[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 14.2.2007

SEC(2007) 112

COMMISSION STAFF WORKING DOCUMENT

Accompanying document to theProposal for aREGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCILlaying down procedures relating to the application of certain national technical rules to products lawfully marketed in another Member State and repealing Decision 3052/95/ECI mpact assessment

{COM(2007) 36 final }{SEC(2007) 113}

TABLE OF CONTENTS

1. Introduction 5

1.1. Procedural issues and consultation of interested parties 5

1.2. What is the mutual recognition principle and how does it work in theory? 5

1.3. When is mutual recognition being applied? 8

1.4. Mutual recognition is a way of ensuring the free movement of goods 9

1.5. The scope of mutual recognition 10

2. Problem definition 12

2.1. What are the problems with mutual recognition in the field of goods? 12

2.2. The first problem: lack of awareness of the principle 14

2.2.1. The causes of the problem 14

2.2.2. The effects of the problem 15

2.2.3. Current action 16

2.3. The second problem: legal uncertainty about the scope of the principle and the burden of proof 17

2.3.1. The causes of the problem 17

2.3.2. The effects of the problem 18

2.3.3. The current actions 19

2.4. The third problem: The risk for enterprises that their products will not getaccess to, or will have to be withdrawn from, the market of the Member Stateof destination 20

2.4.1. The causes of the problem 20

2.4.2. The effects of the problem 22

2.4.3. Current action 23

2.5. The fourth problem: the absence of a dialogue between competent authorities 24

2.5.1. The causes of the problem 24

2.5.2. The effects of the problem 24

2.5.3. Current action 25

2.6. What are the costs of these problems? 25

2.6.1. Administrative charges and other costs incurred by enterprises 25

2.6.2. Cost to society as a result of firms not entering the market due to problemsregarding mutual recognition 28

2.6.3. Costs to national administrations 29

2.7. Does the EU have the right to act? 29

3. Objectives 29

4. Policy options 30

4.1. Rejected options 30

4.2. Policy options 31

4.2.1. Option 1: status quo 31

4.2.2. Option 2: the non-regulatory option 32

4.2.3. Option 3: the regulatory option 33

4.2.4. Option 4: a combination of regulatory and non-regulatory actions 35

5. Impact analysis 36

5.1. Impact on enterprises 36

5.1.1. Microeconomic impact 36

5.1.2. Administrative costs 39

5.2. Impact on national authorities 39

5.2.1. Quantitative assessment of administrative costs 39

5.2.2. Assessment of other administrative impact on national authorities 40

5.3. Macroeconomic impact 42

5.4. Impact on prices 44

5.5. Impact on the EU budget 44

5.6. Other impact 45

5.6.1. Social impact 45

5.6.2. Impact on transport 45

5.6.3. Environmental impact 46

5.6.4. Impact on energy 47

6. Comparing the options 47

6.1. Is there a need for change? 47

6.2. Comparison of the options with respect to the problems outlined under section 2 48

6.3. Outcome of the comparison 52

7. Monitoring and evaluation 53

Annex 1: Results of the public consultation on future options in the field of mutual recognition of goods 54

1. Objective of the consultation 54

2. Structure of the consultation 54

3. Option 1: Continue current policy unchanged 55

4. Option 2: Improve current policy without new Community legislation 56

5. Option 3: New regulation laying down key principles 57

Annex 2: Results of the consultation of the European Business Test Panel 59

1. Summary 59

2. Participation 59

3. Familiarity with/making use of the principle of mutual recognition 59

4. Obtaining information on mutual recognition - Identifying national authorities 60

5. Proposals to make mutual recognition work better. 60

5.1. Use of Electronic Certificate 60

5.2. Role of national authorities 60

5.2.1. Publishing details on the application of mutual recognition 60

5.2.2. Providing advance confirmation 61

5.2.3. Informing operators in the event that access to markets is denied 61

6. Creating a dialogue with national authorities 61

Annex 3: Case studies 62

Annex 4: Global administrative costs 80

INTRODUCTION

Procedural issues and consultation of interested parties

This impact assessment examines the policy options to ensure that, whenever national technical rules are being applied to products lawfully marketed in another Member State in the non-harmonised field of products, this is done in accordance with Articles 28 and 30 EC Treaty.

This impact assessment and the corresponding formal decision selecting the most appropriate policy option appear as item 2006/ENTR/002 in the Commission Work Programme for 2006[1]. This impact assessment is drafted on the basis of input from an inter-service steering group comprised of representatives of Directorates General Enterprise and Industry, Health and Consumer Protection, Internal Market and Services, Economic and Financial Affairs, the Secretariat-General and the Legal Service of the Commission.

The data for this impact assessment were collected from the consultations set out below as well as various surveys, case studies and literature reviews.

Preparations for the impact assessment started in 2004, with a public consultation of stakeholders between 17 February 2004 and 30 April 2004 via the Commission's "Your Voice in Europe" Internet site[2], in accordance with the general principles and minimum standards for consultation of interested parties by the Commission[3]. According to the replies to the consultation, the Commission should do more to improve the functioning of mutual recognition in the non-harmonised area. About 60% of respondents thought that a legislative instrument was necessary whilst about 33% thought not. The consultation called strongly for a strengthening of administrative cooperation between national authorities, and for more transparent dialogue between business and the national authorities of the Member State of destination. Annex I contains a more detailed overview of the results.

In addition, the European Business Test Panel was consulted between May and September 2004. The results of this consultation are shown in Annex 2. Throughout the preparation, SME stakeholders were also consulted through the SME Envoy while Member States were consulted through the Senior Officials Group on Standardisation (SOGS), the Enterprise Policy Group (EPG) and the Internal Market Advisory Group (IMAC).

What is the mutual recognition principle and how does it work in theory?

Technical obstacles to the free movement of goods within the EU are still widespread. They are the consequence of applying, to goods coming from other Member States where they are lawfully marketed, national rules that lay down requirements to be met by such goods (e.g. relating to designation, form, size, weight, composition, presentation, labelling and packaging). If these rules do not implement secondary EC legislation, they constitute technical obstacles to which Articles 28 and 30 of the EC Treaty apply. This is so even if those rules apply without distinction to all products.

One of the important prerequisites for an optimally functioning internal market for goods is the elimination of technical obstacles. There are, in the field of goods, two main types of instrument for doing this, namely:

- The approximation of national legislation (“harmonisation of laws”) whereby technical obstacles are eliminated by the harmonisation of national technical rules through secondary EC legislation (directives, regulations and decisions) under Article 95 of the EC Treaty.

- Mutual recognition under Articles 28 and 30 of the EC Treaty [4]. Under the “Mutual Recognition Principle”[5], different national technical rules continue to co-exist within the internal market. The principle means that, notwithstanding technical differences between the various national rules that apply throughout the EU, Member States of destination cannot forbid the sale on their territories of products which are not subject to Community harmonisation that are lawfully marketed in another Member State, even if they were manufactured according to technical and quality rules different to those that must be met by domestic products. The only exceptions to this principle are restrictions that are justified on the grounds described in Article 30 of the EC Treaty (e.g. the protection of public morality or public security, the protection of health and life of humans, animals or plants, etc), or on the basis of overriding requirements of general public importance recognised by the case law of the Court of Justice[6], and are proportionate to the aim pursued.

The “Mutual Recognition Principle” in the non-harmonised field of products consists of a rule and an exception :

a) The general rule that, notwithstanding the existence of a national technical rule in the Member State of destination, products lawfully marketed in another Member State enjoy a basic right to free movement, guaranteed by the EC Treaty, and

b) The exception that products lawfully marketed in another Member State do not enjoy this right if the Member State of destination can prove that it is essential to impose its own technical rule[7] on the products.

In more detail, mutual recognition in the non-harmonised field of products has the following ingredients:

1. A product is already lawfully marketed in one Member State;

2. An enterprise intends to sell it in another Member State but comes across a technical rule[8] that actually or potentially prevents the marketing of the product in its current form, or an enterprise is able to begin selling the product in another Member State but is obliged by market surveillance authorities to withdraw it from the market or to modify it.

3. The part of the technical rule that is used to prevent the marketing of the product in the other Member State is not contemplated by secondary Community law.

4. When national authorities find that the product does not comply with certain parts of their national technical rules, the EC Treaty obliges them to analyse them in the light of Articles 28 and 30 EC Treaty. If they conclude that national law contravenes Articles 28 and 30 EC Treaty, national courts and administrations are under a duty to apply mutual recognition by giving full effect to the Treaty, i.e. by not applying the disproportionate parts of their national rules and allowing the product onto the market[9];

Example 1 :

Member States have very different traditions for bread and bakery products . Some Member States regulate these products so that, at least formally, bread and bakery products that are lawfully sold in one Member State cannot be sold in another. In the past, Belgium required that the cooking salt content expressed in terms of sodium chloride and calculated on the basis of the dry matter was not allowed to exceed 2.00% in bread. The case was submitted to a national court which asked the Court of Justice to issue a preliminary ruling.

Since it concerned an exception to the principle of the free movement of goods, it was for the national authorities to demonstrate in that case that their rules were consistent with the principle of proportionality, that is to say, that they were necessary in order to achieve the declared purpose, which in the present case was the protection of public health. According to the Court of Justice, the national authorities neglected to produce scientific data justifying their national rules (cases C-17/93 and C-123/00).

The Commission has explained in detail how mutual recognition should function in practice in several interpretative communications[10].

When is mutual recognition being applied?

Mutual recognition may be applied before (“ex ante”) or after (“ex post”) the product is put on the national market of the Member State of destination.

“Ex ante” mutual recognition normally takes place in the framework of the prior administrative authorisation of a product, i.e. national legislation that subjects the product to obligatory prior approval before it can be marketed. In the non-harmonised area of products prior administrative authorisation schemes are only applied in a minority of cases. There is a dialogue, albeit quite formal, between the enterprise and the national authorities during the “ex ante” authorisation procedure which actually constitutes an additional barrier to intra-EU trade. Although this procedure can often be lengthy, costly and burdensome, it is an opportunity for businesses to present their arguments and provide the competent authorities with all relevant information about the product.

Example 2 :

In Portugal, polyethylene pipes imported from other Member States and intended for use in the water distribution network were subject to such procedure (case C-432/03). Vitamin preparations and preparations containing minerals were subject to authorisation procedures in France (case C-24/00) and Austria (case C-150/00). Blocks of red cedar wood having natural anti-moth properties could not be marketed in Italy without prior authorisation (case C-443/02).

“Ex post” mutual recognition is more common nowadays. It takes place when there is no prior administrative authorisation procedure but, during market surveillance, the competent authorities come across a product that is lawfully marketed in another Member State but does not comply with their national technical rules.

Example 3 :

The case on bread and bakery products that was submitted to the national court (example 1) was the consequence of checks carried out by food inspectors on samples of products sold in a local shop. On the basis of these checks and the corresponding samples, the national authorities should have applied mutual recognition to this specific product and should have allowed it onto the national market.

Another case (C-448/98) was the consequence of an inspection carried out by national inspectors at the premises of a company specialising in the cutting and packaging of portions of cheese prepacked in plastic film, intended particularly for sale in supermarkets. During that inspection, 260 whole Emmenthal cheeses without rind were discovered.

Mutual recognition is a way of ensuring the free movement of goods

Hence, mutual recognition is a means of ensuring the free movement of goods within the EU for products for which there is no harmonisation of laws at EC level, or for aspects of products falling outside the scope of EC harmonisation measures. It remains the “ lex generalis ” unless a “ lex specialis ” (i.e. a harmonisation measure) organises intra-Community trade in a product differently.

One of the advantages of mutual recognition is that not all technical rules on products need to be harmonised throughout Europe . Some Member States have technical rules for specific types of products while others have not. Technical harmonisation means that all Member States must introduce harmonised technical rules, including those which not had them hitherto. Mutual recognition eliminates technical obstacles: Member States which have no technical rules on a specific category of products create no technical obstacles and are therefore not directly concerned by mutual recognition. Member States with technical rules on specific types of products must apply the mutual recognition principle.

Another advantage of mutual recognition is efficiency : it involves the implicit or explicit reliance, by the Member State of destination, on the level of protection assured by another Member State in which the product is already lawfully marketed. It avoids the need for products to fully comply with every technical rule in every Member States where the product is or will be marketed.

Mutual recognition presupposes confidence in other Member States, and specifically in the extent to which they protect relevant public interests. The combination of efficiency and confidence has made mutual recognition one of the essential legal instruments for ensuring the free movement of goods within the EU.

However, mutual recognition does not entail a comparison between the technical rules of the Member State of origin and of the Member State of destination. Mutual recognition is confined to an analysis, by the competent authorities of the Member State of destination, of the necessity and proportionality of its own technical rule in a specific case.

Because an exception under Article 30 or the mandatory requirements accepted by the Court of Justice may apply, mutual recognition is not always automatic . The assessment by the competent authorities in the Member State of destination of the necessity and proportionality of their technical rules under Article 30 EC Treaty or under the mandatory requirements is often not a straightforward exercise. A case-by-case assessment is therefore unavoidable in the field of mutual recognition[11] and can lead to very different conclusions in very similar cases[12]. In addition, scientific knowledge and technical development evolve at high speed: what may have been justified and proportionate when the rule was adopted may have become obsolete following new scientific or technical developments or product innovation[13].

The scope of mutual recognition

Mutual recognition applies to products to which no EC directives and regulations apply, including many standard non-electrical products for daily use at home. An important group of products, however, consists of products where mutual recognition applies to certain aspects falling outside the scope of EC harmonisation [14]. In some cases it is not always easy to establish precisely which aspects are covered by mutual recognition[15].

The actual economic volume of products to which mutual recognition could be applied cannot be calculated with scientific precision , for several reasons. Firstly, it is impossible to determine the economic value of aspects of products that are only partly harmonised (mutual recognition applies to certain aspects falling outside the scope of EC harmonisation). Secondly, technical barriers for a specific type of product do not exist in all Member States. It would require an inventory of all national technical barriers within the EU as well as evaluation of the potential market for products that do not yet have full access to the market. The absence of reliable information about the existence of technical barriers in the Member States undermines all possible attempts to calculate the precise value of products covered by mutual recognition. Thirdly, the internal market for goods is evolving: old technical barriers are removed through harmonisation or unilateral withdrawal by Member States, while new ones emerge. Fourthly, mutual recognition does not apply when a national technical rule is justified under Article 30 EC Treaty or by the mandatory requirements in the general public interest accepted by the Court of Justice. Fifthly, enterprises may have own their own commercial or other reasons for not selling their products in another Member State, not linked to trade barriers.

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Source: Innobarometer 2004

Nevertheless, it is estimated on the basis of extrapolation from existing data[16] that about 25% of intra-EU manufacturing trade could be covered by mutual recognition .

PROBLEM DEFINITION

What are the problems with mutual recognition in the field of goods?

The great strength of mutual recognition is that there is no paperwork. However, the corollary is that there is no reporting, no statistics and hence no reliable source of information about how mutual recognition is applied. There is no inventory of possible national technical barriers to the free movement of products within the EU.

In theory, there are several sources of information on the functioning of mutual recognition for products within the EU. However, each of them has its limitations:

5. Enterprises, industry federations, citizens and other stakeholders can report problems to the Commission on their own initiative, through formal complaints under Article 226 EC Treaty, position papers or through public consultation. They can also go through SOLVIT or report problems to a Euro Info Centre. However useful and necessary these reporting systems may be, they will never be capable of providing systematic and exhaustive information. Enterprises and citizens are not necessarily aware that they can raise the issue through formal channels, or may prefer not to spend time reporting cases. The mere reporting of an issue to the Commission does not measure the problem in terms of an impact on intra-EU trade.

6. In theory, national authorities should inform the Commission and the other Member States when they refuse mutual recognition, pursuant to Decision n° 3052/95/EC [17]. In practice, they do not. After an encouraging number of notifications during the early years of Decision n° 3052/95/EC, notifications became very rare between 2000 and 2003. Since 2003, only two were made. There may be various reasons for this very low number: the number of remaining obstacles within the internal market may be very limited, or the restrictive national rules may already have been notified in another context (for example in draft under Directive 98/34/EC). Another possibility is that Member States simply do not apply the Decision correctly. There could be several reasons for this. Firstly, the Decision did not need to be transposed into national law, unlike a directive. It is therefore possible that some national administrations did not take the necessary organizational measures to correctly apply the Decision. Secondly, the Decision does not specify the consequences of a notification: it does not indicate whether the Commission must approve a notified measure or what other concrete action it might take. Thirdly, the Decision provides for a substantial number of exceptions so that certain categories of restrictive measures need not be notified to the Commission. Fourthly, it does not contain any specific sanctions for failure to notify.

7. Over the years, the Commission and several Member States have organized surveys on the functioning of mutual recognition in the area of goods [18]. These surveys concerned enterprises and public authorities and revealed a number of problems. Surveys are very important in this field since they reveal problems that otherwise would not be reported through formal complaints, SOLVIT or Euro Info Centres. The results of surveys on the application of mutual recognition in the area of goods, however, are only indicative: they reflect the opinion of the sample of enterprises participating in the survey. They are therefore not necessarily wholly reliable or completely accurate. Moreover, participation in such surveys is often low. Respondents’ judgment may be biased by other considerations, such as fear of identification and retaliatory measures, reluctance to disclose commercial information, etc.

Nevertheless, the combination of these various sources of information indicate that many problems still surround the implementation of the mutual recognition principle , specifically for technically complex products or products which can pose safety or health problems[19].

- About 25% of complaints in the field of Articles 28 to 30 EC Treaty relate to mutual recognition while market access for products constitutes the second most important category of problems for SOLVIT[20]. Although general research by the OECD shows that regulatory impediments to product market competition have declined in recent years and that the extent of government involvement in product markets has fallen considerably[21], Member States' product conformity requirements are the main regulatory concern of European companies, forcing them to adapt product design, reorganise production processes and repackage and re-test their products before they can be put onto the market[22].

- According to the results of a business survey presented in the October 1998 Single Market Scoreboard, 80% of the companies surveyed still found obstacles to free movement within the EU inhibiting their ability to do business in other Member States. For products, 41% related these obstacles to differing national specifications and 34% related them to unusual testing, certification or approval procedures .

- The broad surveys made for the second biennial report[23] indicated that about 35% of enterprises reported problems with mutual recognition. About 50% of enterprises decided to adapt their products to the rules of the Member State of destination although mutual recognition could have applied.

- An analysis of the queries addressed to the European Information Centre network, where success stories are not reported, shows that about 60% of cases in the non-harmonised field of goods concern problems caused by technical rules to which mutual recognition could apply .

- A more recent UNICE survey shows that 57% of companies reported mandatory national requirements that result in product changes , while 46% were confronted with requirements for extra national testing/certification of products. 17% encountered other requirements, such as extra or different documentation[24].

These figures highlight that the free movement of goods is far from being achieved in the non-harmonised area . An analysis of the different surveys and case studies as well as literature reviews indicate that these difficulties are caused by four fundamental problems that are all interrelated:

8. lack of awareness of the mutual recognition principle on the part of enterprises and national authorities;

9. legal uncertainty about the scope of the principle and the burden of proof;

10. The risk for enterprises that their products will not get access to, or will have to be withdrawn from, the market of the Member State of destination,, and

11. the absence of a dialogue between competent authorities in different Member States.

The first problem: lack of awareness of the principle

The causes of the problem

When there is no harmonised Community legislation for a specific type of product, Member States are entitled to keep their national rules provided that they comply with the principle of free movement of goods laid down in the EC Treaty. In practice, however, many national rules give the false impression that they are the only applicable legislation or that they prevail [25].

Moreover, the EC Treaty does not expressly confirm the existence of the mutual recognition principle in the area of goods. The principle is a concept developed on the basis of the “Cassis de Dijon”-judgement[26], which concerned the interpretation of measures having an effect equivalent to quantitative restrictions on imports of goods under Article 28 of the EC Treaty.

The effects of the problem

The main effect of the lack of awareness is that enterprises and national administrations take national technical rules for granted[27].

The lack of awareness disadvantages enterprises looking for business opportunities in other Member States, and in particular small and medium-sized enterprises[28]. In most cases, enterprises check and evaluate the technical rules of the Member State of destination before marketing their products there. Almost 80% of respondents in the European Business Test Panel Consultation and 95% of responding enterprises in the I.P.M. consultation examine the applicable technical rules in the Member State of destination before marketing their products. It is not surprising that very often they take those technical rules for granted, unaware that Community law, as interpreted by the Court of Justice, provides for mutual recognition. Enterprises adapt their product to local requirements or get them retested or, in the worst case, refrain from entering the national market at all.

The European Business Test Panel Consultation shows that only 46% of respondents are familiar with mutual recognition. This confirms similar findings from sectoral surveys organised for the second biennial report:

Sectoral surveys (2002): Enterprises’ awareness of the existence of the principle |

Sector | Familiar | Unfamiliar |

Bicycles | 59% | 41% |

Childcare articles | 45% | 55% |

Fire alarm systems | 54% | 46% |

Burglar alarm systems | 45% | 55% |

Articles of precious metal | 56% | 44% |

Tanks | 52% | 48% |

Containers | 61% | 39% |

Moreover, familiarity with the principle does not necessarily mean that enterprises actually invoke it. Only half of the respondents in the European Business Test Panel Consultation who expressed familiarity with mutual recognition actually relied on it to obtain access to the market of another Member State.

National administrations stick to, and strictly apply, their national rules although Articles 28 to 30 of the EC Treaty take precedence over all contrary national measures[29]. The lack of awareness means that national authorities then consider their national rules to be the only applicable legal tool to assess product conformity[30].

Current action

Lack of awareness has until now been tackled by so-called “mutual recognition clauses” [31] that Member States have been encouraged or obliged to insert in their national legislation. The purpose of the clause is to refer to the mutual recognition principle or to incorporate it into national law, by permitting the marketing of products lawfully manufactured and/or marketed in another Member State even though they may not comply with national rules.

However, “mutual recognition clauses” are suffering from different problems:

- They are often not very detailed . The insertion of a clause in each legal instrument has the advantage of making mutual recognition a general principle of national law. Unfortunately, many clauses simply state the mutual recognition principle without specifying how and when it will be applied.

- Their presence in national legislations is not yet systematic . Member States usually insert mutual recognition clauses when they prepare a draft technical regulation and notify it to the Commission under directive 98/34/EC[32], or to put an end to an infringement procedure. More recent national rules and rules about which a complaint has been lodged with the Commission are therefore more likely to contain a “mutual recognition clause” than older rules or rules that no-one has yet complained about. Thus there can be inconsistency in the way categories of similar goods are treated from the point of view of mutual recognition.

- The obligation to insert them in national legislation is often questioned , especially when the authorities have determined the rules on the basis of scientific or technical evidence. Some argue that they do not need a clause as they will update their national rules in the light of product innovation and international scientific research. Moreover, the Court of Justice has also cast some doubt on the need to include the clauses in national legislation[33].

Although they offer a visible legal basis to national authorities to apply mutual recognition, the number of enterprises and national administrations that invoke mutual recognition clauses is limited:

Sectoral surveys (2002): Application of the mutual recognition clause |

Sector | Enterprises | Authorities |

Bicycles | 3% | 0% |

Childcare articles | 3% | 12% |

Fire alarm systems | 11% | 25% |

Burglar alarm systems | 0% | 24% |

Articles of precious metal | 1% | 19% |

Tanks | 1% | 53% |

Containers | 4% | 40% |

The European Business Test Panel Consultation shows that, of 46% of respondents familiar with mutual recognition, only 36% check whether national rules contain a mutual recognition clause.

The Commission has published interpretative communications setting out how mutual recognition should actually work. It has also organized conferences, seminars and round tables to raise awareness in businesses and national authorities. It is, however, very difficult to reach businesses through these gatherings, especially when they are organised across different industrial sectors.

The second problem: legal uncertainty about the scope of the principle and the burden of proof

The causes of the problem

It is often unclear to which categories of product mutual recognition applies . Mutual recognition is residual, i.e. it only applies if and when the national rules on such goods do not implement secondary EC legislation. Moreover, harmonisation or approximation of national laws does not always cover all products or all essential aspects of products[34]. There is no list of products or aspects of products to which mutual recognition should apply. This means that, for every special aspect of a product, enterprises and national administrations should first examine whether it is formally regulated in secondary EC legislation before concluding whether mutual recognition applies. This requires a profound knowledge of EC law.

Secondly, the text of Articles 28 and 30 EC Treaty is so concise that its interpretation has produced abundant jurisprudence of the Court of Justice . Roughly 300 judgements of the Court of Justice relate to mutual recognition in the area of goods. The term “mutual recognition” has almost never been used in the jurisprudence of the Court, so that a profound knowledge of the Court’s jurisprudence is also necessary to distinguish the case-law on mutual recognition from the other case-law on Articles 28 and 30 EC Treaty.

Thirdly, the most important problem is without any doubt the widespread legal uncertainty about the burden of proof . Some enterprises wrongly believe that if a product is lawfully marketed in another Member State, they need not provide any information to the market surveillance authorities of the receiving Member State. For reasons of administrative facility, some national laws put the onus on enterprises to show that the product meets the requirements of the Member State of destination. Even if it is not expressly stated, some competent authorities wrongly believe that the enterprise must demonstrate that the imported product affords a level of protection equivalent to that required of the domestic product.

The effects of the problem

Apart from the strict adherence to national rules, uncertainty makes national authorities very cautious towards products lawfully marketed in another Member State but not in conformity with the national technical rules of the Member State of destination.

Since national rules define the roles, functions and liability of controlling officers, few are likely to put their national rules aside, however outdated or restrictive they may be, and let the EC Treaty prevail. For some authorities, not applying mutual recognition has advantages: there is no need to enter into discussion with enterprises whose products do not comply with national rules. In addition, the non-application of mutual recognition may benefit competing local manufacturers[35].

National authorities having encountered problems with mutual recognition (2002): |

Alarm systems | 32% |

Bicycles | 45% |

Beverages | 50% |

Tanks and containers | 43% |

Ladders and scaffolding | 29% |

Precious metals | 50% |

Construction products | 35% |

Childcare products | 24% |

Canned food | 53% |

Food supplements | 87% |

This legal uncertainty prevents enterprises from relying on the mutual recognition principle [36]. The European Business Test Panel (EBTP) consultation in 2004[37] shows that 25% of enterprises that already relied on mutual recognition when selling goods in another Member State have had problems. This is in line with similar findings in the sectoral surveys:

Proportion of enterprises that have encountered problems with mutual recognition (2002) |

Bicycles | 33% |

Childcare articles | 18% |

Fire alarm systems | 28% |

Burglar alarm systems | 43% |

Objects in precious metals | 27% |

Tanks | 41% |

Ladders and scaffolding | 29% |

Canned food | 33% |

Non-alcoholic beverages and beer | 41% |

Fortified products | 89% |

Construction products | 54% |

Containers | 18% |

The current actions

The scope of mutual recognition has not received systematic attention. The most important reason is that the insertion of a “mutual recognition clause” in all national technical rules on products that do not transpose secondary EC law avoids the need for careful analysis of the scope of mutual recognition. The presence of a “mutual recognition clause” confirms that mutual recognition applies to this category of products. However, the absence of a clause does not necessarily imply that mutual recognition does not apply.

The question of the burden of proof is hard to solve with current legal tools . It has indeed been noted that far too often “mutual recognition clauses” only nominally incorporate the mutual recognition principle in national legislation without specifying how it is to be implemented in practice. The dilemma of the “mutual recognition clause”, however, is that the mere reference to Articles 28 and 30 EC Treaty is legally and formally sufficient but that, on the ground, this is not sufficiently explicit to create legal certainty for enterprises and national administrations.

It should be noted in this context that the case-law of the Court of Justice does not necessarily allow the Commission to require much more from Member States than a mere reference to Articles 28 and 30 EC Treaty in their national rules: the Court has indicated that Member States enjoy a margin of discretion in determining what measures are most appropriate to eliminate barriers to the imports of products. It is therefore not for the Community institutions, according to the Court, to act in place of the Member States and to prescribe for them the measures which they must adopt and effectively apply to safeguard the free movement of goods in their territories.

Since the early eighties, the Commission has tried to summarize the Court’s jurisprudence on mutual recognition in various interpretative communications , such as the interpretative communication on mutual recognition[38].

The third problem: The risk for enterprises that their products will not get access to, or will have to be withdrawn from, the market of the Member State of destination

The causes of the problem

Enterprises run the risk for enterprises that their products will not get access to, or will have to be withdrawn from, the market of the Member State of destination. Most enterprises assess and manage such risks by starting with risk identification (i.e. identifying national rules with a potential negative effect on the marketing of the product in the receiving Member State) followed by a risk assessment (i.e. evaluation of the risks posed by these rules). On that basis, enterprises decide how they will market the product in the receiving Member State. It is difficult for businesses to find out beforehand if, how and when mutual recognition is applied.

Such risk identification is the first difficult step for enterprises in the non-harmonised field of goods. Almost 80% of respondents in the European Business Test Panel Consultation like to know beforehand about the technical rules in force in those Member States where they wish to market products. The public consultation gave similar results:

Do you prefer to know the technical rules of the Member State of destination and to assess them before marketing your products in the recipient Member State? |

Yes | 95% |

No | 3% |

Getting specific information on national technical rules and the implementation of mutual recognition poses a problem for certain enterprises:

European Business Test Panel consultation (2004) |

Types of difficulties with obtaining information on how mutual recognition is applied |

Difficulties to get sufficient information on the technical rules in force in the receiving Member State | 33% |

Difficulties to identify the competent national authorities | 28% |

Would it be helpful if the information on technical rules and on the application of mutual recognition becomes more accessible? |

Yes | 88% |

No | 12% |

It is a paradox, at least from an internal market point of view, that the risk for enterprises that their products will not get access to, or will have to be withdrawn from, the market of the Member State of destination is reduced under an “ex ante” mutual recognition schemes [39]. In that case, market authorisation or its refusal officially confirms whether the product is allowed onto the national market. The national market authorisation procedure is already an important obstacle to the free movement of goods, due to the unavoidable delay in market access and the costs to businesses. However, despite its inconveniences from an internal market stance, such procedures allow direct contact with the competent authorities before the product is put on the national market.

The subsequent paradox is that when there is no paperwork as in “ex post” schemes [40] the risk for enterprises that their products will not get access to, or will have to be withdrawn from, the market of the Member State of destination is much higher. The enterprise will not know in advance of marketing the product in the receiving Member State if, when and how mutual recognition will be applied and if the product will be considered lawfully on the market in the Member State of destination. Market surveillance activities may reveal non-compliance with national rules. In that case, the competent authorities may decide to take action against the product and require its immediate withdrawal from the market for non-compliance with their national rules.

This risk is also determined by the nature of the restrictive measures that can be taken by the authorities of the receiving Member State in the case of non-compliance of the product with national rules. Usually, the only possible way a business can avoid the product being sanctioned or even withdrawn from the market, is litigation in the Member State of destination to suspend or the annul the decision to withdraw the product. There are almost no alternative, more consensual methods. Businesses established in the Member State of destination and facing the possibility of litigation costs are likely not to go ahead with selling products originating in another Member State, while enterprises established in another Member State would have to engage in a cross-border dispute, involving lengthy proceedings and high court costs[41].

The effects of the problem

If an enterprise faces the risk for enterprises that their products will not get access to, or will have to be withdrawn from, the market of the Member State of destination, it can refrain from selling the product, adapt it to local rules, or start marketing and await the outcome of market surveillance activities.

One major consequence of such risk is risk avoidance : enterprises will “play it safe” by avoiding any possible conflict or discussion with the national authorities of the Member State of destination. In this regard, SMEs might behave differently to larger enterprises. Surveys suggest that SMEs are more inclined to steer away from such problems because it is, or is perceived to be, too difficult and too expensive to confront national authorities. By comparison larger enterprises seem more inclined to tackle problems and seek solutions, partly because they have greater resources and partly because they are keen to seek economies of scale through the equal treatment of their products throughout the internal market. This may explain why SMEs seem to give up on mutual recognition long before larger enterprises in a similar situation. Of the respondents of the European Business Test Panel Consultation who had problems with mutual recognition, more than 20% simply gave up and decided not to sell on that national market.

13% of companies participating in a recent Flash Eurobarometer[42] would like to export but are concerned about encountering barriers, The response of managers in Germany and France stand out from that in other Member States, with one in five managers who would like to export but are concerned about encountering barriers. Over one in ten managers in Greece, Portugal, Belgium and Spain would like to begin exporting to other Member States but are also concerned about encountering barriers. 11% of companies participating in the same Flash Eurobarometer would like to export but are in need of more information. Especially company executives in Germany (16%), Greece (16%), Spain and France (both 11%) need more information. 7% actually encountered problems.

When there is a high risk that the products will not get access to, or will have to be withdrawn from, the market of the Member State of destination, it is usually easier for the individual enterprise to adjust its products to national requirements (if the market is sufficiently large and attractive), or to stay out of the market (if it is small), than to launch a lengthy, time-consuming dispute with national authorities which may entails a number of negative implications[43]. The additional litigation costs and procedural delays can give local competitors substantial commercial advantages. Besides these financial costs, litigation has a negative impact on further contact between the administration and the enterprise. In addition, it often entails fewer risks and is more cost effective to give up and conform to the technical rules of the Member State of destination rather than wait for a possible positive outcome to litigation[44]. The costs of adapting products are often high and can only be offset by businesses which sell in sufficiently large volume. Nevertheless, the policy of avoiding risks that the products will not get access to, or will have to be withdrawn from, the market of the Member State of destination is understandable - most enterprises wish to avoid damage to the reputation of their product, caused for example by the possible subsequent suspension of marketing by the authorities of the Member State of destination.

Some enterprises will attempt to reduce the risk through dialogue with the national authorities in the receiving Member State . However, the possibility of such contact with the competent authorities before the product is put on the national market depends often upon the goodwill and accessibility of the national authorities and their willingness to indicate whether the product can be lawfully marketed although it does not comply with the national technical rules. In any event, there is strong demand from European enterprises for reducing such risk by better organised and structured dialogue with the competent authorities of the receiving Member State:

European Business Test Panel consultation (2004) |

Would it be helpful if enterprises could discuss the application of mutual recognition with the national authorities of the receiving Member State? |

Yes | 80% |

No | 6% |

Current action

Current policy to minimize the risk for enterprises relies partly on “mutual recognition clauses” (see above) and partly on reporting restrictive measures taken by the authorities of the Member State in case of non-compliance of the product with their national rules:

- Individual cases can be reported to the SOLVIT on-line problem solving network [45] in which EU Member States work together to solve (without legal proceedings) problems caused by the possible misapplication of Internal Market law by public authorities. In the SOLVIT-system, an enterprise or citizen submits the problem to the local SOLVIT Centre, which enters the case in an on-line database. The case is then forwarded automatically to the SOLVIT Centre in the other Member State where the problem has occurred. The number of cases dealt with in the non-harmonised area of goods is increasing: 43 cases in 2005 compared with 15 in 2003 and 10 in 2004. In 2005, about 60% of SOLVIT cases on the free movement of goods reached a solution that was accepted by the SOLVIT Centre that introduced the case. In other words, in more than half of the cases the product was eventually marketed in the Member State of destination thanks to the SOLVIT mechanism. The fact that the remaining 40% did not reach a satisfactory solution does not necessarily mean that the Member State in which the cross-border problem occurred was wrong in refusing market access. It is possible that the legislation was justified by mandatory requirements of public interest and represented the least trade-restrictive measure. Although the SOLVIT network managed to resolve a substantial number of cases, much depends on the goodwill of the local Centre. It is not obliged to accept or to solve the case. When it accepts a case, it must merely “use its best endeavours to resolve the case in close cooperation with other parts of its Administration”. Furthermore, the SOLVIT system is conceived for solving actual problems and does not play a role in preventing problems. Nor does it suspend deadlines for an appeal before the national court. The system is still young and needs to be further developed.

- I nfringement proceedings under Article 226 EC are normally launched on a case-by-case basis and depend mainly on complaints . Infringement proceedings usually aim to removing technical barriers laid down in national rules. They are, however, less suited for solving problems encountered by individual enterprises, as they do not provide redress in specific cases but rather tackle the national rule on the basis of which the individual restriction was imposed. In addition, even if infringement proceedings succeed in removing the barrier to trade, it is too slow an instrument for enterprises. Few can afford to await the outcome of the procedure before entering the market of another Member State. Finally, a judgement of the Court of Justice on the basis of an infringement procedure has no direct or immediate impact on the complainant, since it does not serve to resolve individual cases. It merely obliges the Member State to comply with Community law.

The fourth problem: the absence of a dialogue between competent authorities

The causes of the problem

Dialogue between national administrations of different Member States in the non-harmonised area is difficult in practice, due to the lack of a common address book in the non-harmonised field of products within the EU. It takes place on an ad-hoc basis whereas, by contrast, administrative cooperation is well organised in the harmonised area where it is put in place by the secondary EC legislation.

These contacts are nevertheless often necessary for getting more information about the product and the technical rules in the Member State of origin.

The effects of the problem

The absence of a dialogue between national administrations of different Member States in the non-harmonised field of products complicates the task of market surveillance authorities, which often rely on a single source of information, i.e. the enterprise marketing the product. Conversely, that enterprise will be requested to transmit more information than if market surveillance authorities had received information directly from their colleagues in other Member States.

This lack of administrative cooperation is worrying since it is a legal obligation according to settled case-law of the Court of Justice: “Strict compliance with [the obligation to bring about a relaxation of the controls existing in intra-Community trade] requires an active approach on the part of the national body to which an application is made for approval of a product or recognition, in that context, of the equivalence of a certificate issued by an approval body of another Member State. Further, such an active approach is also required, where appropriate, of the latter body, and in this respect it is for the Member States to ensure that the competent approval bodies cooperate with each other with a view to facilitating the procedures to be followed to obtain access to the national market of the importing Member State [46].”

Current action

No specific action has been taken yet to organise dialogues between national administrations of different Member States in the non-harmonised field of products. Such dialogue takes place on an ad-hoc basis, through informal contacts (for example established via the Standing Committee set up by Directive 98/34/EC) and/or through SOLVIT.

What are the costs of these problems?

The administrative charges that result from difficulties related to mutual recognition are considerable : there is a wide variety of costs, to (a) enterprises that, despite the technical obstacle, choose to enter the market, (b) society (consumers, firms and labour) as a result of firms being put off entering the market and (c) national administrations.

Administrative charges and other costs incurred by enterprises

Enterprises incur information gathering costs for obtaining information on the (future) rules of the Member State of destination[47]. Enterprises may need to translate national rules into their own language, to hire lawyers to find and to explain these rules, to identify the competent national authorities, and so forth. These costs tend to be greater for companies established in another Member State. They worst affect SMEs.

Furthermore, since the costs of learning about national rules in another Member State may be largely unrelated to the enterprise’s output, they tend to add more to the unit costs of firms that have a smaller market presence. In addition, advance notice of impending regulatory changes can confer a competitive advantage on local manufacturers so that they can serve their local market sooner than others. At least during a transitional period, they will have exclusive access to the local market and, in the longer run, some competitive advantage.

Compliance costs are incurred when enterprises wish to market, in the Member State of destination, a product lawfully marketed or manufactured in another Member State, without relying on mutual recognition – or when mutual recognition is denied. In that case, the product will have to be adapted, increasing the cost of doing business[48].

This compliance cost can also be considered a cost advantage for domestic manufactures which anyhow have to ensure the compliance of their products with the rules of the Member State of manufacture. Compliance costs are a very important deterrent to enterprises exploring new markets. If the Member State of destination has different regulatory requirements, the costs of adapting products and modifying manufacturing processes will put a lot of enterprises off[49]. When Member States pursue their regulatory objectives in different ways, enterprises may become subject to redundant regulatory requirements that increase their costs of doing business in different Member States. These unnecessary costs tend to fall exclusively on firms that engage in intra-Community trade.

Non-application of mutual recognition and compliance with national technical rules (2002) |

Sector | The economic operator was ultimately able to place or keep the product on the market without having to adapt it | The economic operator adapted the product | Changes made mainly at the request of the importer or purchaser | Changes made mainly at the request of the authorities of the Member State of destination | Actions or measures by the country which led directly or indirectly to changes being made to the product |

Bicycles | 44% | 48% | 21% | 10% | 27% |

Childcare articles | 10% | 61% | 39% | 27% | 31% |

Fire alarm systems | 53% | 36% | 9% | 26% | 26% |

Burglar alarm systems | 38% | 54% | 29% | 5% | 6% |

Articles of precious metal | 27% | 52% | 15% | 23% | 26% |

Tanks | 21% | 60% | 19% | 11% | 17% |

Containers | 77% | 17% | 7% | 0% | 0% |

The costs of complying with the rules of the Member State of destination can be distinguished from conformity assessment costs , i.e. the costs of proving compliance with the rules of that Member State. Conformity assessment procedures often create language barriers and entail dealing with an unfamiliar body in the Member State of destination, which increases costs, especially for enterprises not yet present on that market. Enterprises with larger output can spread the costs over a larger base. If there is a conformity assessment procedure in the Member State of origin, the enterprise wishing to market its product in another Member State will face double costs.

Loss of economies of scale occurs when enterprises decide to divide their manufacturing operations into separate components that each need only to comply with the regulations in one market. Different manufacturing operations to serve different markets of Member States will often increase unit costs considerably and may forfeit economies of scale in manufacturing, management, marketing, risk diversification, etc. Where economies of scale are important, enterprises may not be able to enter a market without doing so on a large scale, an option that may be quite unattractive due to the number of risks involved or the existence of substantial capacity in the market of the Member State of destination.

An analysis of the behaviour of SMEs disclosed that the costs of gaining access to the market of another Member State are nearly twice as high as for big companies as a share of total turnover. This burden hampers SMEs efforts to become European players. A case study indicates that most of the smaller firms with a turnover of €15 million or less only export into Member States with loose regulatory systems. In the off-road machinery sector, for example, nearly no small firms export to Member States with high requirements and third-party certification.

The estimates of all these costs vary widely , depending on the type of product, its technical specifications, the size of the market of the receiving Member State, the size of the enterprise and many other elements. According to the case studies [50], these costs vary between 100% and 250% of the annual turnover of the same type of product on the national market in the Member State of destination. For companies offering several product types on the national market of a receiving Member State, these costs amount to approximately 2% of their entire annual turnover on that market. For companies specialised in one specific product type, compliance costs are reported to amount to approximately 10% to 15% of their entire annual turnover on a larger market. These percentages increase fast for smaller national markets[51].

It is estimated that, depending on the product, the differences between technical rules in different national markets, combined with the need for multiple testing and certification, may constitute between 2% and 10% of overall production costs . These figures, however, should be read with one caveat : certain costs may be unavoidable when the technical rules of the Member State of destination comply with Articles 28 to 30 EC Treaty. The fact that national technical rules may comply with these provisions means that, even under the most effective option to improve mutual recognition, the potential reduction of overall production costs would always be lower than the total costs caused by the differences between technical rules in different national markets .

Cost to society as a result of firms not entering the market due to problems regarding mutual recognition

Many enterprises, having observed difficulties with mutual recognition, decide not to enter the market of another Member State. Enterprises, particularly SMEs, will not wish to incur the significant sunk costs of gaining entry to the market (i.e. investment costs incurred before a certain activity can take place, which cannot be recovered by the possible sale of the relevant asset. eg. legal and other consultancy fees). Sunk costs are an important barrier to export, especially for small and medium firms[52].Thus a fully functional system of mutual recognition would generate more trade within the EU. Through reduced competition, lower economies of scale and less consumer choice, reduced trade will also impact on economic output and employment in the EU.

A lack of mutual recognition creates competitive advantages for larger enterprises and enterprises that adapted their products to national rules, since competing products are barred from entering that national market. Larger enterprises often prefer to follow the strictest national rules so that products can be accepted in all markets and economies of scale fully exploited[53]. This situation is fundamentally different from the situation for a typical smaller enterprise that wants to export its products under mutual recognition. The small enterprise has often established the product on the home market first before contemplating selling the product elsewhere.

Source: Innobarometer 2004

Costs to national administrations

Applying mutual recognition is usually part of market surveillance and does not necessarily entail extra costs for national authorities . Whether they apply mutual recognition correctly or apply national technical rules without mutual recognition, they have to gather information, assess the product, decide whether the product can be allowed in its current form and, if not, inform the economic operator, stating reasons and the methods of appeal open to him. The only formal difference is the content of the statement of reasons which, for mutual recognition, will be based on Articles 28 and 30 EC Treaty while it will be limited to the national technical rules when mutual recognition is not applied.

In contrast with enterprises, national authorities incur few costs when mutual recognition is not applied. Refusal is the cheapest, easiest solution for national administrations which, even in the worst case, probably only incur litigation costs.

Does the EU have the right to act?

The EU has the right to act to ensure the functioning of the internal market for goods. Pursuant to Article 14(2) of the EC Treaty, the internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaty. The prohibition, as between Member States, of measures having equivalent effect to quantitative restrictions on imports of goods is one of the main principles of the EC Treaty (Articles 3(1)(a) and 28 to 30).

If a comparison of the options from the point of view of their effectiveness and likely impact indicates that a non-regulatory option would be the most appropriate way to improve the functioning of the “mutual recognition principle”, the Commission has the right to act pursuant to Articles 211, 226 and 228 EC Treaty, Directive 98/34/EC and Decision 3052/95/EC.

However, if a comparison of the options points to a regulatory approach , the EC has the right to act on the basis of Article 95(1) EC Treaty. It specifies that, by way of derogation from Article 94 and save where otherwise provided in the Treaty, the objectives set out in Article 14 can be reached by adopting measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market.

OBJECTIVES

FURTHER INTEGRATION OF THE INTERNAL MARKET FOR GOODS IN THE NON-HARMONISED AREA REQUIRES, IN THE LIGHT OF CHAPTER 2, THE REMOVAL OF THESE PROBLEMS SURROUNDING THE IMPLEMENTATION OF THE MUTUAL RECOGNITION PRINCIPLE. THE OBJECTIVES ARE:

12. Enterprises and national authorities facing a technical rule actually or potentially hindering imports of a product lawfully manufactured or marketed in another Member State should be aware of the existence of the mutual recognition principle , so that they understand that such rules are not necessarily insurmountable obstacles to the marketing of products lawfully manufactured or marketed in another Member State;

13. Enterprises and national authorities should have legal certainty concerning the scope of the principle and the burden of proof so that they know what they can reasonably expect and understand their rights and obligations when mutual recognition is, or ought to be, applied;

14. The risk for enterprises that their products will not get access to, or will have to be withdrawn from, the market of the Member State of destination should be reduced;

15. Dialogues between national authorities of different Member States should be facilitated so that can easily exchange information.

These objectives do not at all imply that approximation of laws under Article 95 EC Treaty will no longer be necessary. Harmonisation or further harmonisation of national technical rules remains without doubt one of the most effective instruments, both for businesses and for the national administrations. Mutual recognition cannot be a miracle solution for ensuring the free movement of goods in the single market. Therefore, greater harmonisation will continue to be indispensable in sectors where divergence of technical rules poses too many problems to permit the proper application of the principle of mutual recognition.

POLICY OPTIONS

REJECTED OPTIONS

This impact assessment aims to identify and analyse alternative policy options for improving mutual recognition , i.e. the functioning of Articles 28 and 30 of the EC Treaty in the field of national technical rules. During the assessment process, two policy options were quickly discarded as being likely to create more problems than they would resolve:

16. The creation of an official certificate of lawful marketing in the Member State of origin : certain sources argued that official certificate of origin, confirming that a product is lawfully marketed in the Member State of origin, would help to dismiss doubts about the product. However, the would constitute a heavy financial and administrative burden for enterprises and national administrations and would certainly lead to more red tape and disproportionate administrative costs. Moreover, it would not provide any additional useful information that could not be presented through other means. The certificate would also not prevent national authorities of the Member State of destination disregarding mutual recognition.

17. A preliminary opinion of the competent authorities on market access for a specific product : This idea is inspired by tax legislation in several Member States which provides for the possibility of a "ruling". This is a legal instrument by which the competent tax authority determines how the law would apply to a hypothetical situation or individual operation. The "ruling" is a commitment by the competent authority to treat the situation or operation in accordance with the "ruling" and gives the applicant tax certainty for a certain period. A similar system of voluntary conformity assessment could in theory be envisaged in the field of the free movement of goods, to reduce the risk for enterprises. The receiving Member State would confirm that a product, although not fully compliant with the legislation of the receiving Member State, can be lawfully sold. This issue was controversial during consultation with stakeholders: many were reluctant to go for a voluntary system of preliminary opinions on market access, while participants in the European Business Test Panel consultation showed more interest:

Public consultation of stakeholders |

Should such “preliminary opinion on market access” be introduced to facilitate the entry to the national market? |

Yes: such a system would reduce the uncertainty | 44.7% |

No: this system would be cumbersome and that it risks becoming de facto compulsory | 39.4% |

European Business Test Panel consultation (2004) |

A system of “preliminary opinions on market access” would be: |

Very useful | 41.6% |

Helpful | 43.8% |

Not useful | 14.6% |

The Commission rejected this option since it would create new barriers rather than eliminate existing ones. In practice such a system would very quickly develop into a de facto obligatory system in all Member States, which would create many additional obstacles in the internal market for goods. It would result in a new generation of administrative procedures that would be very burdensome and slow for enterprises. In addition, it would be difficult to manage for national authorities which would be obliged to set up new administrative structures with the necessary technical and scientific expertise to examine the products. The system would also be at odds with the general policy of the EU to reduce administrative burdens for enterprises and national authorities.

Policy options

Besides using existing instruments (status quo – option 1), the specific objectives set out under chapter 3 could be achieved through complementary non-regulatory actions (option 2) , a regulatory instrument (option 3) or through a combination of regulatory and non-regulatory actions (option 4).

Option 1: status quo

The existing instruments are set out in more detail under chapter 2, under the headings “Current action”.

Option 2: the non-regulato ry option

The non-regulatory option consists of a combination of existing instruments and the following new action :

18. The creation of a website with a list of products to which mutual recognition applies. Until now, there has been no list of products or aspects of products to which mutual recognition should apply. This contributes to legal uncertainty and means that, for every special aspect of a product, enterprises and national administrations should first examine whether it is formally regulated at EC level before deciding whether mutual recognition applies. The creation of a website with a list of products to which mutual recognition applies would address this problem . The list of products would, for example, be inspired by the Combined Nomenclature (CN) used in customs matters[54], since the CN is also used in intra-Community trade statistics. The CN is comprised of the Harmonized System (HS) nomenclature with further Community subdivisions, which results in a very detailed list. However, another product classification could also be used. The list on the site would then specify the aspects to which mutual recognition applies and refer directly to the applicable secondary EC legislation on EUR-LEX. When the product is subject to mutual recognition, the site could, for example, refer to the most relevant jurisprudence of the Court of Justice or to any other useful information. The site would fit the new thematic approach of the general website of the Commission - structured by theme and topic rather than on the basis of the Commission’s internal organisational structure.

19. A sectoral approach: The establishment of a list of products to which mutual recognition applies would then serve as a basis for general screening by the Commission and the Member States of all national technical rules on a specific category of products and the identification of national authorities responsible for these rules. The screening would determine how the free movement of this category of goods could best be organised. The approach would also be used to set up voluntary administrative cooperation between national administrations.

20. The list of products and the general screening would serve as a basis for awareness raising actions through conferences and seminars organised in the Member States and targeted at enterprises and competent authorities and through specific publications explaining mutual recognition for specific categories of products.

21. The systematic inclusion of the final text of all technical rules notified pursuant to Directive 98/34/EC in the TRIS database . Article 8(3) of the Directive obliges Member States to communicate the definitive text of a technical regulation to the Commission without delay. However, they have not always fulfilled this obligation. The systematic inclusion of the final text of the technical rules IN the TRIS database would improve their accessibility.

22. A new generation of “mutual recognition clauses” : Member States that opt for “mutual recognition clauses” to eliminate barriers regularly use vaguely worded, ambiguous clauses which state the principle without specifying how it will be implemented. Under this non-regulatory option, all clauses would have to indicate in detail how mutual recognition is applied in practice. Templates would provided by the Commission.

23. The organisation of dialogue between national authorities through existing committees . Many instruments of EC law provide for committees which assemble representatives of national authorities with technical expertise in their field. These committees could look into the application of mutual recognition to products which, although outside the scope of their directive or regulation, are similar.

Option 3: the r egulatory option

The fact that this impact assessment aims to identify and analyse policy options to improve the application of Articles 28 and 30 EC Treaty in the field of national technical rules has two consequences for the identification of regulatory options:

- A regulatory option that would consist of harmonising national technical rules on products necessarily falls outside the scope of this impact assessment. It is indeed established case-law of the Court of Justice that Articles 28 and 30 EC Treaty only apply in the absence of EC harmonisation of technical rules.

- There is no need to intervene by regulatory means in cases where the free movement of goods within the EU functions well and where there is no actual or potential barrier caused by a national technical rule.

Consequently, a regulatory option would only have to address cases where technical obstacles arise or could arise . The legislative instrument would therefore be strictly limited to the application of technical rules in the receiving Member State.

Within these parameters, the regulatory option would first address the difficulties related to the burden of proof and the risk for enterprises that their products will not get access to, or will have to be withdrawn from, the market of the Member State of destination:.

24. The scope of the legislative instrument would consist of a list of products or aspects of products to which mutual recognition applies .

25. The legislative instrument would define the rights and obligations of national authorities and enterprises wishing to sell in one Member State products already lawfully marketed in another, when the competent authorities intend to restrict the marketing of the product under national technical rules. In particular, the legislative instrument would concentrate on the burden of proof by setting out the procedural requirements for denying mutual recognition . In a nutshell, Member States would remain obliged to allow the marketing of a product lawfully manufactured or marketed in another Member State. If, however, the recipient Member State intends to refuse or to restrict the marketing of such product, it should explain clearly the technical or scientific reasons. It should also prove to the enterprise concerned, on the basis of all relevant scientific information available to that State, that there are overriding grounds in the general public interest for applying the technical rule concerned and that less restrictive measures could not have been used. The competent authority must invite the enterprise to submit any comments within a reasonable period before restricting the marketing of the product[55]. The final decision to do so should be notified to the enterprise and should state the methods of appeal available.

26. It should be noted that creating legal certainty on the burden of proof does not address the problem of the risk for enterprises that their products will not get access to, or will have to be withdrawn from, the market of the Member State of destination. This risk could be reduced by establishing one or several "Product Contact Points" in each Member State. Their main task would be to provide information on technical rules on products to enterprises and competent authorities in other Member States, as well as providing the contact details of the latter. That would also allow public authorities to identify their colleagues in other Member States so that they can easily obtain information from, and start a dialogue with, the competent authorities in other Member States . The Product Contact Points should respond as quickly as possible to any request for information. The concept of "Product Contact Points" would allow, but not oblige, each Member State to set up only one contact point for its entire territory. The number of Product Contact Points in each Member State, and their institutional nature, would vary depending on the internal organisation of the Member State and in particular regional or local competencies or the activities concerned. Product Contact Points might be the authorities that are directly competent for the legislation or bodies that function as intermediaries between enterprises and the competent authorities, such as SOLVIT-centres, EuroInfoCentres and other existing organisations. It should be noted that 65.2% of interested parties in the public consultation consider that the legislative instrument should establish a kind of national helpdesk for answering questions on the actual implementation of mutual recognition.

27. The problem of the lack of reliable facts and figures about the actual implementation of mutual recognition for specific products in the Member States could be solved by an efficient monitoring scheme allowing Member States and the Commission to be informed on a regular basis about denials of mutual recognition . Such a scheme should not increase the administrative burden on national authorities. Under the regulatory option, this would either require amendment of Decision 3052/95/EC to ensure its convergence with the new legislative instrument (and to address the current weaknesses of the Decision) or the repeal of the Decision and the incorporation of its main principles into the new legislative instrument. Better Regulation principles suggest the latter is the better option.

The choice of the most appropriate form of legislative instrument depends on its content. It is important that the burden of proof and the procedural requirements for denying mutual recognition are incorporated in national law, so that they can be immediately implemented by the competent authorities. In this particular case, the specificity of mutual recognition in the non-harmonised field of goods is that it always has to be applied in conjunction with an existing national technical rule. In other words, mutual recognition only comes into play when a national technical rule would prevent the marketing of a product lawfully marketed in another Member State. The regulatory approach would mean, inter alia, that “mutual recognition clauses” would no longer have to be inserted in (draft) national rules to ensure compliance with Articles 28 and 30 EC Treaty. Instead, (draft) national rules would either have to transpose the directive or refer to the regulation.

On the one hand, if the objective is to ensure that mutual recognition is indeed applied when a national rule is to be applied, it would be necessary to incorporate mutual recognition in national law. This would make national authorities fully aware that the product does not only have to be assessed in the light of the national technical rule but also in the light of the national rule transposing the directive. A directive would, in this case, establish a level playing-field in the “regulatory competition” between the national rule and the mutual recognition principle. In addition, a directive would offer have the advantage that Member States would have to reflect, during the transposition process, on any necessary amendments of existing legislation and the setting up of “Product Contact Points”. On the other hand, a regulation would ensure a uniform application of the mutual recognition principle throughout the EU. It would also avoid difficult transposition questions and it would be certainly more efficient for enterprises and Member States.

Consequently, a regulation would seem the most appropriate legislative instrument for the regulatory option.

Option 4: a combination of regulatory and non-regulatory actions

A final option that should be examined is a combination of regulatory and non-regulatory action that could address the possible shortcomings of an exclusively regulatory or non-regulatory approach.

Option 4 is based on the regulatory approach (a regulation) set out under option 3, with one major difference: instead of including a list of products or aspects of products to which mutual recognition applies in the regulation, option 4 creates, as a flanking non-regulatory measure, a website with a list of products to which mutual recognition applies , as set out under option 2.

Impact analysis

I mpact on enterprises

Microeconomic impact

The application of mutual recognition reduces the effect of non-tariff barriers on intra-EU trade of goods. Generally, the elimination of trade barriers facilitates market entry by new enterprises and contributes to the introduction of new products into different national markets . Consequently, competition would increase and a decline in profit margins can be expected, in particular for producers that fail to adapt.

A quantitative measurement of the microeconomic effect of the removal of national non-tariff barriers for individual products is difficult. Firstly, the removal of barriers to trade has been a continuous process of EU integration. Therefore, even if existing economic data can be extrapolated to assess the economic impact of an improvement in mutual recognition, the specific changes, notably the increased mutual recognition in the non-harmonised field of goods cannot be clearly distinguished from many other contributing factors[56]. Secondly, the assessment of the precise impact on businesses in specific markets of a reduction of trade barriers is difficult to predict. Increased competition and the subsequent decline in profit margins may cause firms to reduce production costs or implement strategies to increase their market power. Thirdly, measurement is made difficult by the fact that changes in market conditions - firms behaviour and industrial organisation – do not necessarily occur in sequence. Rather, they are continuous and dynamic[57]. For example, 62% of companies participating in a recent Flash Eurobarometer[58] do not sell their products in another Member State since their local demand is perceived to be sufficient. 43% of companies not exporting to other Member States consider that their products are not suitable for export:

[pic]Regarding the expected microeconomic effects of the three observed policy options, the following statements can be made:

- Policy Option 1 would normally generate little measurable impact on the introduction of new products into different national markets unless the relevant Member State decides to start implementing mutual recognition in a well-determined area of regulated products. The case-by-case approach for infringement proceedings and notifications pursuant to Directive 98/34/EC under this option would have a case-by-case impact, the dimensions of which would also be determined by other factors such as the size of the national market, the scope of the national technical rule, demand for the product, etc.

- Policy Option 2 is expected to have a positive microeconomic impact in the product categories that have undergone sectoral screening only after its gradual implementation in all Member States. Therefore, it is unlikely that this option would have a noticeable short-term impact on the introduction of new products. Moreover, if Member States resist the non-regulatory approach and more infringement proceedings have to be started, measuring the microeconomic impact may require a substantial adjustment period. In addition, the fact that option 2 would only be gradually implemented may result in a failure to convince businesses that it is worthwhile to introduce a new product in a specific national market. The information gathering costs and possibly conformity assessment costs would remain under option 2, while compliance costs and loss of economies of scale would be reduced in the specific product markets of Member States that start implementing mutual recognition correctly. The sectoral approach implies that microeconomic impacts can only be estimated after the selection of the sectors that would be handled first. This makes it impossible to quantify the microeconomic impacts of option 2.

- Policy Options 3 and 4 should both substantially facilitate the introduction of new products into different national markets. This in turn should have already a short-term microeconomic impact via the above-described effects of allocative efficiency , resulting in increased competition and a subsequent decline in profit margins. This may cause enterprises to reduce production costs or implement strategies to increase their market power. In the medium-term, competition typically has a corrective effect on the behaviour of managers and workers, thus leading to greater productive efficiency in the organisation of work. In the longer term dynamic efficiency effects can be expected, thus stronger competition provides an increased incentive for producers to invest in product and process innovations and allows them to move to the technology frontier more rapidly. In practical terms, one way to reduce production costs is to concentrate production in sectors where the enterprise has a leading position in the market (“return to core business”). This implies a decline in sectoral diversification[59]. Another possible reaction is to exploit economies of scale by expanding into new geographical markets. This would inevitably imply a strengthening of the multinational character of the firm. Such changes should be reflected in average cost reductions, that is, gains in productive efficiency, and thus should contribute to the restoration of profit margins. A further possibility is to increase product differentiation in order to distinguish the product from that of competitors or from its own product marketed in other Member States. However, product differentiation requires investment in R&D and advertising, so that the enterprise may be forced to focus on its core business and to abandon non-essential activities[60]. Efficiency improvements arising from removing barriers to intra-EU trade of goods are secured by a positive and permanent increase in the level of total factor productivity. The reason for this is that previously protected enterprises may have produced with excess capacity, and increased competition forces enterprises to use available resources more efficiently[61].

The efficiency improving and adjustment effects of policy options 3 and 4 would be hardly identifiable under options 1 and 2 , since the increased competition would occur in specific national product markets in each Member State that decides to implement the mutual recognition principle in a specific product sector. In addition, the compliance and redundancy costs, loss of economies of scale and conformity assessment costs would be strongly reduced under options 3 and 4.

Information gathering costs would probably be slightly reduced under option 3 but would certainly continue to exist, due to uncertainty over the scope of mutual recognition. These costs would normally decrease sharply under option 4, given the fact that the information on national technical rules and on the application of mutual recognition would be readily available to enterprises, through the list of products.

Administrative costs

The differences between technical rules in different national markets, combined with the need for multiple testing and certification, may constitute between 2% and 10% of overall production costs. These costs are likely to remain under policy option 2 , the impact of which on enterprises would be hardly identifiable. This is mainly due to the fact that the effects of case-by-case actions would only be felt by new entrants in national markets where mutual recognition would start to be applied. The case studies, the surveys and the consultation show that for enterprises, most of the problems outlined above would probably continue to exist under option 2 .

Policy options 3 and 4 would have an immediate effect on enterprises and would reduce their administrative charges . Besides the fact that enterprises would almost immediately become aware of their rights and obligations through a regulation, the risk for enterprises that their products will not get access to, or will have to be withdrawn from, the market of the Member State of destination would be very much reduced. The impact would obviously differ from company to company. There are a number of other factors that would determine whether a regulation would have an impact on a specific enterprise. Currently the firms that experience higher costs are those that are more innovative than their competitors (there are manufacturers with life cycles for their products of well under three years), have to manufacture a high number of variants or manufacture a small number of units only, especially SMEs. A case study reveals, for instance, that the delivery of a small number of specialised machines into another Member State can raise homologation costs up to 5% of turnover. An analysis of the behaviour of SMEs disclosed that the costs of gaining access to the market of another Member State are nearly twice as high as for big companies, as a share of total turnover. Therefore, options 3 and 4 would reduce the administrative costs of SMEs wishing to sell their products in another Member State . The case studies and existing surveys suggest that for larger enterprises entering a new national market and under the best circumstances, the impact could be estimated at 100% of the annual turnover of the same type of product on the national market of the Member State of destination. For SMEs, the case studies and existing surveys seem to indicate that up to 250% of the annual turnover of the same type of product on the national market of the Member State of destination could be saved. Nevertheless, such quantitative assessment can probably not be applied across the board.

Impact on national authorities

Quantitative assessment of administrative costs

For national authorities, the precise amount of administrative costs depends on a number of different factors for some of which no data are available , such as the size of the national market, the existence and the type of regulatory barriers, the availability of similar products on that market, the current implementation of mutual recognition, the level of market surveillance and many other elements.

Mutual recognition and market surveillance are already part of Community law, and should have been applied throughout the EU. Conformity assessment by national authorities and the dialogue with enterprises and/or authorities in other Member States should therefore not generate extra administrative costs for the Member States that already apply mutual recognition and ensure that national rules are accessible to third parties. A global estimate of existing administrative costs[62] for Member States is set out in annex 4.

However, not all Member States apply mutual recognition correctly throughout all non-harmonised product sectors. Consequently, new administrative costs will only be incurred by the national authorities that do not yet apply mutual recognition correctly and do not yet provide information on technical rules.

Assessment of other administrative impact on national authorities

Under policy option 2 , the impact on national administrations would be sectorally and geographically dispersed :

28. Many national authorities would feel a heavier legislative burden if requested to amend individual technical rules to include more detailed “mutual recognition clauses” or to repeal unjustified or disproportionate technical rules. It is likely that, in the longer term, the impact would be more tangible for administrations of Member States with a larger national market: the national rules of these Member States would be likely to attract more complaints following awareness raising actions. These national rules would therefore be more likely to become the subject of infringement proceedings. Indeed, it would then be more interesting for businesses to gain access to a bigger national market and to make the effort to file a complaint, since the economic return on the investment of drafting a complaint would be higher if the product had free access to a large national market. Conversely, the impact on national authorities which amended their national technical rules for strictly internal considerations or reasons other than making them comply with Articles 28 and 30 EC Treaty, would probably be negligible. Inserting a detailed “mutual recognition clause” or abolishing unjustified or disproportionate national technical rules would in such case not require any additional effort.

29. The implementation of the mutual recognition principle in daily practice would only have an impact on national authorities not yet applying mutual recognition. The impact would probably not be perceptible for all other national authorities.

30. It is not excluded that, when national authorities start applying mutual recognition, the current lack of organised administrative cooperation in the non-harmonised field of goods would constitute an additional burden for the authorities responsible. The absence of such organised cooperation would probably force them to seek more information about the product and its lawful marketing in another Member State otherwise than by administrative cooperation. Administrative cooperation could also be helpful to evaluate the proportionality of the technical rules of the Member State of destination. It is possible that an assessment of one’s own rules in the light of technical and scientific information gathered from other Member States could shed a different light on the proportionality of the application of these rules to a specific product.

31. Conversely, national authorities that applied mutual recognition would no longer suffer from uncertainty about when mutual recognition should be applied. The increasing implementation of the mutual recognition principle by national authorities would result in administrative efficiency gains .

Options 3 and 4 would have an immediate and general impact throughout the EU:

- The main difference with option 2 is that one harmonised method of applying mutual recognition would apply throughout the EU , so that a level playing field would be created for all national authorities and businesses.

- The implementation of the mutual recognition principle in daily practice would have a very tangible impact on the workload of national authorities that do not yet apply mutual recognition. The situation would normally be the same as under option 2.

- Setting up "Product Contact Points" would be obligatory in all Member States and would certainly result in initial costs to Member States that do not yet provide for easily available administrative information on national technical rules and on the implementation of mutual recognition. The "Product Contact Points" would only result in additional operational costs for Member States that decide to establish new structures, instead of using existing structures like SOLVIT-centres, Euro Info Centres etc.

- National authorities would probably benefit from the organised administrative cooperation between them in the non-harmonised field of goods. It would allow them to seek more information on the product and its lawful marketing in another Member State. Moreover, easily available information about the technical and scientific information on the basis of which other Member States have drafted their technical rules would facilitate the evaluation of the proportionality of the technical rules of the Member State of destination[63]. However, Member States that do not yet provide for easily available administrative information to enterprises and citizens would incur certain costs.

- Uncertainty about the burden of proof would cease and would result in administrative efficiency gains .

- The number of infringement proceedings pursuant to Article 226 EC treaty should decrease dramatically . The regulation would serve as a basis for handling individual cases through appeals in national courts.

- Finally, the website with a list of products to which mutual recognition applies, as set out under option 4 , would probably be more helpful to, and efficient for, national authorities than a full and exhaustive list of products in the text of the regulation which would have to be applied by them.

Macroeconomic impact

Similar to the microeconomic effects, it is inherently difficult to provide a quantitative assessment of the macroeconomic impact of a better functioning mutual recognition principle in the non-harmonised field of goods . The design of market institutions is multifaceted and often of a highly qualitative nature, which is not easily described by aggregated quantitative indicators. Moreover, significant gaps in data that are comparable across countries and over time pose serious problems to econometric analysis, as well as the fact that an unfavourable macroeconomic environment may have a restraining impact on the potential positive effects of the elimination of technical barriers within the EU

The use of a model of a perfectly integrated Internal Market with a minor extension can provide estimates of the maximum possible cost produced by failure in the implementation of the principle of mutual recognition[64]. The extension is the assumption that a sector’s share of industrial output is equal to that same sector’s share of intra-EU trade. An Internal Market study[65] estimated that 21% of industrial production or 7% of GDP inside the EU is covered by mutual recognition and about 28% of intra-EU manufacturing trade (whose value is equivalent to about 5% of EU GDP). Taking this figure as a basis for calculation and assuming the internal market were perfectly integrated[66], the value of trade in products covered by mutual recognition should equal their contribution to GDP (i.e. 7% of EU GDP). That would imply that current trade in products to which mutual recognition applies is 45% below what it would be in a perfectly integrated Internal Market, a shortfall equivalent to 1.8% of EU GDP. If, however, the principle of mutual recognition covers 36% of intra-EU manufacturing trade[67] (equivalent to just over 6% of EU GDP), then actual trade in products covered by the principle is closer to what it would be in a hypothetical, perfectly integrated Internal Market, although at 13% the difference is still significant (equivalent to 0.7% of current EU GDP).

Successfully ensuring the perfect operation of mutual recognition inside the EU tomorrow would produce a maximum possible one-off increase in EU GDP of 1.8%[68]. In any event, it is estimated that the failure to properly apply the principle of mutual recognition reduced trade in goods within the Internal Market by up to 10% or €150 billion in 2000[69].

A number of econometric studies have attempted to link increases in trade to increases in GDP. However, the results of such