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2.40 The most prominent and controversial piece of legislation in this area is the Services Directive, Directive 2006/123. It deserves special comment. Despite its name, it covers both services and establishment. It was proposed by the Commission in 2004. The original proposal was controversial because it was aimed at enshrining the country of origin principle (see box below) into the EU services market, i.e. that Member States should, in principle, allow any person or company duly registered in one Member State to provide services or establish itself in another. In this, it reflected earlier legislation that did just that, for example the Television without Frontiers Directive (now updated into Directive 2010/13) or the E-commerce Directive (2000/31). However, the breadth of the Services Directive’s scope, and its lack of positive regulation to balance out the deregulation implied by the country of origin principle, led some Member States to fear, however unrealistically, that it could produce unfair competition or a race to the bottom.
The country of origin principle
2.41 The country of origin provisions were watered down in the final version of the Directive.
It still requires Member States to allow access for others’ service providers, but allows the imposition of a range of conditions which qualify the country of origin rule in practice.
Beyond this, it codifies some case law, lays down rules on the rights of recipients and quality of service, and requires the establishment of a network of contact points between Member States enabling exchange of information about service providers’ bona fides and enabling providers to register in each Member State to provide services. Some major areas of service provision are excluded, and the Directive does not apply to areas covered in separate legislation. The effect is to exclude major areas from the Directive, such as 26 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market financial services, telecoms, energy, healthcare, audiovisual, and taxation. Finally, the Directive specifically provides that it cannot affect labour law and social security provisions in the Member States. All this together means that the services landscape in the EU is fragmented and it is still difficult for service providers to enforce their rights. Major efforts are being led by the Commission and some Member States to deepen and integrate the market further, but it remains much less integrated than the Single Market for goods6.
2.42 Financial services are handled in a significantly different way. There is a large quantity of subject-specific legislation covering both the wholesale and retail areas. The wholesale financial services sector in particular is one of the most integrated parts of the Single Market. There is a very high degree of integration of money markets, considerable integration of bond markets and increasing integration of equity markets, under the supervision of the recently constituted European Supervisory Authorities7.
2.43 Finally, it is worth also noting that the EU’s rules on public procurement are part of this freedom. With public procurement making up 19% of EU GDP (€420bn in 2009)8, a common set of rules is important to the operation of the Single Market. The key Directives are 2004/17 and 2004/18, though they are currently being revised by the Council and EP.
2.44 The Treaty provisions are set out in Articles 63 – 66 TFEU. Article 63 provides for the right to move capital freely, not just between EU Member States, but also between EU Member States and third countries, for purposes of investment or of payment, without restrictions and without discrimination. In their current form these provisions date from the Maastricht Treaty (1993).
2.45 This general provision is subject to a series of broad exemptions.
• First, Article 64 allows certain restrictions in place on 31 December 1993 to remain in force in the Member States. It also gives a legislative power to put in place certain restrictions on movements of capital involving direct investment vis-a-vis third countries, or to adopt measures which “constitute a step backwards in Union law as regards the liberalisation of the movement of capital to or from third countries”.
• Second, Article 65 provides a series of specific exemptions: to protect the integrity of national tax systems; to prevent capital transfers that break national law in taxation, prudential supervision of financial institutions, and, according to the Court, activities such as money laundering, drug trafficking, and terrorism; and to allow national rules for reasons of public policy and public security (which the CJEU has ruled may not be justified for purely economic ends, e.g. to weaken competition or prevent the closure of companies). This final exemption is the one on which Cyprus has relied for its recent introduction of temporary capital controls.
• Third, Article 66 allows safeguard measures for up to six months where in exceptional circumstances movements of capital vis a vis third countries might cause operating difficulties for the Euro.
See examples in evidence submitted by the British Retail Consortium 6 See evidence submitted by the British Bankers’ Association, the Building Societies Association, and TheCityUK 7
How legislation happens in practice: Article 114
2.46 Until the Single European Act (1987) all legislation covering the Four Freedoms had to be agreed unanimously by all Member States, with a very limited role for the European Parliament. The Single European Act introduced what is now Article 114 TFEU. This provides a power for “approximation” of Member States’ rules for the purposes of creating the Single Market. Decisions under it are generally taken by qualified majority. The role of the European Parliament has grown steadily over the years in this area to the extent that it is now a co-legislator with the Member States in the Council, i.e. the Parliament and the Council must both agree on a law if it is to come into force.
2.47 For example, Single Market legislation may be needed to avoid the risk of different national rules which would require, say, lawnmower manufacturers to adapt their product to each national market before it can be sold there. In these cases the EU can and does legislate under Article 114 to adopt a single standard. Indeed it has done just that with Directive 2000/14/EC.9
2.48 Article 114 cannot be used to adopt fiscal (tax) measures or decisions relating to the freedom of movement of persons or workers.
2.49 There has been a vigorous debate about what Article 114 can be used to do. It is drafted very broadly. Some have argued that it is close to being a general legislative power for the EU. Perhaps sensitive to this debate, the CJEU drew a formal limit in 2000, in the Tobacco Advertising case10. This was a challenge to the EU’s power to adopt the Tobacco Advertising Directive (98/43/EC) under Article 114. Germany argued that the Directive was really a public health measure, and that the Treaty article on public health, Article 168, did not give the EU the power to harmonise rules. The Court annulled the Directive on the grounds that not all of its provisions concerned inter-state trade or distortions of competition, and made clear that Article 114 could only be used for measures that genuinely improve the functioning of the Single Market, not just to eliminate differences between Member States.
2.50 This case was a symbolic and important recognition that there were limits to the use of Article 114 and hence to positive integration. That said, the CJEU has not, since 2000, struck down any other use of Article 114 TFEU, although this may be because the Commission has become more adept at drafting proposals which fit within the guidance provided by the Court. Indeed, some would say that in some ways the Court has broadened the scope of the Article. It has ruled, for example, that Article 114 can in some circumstances cover situations which concern only one Member State, i.e. where there is no cross border element11; that it can be used to establish EU agencies12 13, provided the Agency’s tasks are “closely linked” to existing Single Market legislation (the Meroni case14 sets the limits of discretion in this area); and that “approximation” can mean a wide range of measures, including in certain circumstances even banning a product15.
Evidence submitted by Barnard 9 Case C-376/98 Germany v.European Parliament and Council  ECR I–8419 and Case C–74/99 10 R v. Secretary of State for Health and others, ex p. Imperial Tobacco  ECR I–8599.
Case C-465/00  ECR I–4989, para. 41.
Case C-9/56 and 10/56, Meroni v High Authority (1957/1958) ECR 133 14 Case C-380/03 Tobacco Advertising II  ECR I–11573, para. 42.
15 28 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market
2.51 The current position is therefore as follows. There are in principle limits to the use of Articles 114 and 115: they can only be used for Single Market measures, those measures must genuinely improve the Single Market, and there must be no more specific legal base anywhere else in the Treaty. However, what actually constitutes a Single Market measure has been interpreted expansively by the Court.
2.52 The use of Qualified Majority Voting (QMV) in Single Market legislation has also aroused comment at times, though more so in the UK than elsewhere. All Single Market legislation is decided by QMV except on taxation, which is decided by unanimity, and social security, which is decided by QMV with an emergency brake, although a vote is only explicitly taken on a small proportion, and consensus is usually found in practice. It is argued by many observers that the extension of the Single Market would not have been possible without the use of QMV16.
Mutual recognition v harmonisation
2.53 An important distinction is that between mutual recognition and harmonisation.
2.54 Under mutual recognition, Member States agree to recognise each others’ regulations and goods or services authorised under them. For example, if a particular good meets the requirements of one Member State, it has in principle to be accepted onto the market in all other Member States. Mutual recognition can be provided for directly by the Treaty or by the CJEU’s jurisprudence, or it can be set out in legislation.
2.55 Under harmonisation, Member States’ rules are explicitly brought into line through legislation. Despite the name, it does not necessarily, or even usually, mean making rules exactly the same in all Member States (known as exhaustive harmonisation): examples of exhaustive harmonisation include the Cosmetics Directive (76/768) and much of the legislation covering motor vehicle safety. Its typical form is the “approximation” provided for in Article 114, which normally means significant though not exhaustive harmonisation.
Another form is minimum harmonisation, rules which all Member States must observe but which do not prevent some having tougher rules, for example, in the environment area.
2.56 Mutual recognition is generally simpler and can more readily reflect local conditions and preferences17. It could be said to be more in consonance with the principles of subsidiarity and proportionality set out in the Treaties. It enables regulatory competition and acts as a brake on over-regulation18: for example, many of the large digital service companies have located in Member States with less onerous national privacy and consumer protection regimes19. It does not require legislation20 and can therefore be more adaptable to changes in technology or business models, and be less vulnerable to lobbying by vested interests.
But it can be difficult to assert a mutual recognition right in court if a Member State does not easily enable it; and it can put onus on the consumer to deal with the consequences of divergent national requirements.
Evidence submitted by TheCityUK, Senior European Experts Group Evidence submitted by Consumers for Health Choice Evidence submitted by Open Europe Evidence submitted by Vodafone
2.57 Harmonisation has the corresponding advantages and disadvantages. It can avoid, as some see it, a race to the bottom, by requiring a specific level of regulation across the whole of the EU.
2.58 It gives greater certainty across the whole market and can therefore be cheaper and simpler for businesses to comply with21. This may be why some studies have found that harmonised standards have raised trade in manufactures22. But it can involve significant adjustment costs, with potentially a disproportionate impact on SMEs.23 Harmonised standards can constrain innovation24 and competition25 if new products are unable to comply with overly definitive harmonised requirements. It can also be very slow to negotiate because of the complexity of national regimes that are being harmonised26.
(In their evidence, Lloyd’s point out that the Solvency II proposals have been discussed for over a decade and are unlikely to be agreed before 201627.)
2.59 Neither approach is self-evidently best and much depends on the sector concerned.
BAE Systems maintain that harmonisation is preferable for new technologies if it can be achieved speedily, and that mutual recognition is more appropriate for existing, evolving technologies where standards already exist.28 In contrast, Smiths Group argue that, in the medical device sector, mutual recognition is an appropriate method for ensuring the timely introduction of innovative products. Harmonisation may work better where there is a strong need for a single standard, goods are tangible and standards are easily assessed, and the need to maintain consumer confidence is strong. Mutual recognition may be better where there are significant differences between Member States in consumer preference or regulatory regimes29.