The EU in a flat world Philip Whyte Centre for European Reform Paris, 23 November 2007

Manufacturing and services Why the decline in manufacturing jobs? Why the decline in manufacturing jobs? A popular explanation A popular explanation Weak competitiveness in global markets Weak competitiveness in global markets The principal reasons The principal reasons Stronger productivity growth than in services Stronger productivity growth than in services Rising share of household income spent on services Rising share of household income spent on services Main problem is weak productivity in services Main problem is weak productivity in services Widening gap with the US Widening gap with the US Services account for 70% of EU GDP Services account for 70% of EU GDP

Why is service sector productivity low? Technological change has weaker impact Technological change has weaker impact Many services less capital-intensive Many services less capital-intensive But what explains growing gap with the US? But what explains growing gap with the US? Planning regulations Planning regulations Inhibit big box retailing formats Inhibit big box retailing formats Lower ICT diffusion Lower ICT diffusion Impact of EPL Impact of EPL Weaker competition Weaker competition Single EU market does not exist Single EU market does not exist

Europe of services is not flat National barriers remain important National barriers remain important Progress on single market has slowed Progress on single market has slowed Euro has had little integrative effect Euro has had little integrative effect Symptoms: Symptoms: Low share of intra-EU trade Low share of intra-EU trade Dominance of national firms Dominance of national firms Energy islands Energy islands Retail banking Retail banking Price dispersion has fallen, but still > US Price dispersion has fallen, but still > US

Why is single market in services so hard to achieve? National barriers explained by: National barriers explained by: Different regulatory regimes Different regulatory regimes Strong political resistance to change Strong political resistance to change Perceived threat to national models Perceived threat to national models Impact of EU enlargement Impact of EU enlargement Suspicion of mutual recognition Suspicion of mutual recognition Rejection of Bolkestein directive Rejection of Bolkestein directive Watered-down directive with many exemptions Watered-down directive with many exemptions

Increasing competition in services Legislation reaching diminishing returns Legislation reaching diminishing returns Avoid gap filling Avoid gap filling Prioritise key sectors Prioritise key sectors Network industries, financial services (retail) Network industries, financial services (retail) Pro-active enforcement of EU policy Pro-active enforcement of EU policy Ensure directives are fully implemented Ensure directives are fully implemented Vigorous competition policy Vigorous competition policy Use of sector inquiries Use of sector inquiries Greater role for private actions Greater role for private actions Fight barriers to foreign takeovers Fight barriers to foreign takeovers