in Financial Instruments Directive is in November 2007. More time will be needed to assess its economic effects. The Commission is launching an evaluation of the economic impact of the Financial Services Action Plan as a whole, Results are due for early 2009. However, two recently published studies assessing the economic impact of the FSAP suggest that the benefits outweigh the costs, in the long run:

—    A study by Europe Economies for the European Parliament estimates a long run stimulation of trade in the EU banking by 3.4% and a reduction of the cost of capital by 0.1% in the UK, 0.2% in France, 0.3% in Germany and 0.7% in Italy. An increase in the sustainable GDP growth rate of EU-15 is estimated at 0.1%.[3]

—    A study by Centre for Economic and Business Research for the City of London estimates a net increase of the EU financial intermediaries' economic output by 2% over five years.[4]

Do you support the Commission's Code of Conduct on Clearing and Settlement?

  The Code of Conduct on Clearing and Settlement is not a Commission, but an industry initiative. However, the Commission supports the Code. The Code was deemed as a more flexible and faster solution to some of the efficiency issues currently present in EU post-trading. If properly implemented, the Code will lay down the foundations for competition between past-trading infrastructures. So far, it has already significantly enhanced price transparency in the market for post-trading services. The Commission is closely monitoring the implementation of the Code—via a Monitoring Group which also includes the European Central Bank and the Committee of European Securities Regulators—in order to ensure that the requirements of the Code are implemented properly and on time.

6 July 2007

2   http://ec.europa.eu/comm/competition/sectors/energy/inquiry/index.html (COM(2006)851 and 5EC(2006)1724, 10 January 2007). Back

3   Europe Economics (2007) The Impact of the New Financial Services Framework, a study for the European Parliament's Economic and Monetary Affairs Committee; European Parliament, Policy Department-Economic and Scientific Policy, March 2007 (PE 385.623). Back

4   Centre for Economics and Business Research (2007) "The Importance of Wholesale Financial Services to the EU Economy 2007", City of London, May 2007. Back