EUROPEAN COMMISSION Brussels, 17.12.2019 SWD(2019) 444 final COMMISSION STAFF WORKING DOCUMENT



Single Market Performance Report 2019



Accompanying the document Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank Annual Sustainable Growth Strategy 2020









{COM(2019) 650 final}



Contents Executive summary 1. Introduction 2. goods and services markets a. goods markets b. services markets c. effective competition 3. specific market issues a. energy, infrastructure and environment b. public procurement c. digital markets d. capital markets conclusions

Executive summary

The Single Market ranks at the top among the greatest accomplishments of European integration. For over 25 years, it has been delivering growth, jobs, legal certainty to business, a wide choice of safe products to consumers and guaranteeing the free movement to EU citizens in the Member States. It is part of our daily life, interweaving the activities of businesses and consumers across borders. The Single Market and its benefits should not be taken for granted: without the Single Market, the EU GDP would be 8.5 percent lower than it is today. The Single Market plays a central role in giving a response to the new challenges that the EU is confronting. Revitalising Europe’s competitiveness, providing solutions to the environmental and climate change objectives, speeding up the adoption of new technologies, maintaining financial stability, ensuring the safety and rights of citizens in an environment of demographic change are all major challenges to which the Single Market is already responding. The Capital Market Union, the Digital Single Market and the Energy Union have joined Single Market policies in goods, services and public procurement markets operating for over 25 years to provide effective responses to these new challenges. In these times of change, it is important to ensure that the Single Market performs at its best. We have to provide effective responses to these challenges. Given the importance of the issues at stake nowadays, the cost of a suboptimal performance of the Single Market is higher than ever before. The performance of the Single Market must be improved because it cannot fall short of citizens’ and businesses’ needs and expectations. The Single Market has a very important international dimension. It provides a highly competitive environment to firms from all EU Member States to compete in world markets. It is the most highly integrated economic area in the world allowing firms to specialise in different segments of global value chain. In addition, it provides a stable and predictable environment for businesses that can provide a safe harbour to carry out operations internally and across the globe. The convergence towards common technical norms and market practices, the shared technological base and the free movement of capital, goods and services contributes to increase productivity by lowering input costs and fostering innovation. Last but not least, the size and importance of the Single Market give Europe a high profile and influence on global issues such as climate protection and the respect of the rule of law and human rights. This report highlights the importance of structural reforms at a Member State level for a good performance of the Single Market. There is significant scope for improvement in the compliance with and application of Single Market legislation, not just in services but also in goods markets. However, even if markets are opened to cross-border trade and investment, consumers will not enjoy lower prices and and businesses will not be able to benefit fully from new opportunities if markets remain closed to competition by market power, smothered by disproportionate regulations, isolated by insufficient energy or transport infrastructures, segmented by obstacles to the recognition of qualifications or hampered by insufficient investments in upskilling and reskilling. Thus, the delivery of benefits to citizens and businesses depends also on structural reforms by Member States. The European Semester provides the right framework to foster those reforms. The joint consideration of the Single Market performance and structural reforms under the European Semester will be mutually beneficial. The two reinforce each other. On one side, improving the functioning of the Single Market fosters the EU’s macroeconomic performance by generating trade, promoting productivity growth, thanks to better resource allocation and economic convergence. These changes help to boost internal demand in times of growing uncertainties in export markets. On the other, the recommendations of structural reforms made in the context of the Semester contribute to the delivery of Single Market benefits by removing market imperfections due to inappropriate national regulations and anticompetitive behaviour and improving the business environment. The findings of the report can be summarised as follows: ·Goods markets present a high level of integration. Intra-EU trade is still growing driven by the impulse provided by the integration of Central and Eastern European Member States. However, evidence shows that inadequate compliance with Single Market rules and insufficient market supervision limit the benefits of integration in terms of trade, competition, productivity growth and product safety. ·Services markets present the highest potential for further integration. The cross-border trade in services markets is lower than that of goods but it is growing. In fact, integration in services is greater than trade figures suggest because the value-added contents of services included in the intra-EU trade of manufactured products is increasing. In addition, integration is increasing thanks to the cross-border establishment of subsidiaries. However, the performance of the Single Market in services is hampered by weak competition and unjustified or disproportionate regulatory restrictions, particularly in some business services, retail and construction. ·In some sectors, weak competition prevents consumers and businesses from reaping the full benefits of the Single Market. Increasing market power and concentration are frustrating a part of the price reductions that integration should deliver to consumers and reducing businesses’ incentives to invest and to innovate. ·Significant progress has been achieved in the integration of energy markets, but cross-border energy trade and competition in energy markets must be improved Entry barriers in electricity generation and different rules for electricity retail markets hinder cross-border energy trade. This situation entails important economic costs to energy users, as well as higher social costs from the foregone opportunities to reduce CO2 emissions that the Energy Market Union strives to achieve. ·Ensuring high standards of environmental protection and product safety is a major component of the performance of the Single Market spanning over a broad range of economic activities. For example, Single Market legislation has been successful in reinforcing the safety of citizens exposed to chemical substances. Ecodesign and Ecolabeling contribute to steering process and product innovations towards increasing environmental protection and better informed consumer choices. Better cooperation with authorities in Member states should help ensure a more even environmental performance across all of the Single Market. ·At the core of the Single Market, standardisation plays a key role to further the EU sustainable development agenda. Standards are essential to steer business towards sustainable development goals as they act as bridges linking legal provisions with on-the-ground technical practice. The adoption of EU standards has helped to achieve energy consumption reduction goals in the eco-design and ecolabelling areas. Standards also have the potential to contribute further to enhance product sustainability and the greening of production processes. ·The Single Market has gone a long way in integrating public procurement across Europe, but the performance in public procurement could still be improved. Transparency has increased, especially since the introduction of e-procurement. However, improvements in transparency have not always been followed by more discernible competition as measured for instance, by the number of tenderers per call. The EU has provided Member States with the necessary rules and guidance to make the best out of public procurement practices, not just to increase the quality of public spending but also to pursue other objectives such as green innovation and digitalisation. ·The Single Market is contributing significantly to the digitalisation of Europe's economy but its lasting performance requires the reinforcement and further development of the current EU-wide digital ecosystem. The development of an integrated EU-wide ecosystem is held back by an insufficient and uneven performance on key digitalization drivers, such as digital infrastructure, skills and funding for digital ventures. Member States have a crucial role to play in putting these elements into play. ·EU financial services legislation helped resume integration of capital markets after the setback resulting from the financial crisis and provided better governance to guarantee the stability of financial markets. Despite significant progress, cross-border competition and market penetration levels remain relatively low. The Capital Market Union offers the potential to reach deeper capital market integration across the EU. The good performance of the Single Market is a shared responsibility at EU and Member State level. These findings make apparent the importance of reforms at the national level to optimise the performance of the Single Market. Many of the problems hindering the performance of the Single Market are of a general nature and their impact is not limited to cross-border transaction. Their impacts spill over across national borders. They require structural reforms at national level and that is the level at which the Semester can be most effective.



1. Introduction

The Single Market ranks at the top among the greatest accomplishments of European integration. For over 25 years, it has been delivering growth, jobs and free movement to EU citizens, legal certainty to business and safe products to consumers. It is part of our daily life, interweaving the activities of businesses and consumers across borders. The Single Market is the EU’s real economy. But the pervasiveness of the Single Market and its benefits should not be taken for granted: deprived of a Single Market, the GDP of the EU would be 8.5 % percent lower than it is today. The Single Market has a very important international dimension. It provides a highly competitive environment to firms from all EU Member States to compete in world markets. It is the most highly integrated economic area in the world allowing firms to specialise in different segments of global value chain. The convergence towards common technical norms and market practices, the shared technological base and the free movement of capital, goods and services contributes to increase productivity by lowering input costs and fostering innovation. Last but not least, the size and importance of the Single Market give Europe a high profile and influence on global issues such as climate protection and the respect of the rule of law and human rights. The Single Market is adapting to the new challenges that the EU is facing. Stagnant productivity growth, environmental and climate change challenges, demographic changes, uncertainties in international markets and the adoption of new technologies are just some of the issues requiring a response based on the instruments provided by the Single Market. The Union and the Member States must deliver the full potential of the Single Market because the cost of a suboptimal performance would much too high in terms of business confidence and citizens’ trust in the European project. This report assesses the market performance of the real economy in the Single Market . In the past, monitoring efforts focused mainly on the legal environment of the Single Market to ensure that it was properly enforced. This was particularly important in the early stages of the implementation of the Single Market and it remains a necessary element in the Commission’s job of guardian of the Treaties. Nowadays, the assessment of performance also requires looking at impacts on the EU’s productivity, competitiveness, sustainability and on the achievement of specific policy goals – besides legal compliance. The ability of the Single Market to deliver in this respect does not depend only on legal compliance but also on broader policy measures and businesses environment conditions, undertakings’ conduct and private choices. The European Semester can also benefit from the monitoring and assessment of the Single Market performance in various ways. By fostering trade and sustainable growth, the Single Market underpins internal demand in the EU and contributes to macroeconomic performance. Furthermore, the Single Market is a key tool for better allocation of resources and economic convergence among Member States. Thus a more integrated and diversified Single Market will also increase the resilience of the European economy. The consideration of cross-border activities in the Single Market will also help better understand the spill over effects of national policy measures and the impact of structural reforms not just at the domestic level but also for the Union as a whole. The European Semester offers the right framework to monitor and assess the Single Market. There are important complementarities between the structural reforms fostered by the Semester and Single Market policies. In practice, the Semester has already paid increasing attention to market imperfections, impediments deterring or delaying investment and hindering the good functioning of markets and business dynamics in recent years.The Semester also allows for a joint analysis of different policies and objectives at the national level relevant for the performance of the Single Market. In this context, structural reforms have been proposed and they are contributing to the better functioning of the Single Market. While the focus of the semester country reports and country-specific recommendations is on Member States, this report takes a broader EU level perspective and zooms on the Single Market’s overall deliverables. This makes it a key document of the Annual Sustainable Growth Strategy. A separate report on the barriers to the Single Market, which mostly focuses on a qualitative analysis of what prevents the businesses from trading across the Member States, will specifically address the recent Council request to monitor the Single Market. In a mature Single Market, monitoring must focus on results. The delivery of the Single Market’s ultimate objectives requires going beyond compliance with legal requirements. Realising the effective free circulation of goods and services will contribute to lower market prices to consumers by fostering competition and increasing product market diversity. But the free circulation of goods and services will not result in lower prices if firms with strong market power fail to pass the benefits through to consumers. This report is a first effort to monitor and assess Single Market performance in this comprehensive way. It takes into account (i) obstacles to the delivery of Single Market benefits smothering the delivery of Single Market benefits to citizens and businesses (e.g. not just those hindering integration); (ii) the ultimate objectives of the Single Market (e.g. not just more trade or cross-border activities but the underlying objectives, such as more choice, lower prices, higher productivity and high standards of consumer safety and environmental protection); and (iii) a broad range of activities relevant for the good performance of the Single Market including its environmental performance and digitalisation (e.g. not just cross-border trade or investment). A full assessment along the lines described above would require new indicators and analytical approaches and some of them are not available today. Therefore, the report cannot cover some very important areas and dimensions of the Single Market performance. In addition, it does not go into the assessment of issues related to the free circulation of citizens. Taxation issues are mentioned in some sections of the report but the actual assessment of the impact of taxation issues on the performance of the Single Market would require a dedicated report. The same applies to the monitoring of economic convergence in the Single Market. The Commission is working to develop new indicators that will allow for more complete monitoring of Single Market performance. In the meantime, different elements of evidence currently available are presented here as part of the Autumn Semester package. 2. goods and services markets a. goods markets The evolution of the Single Market for goods The Single Market for goods has successfully achieved a high level of integration in the EU in comparison to other areas of the Single Market. Nevertheless, the recently adopted “Goods Package” highlighted deficiencies and shortcomings suggesting an underperformance of the Single Market for goods in certain areas requiring additional efforts, in particular calling for effective mutual recognition and enhanced market surveillance. The integration of the Single Market is founded on a legal framework that is deeply rooted in national legislations. Since the first issue of the Single Market Scoreboard, the average transposition deficit decreased from 6.3 % to 0.7 % between the end of 1997 and 2018, while the average delay in transposing directives diminished by 50 %. Over the years, Member States have shown a strong political commitment to transpose legislation and meet European Councils targets. A number of tools have contributed effectively to keeping at bay the development of new technical barriers that might have stifled the functioning of the Single Market, but they remain underexploited. A notification procedure for draft national technical regulations relating to products and information society services was introduced in the 1980s and finally codified by the Single Market Transparency Directive. The procedure has proved to be a successful and efficient mechanism in key areas of the Single Market such as information society services, with almost 20 000 notifications. Feedback from market surveillance activities points to weak enforcement of product rules. Member States are responsible for checking the conformity of products sold in the Single Market. However, with over 500 distinct market surveillance authorities across the EU, enforcement is too fragmented to policing the Single Market. Furthermore, enforcement is often hampered by shortcomings in terms of resources (staff, budget, testing and laboratory capacities), coordination, information exchange, and powers with regard to non-compliant products. Thus there is a risk of having too many unsafe and non-compliant products sold on the EU market, with negative consequences also on the competitiveness of compliant businesses. Table 2.1: Evolution of Single Market trade effects – summary of results Membership and accession effects Positive and accelerating intra-EU15 effects/strong stimulus from EU15-Acc. bilateral trade effects Diminishing intra-EU15 effects/ strong stimulus from accession Diminishing intra-EU15 effects/partially compensating effects from accession Diminishing intra-EU15 effects/weak stimulus from accession Decreasing intra-EU15 effects/no positive stimulus from accession Overall pattern Positive and accelerating effects * Textiles, wearing apparel, leather products * Construction * Services * Furniture, other manufactured products. Stable positive effects * Food, beverages, tobacco * Pulp, paper, print., publishing * Computer, electronic. Electric. and optical products Large positive beginning of period effects * Chemicals and pharmaceuticals * Rubber and plastic products * Non-metallic mineral products * Basic and fabricated metals * Machinery Negative/partly negative effects * Wood, wood and cork products * Coke, refined petroleum prod. Source: WIFO (2019)

The establishment of the Single Market for goods has had very different impacts on trade creation and diversion on sectors and countries over time. A recent study showed that the impact of Single Market integration has been mainly driven by the accession of thirteen Member States since 2004. The study provides further details on the different impact on trade between the Member States that joined in or after 2004 and previous Member States for different sectors. These differences allow differentiating between accession and membership effects. The study confirms that trade in goods is currently growing mainly thanks to new trade flows involving the Member States that joined in or after 2004. In addition, the study also shows the time profile of trade creation across sectors. It shows that although integration had a positive impact on trade in almost all sectors, this impact was short-lived in some cases, while in others the intensity is still holding or even increasing in recent years. The trade impact of Single Market integration differs across sectors both in quantity and distribution over time. Table 2.1 provides a summary of the intensity and profile over time of integration. The impact has been positive for the textiles, furniture, transport equipment, food, paper, computer and electronics sectors. However, while the impact continues accelerating in the case of textiles and furniture, it has stabilised for the other sectors. In metal products, plastics, chemicals, non-metallic mineral products and machinery, the large initial impact has weakened in the EU15, but it remains positive thanks to the impulse provided by new trade flows involving the EU13 Member States. In the case of wood and cork products, the impact is no longer positive at present. The cost of imperfect compliance in the Single Market: Impact on trade, competition and productivity Full and real compliance with Single Market goods legislation could further boost intra-EU trade. As explained, different factors hamper the release of all the potential of the Single Market. This also applies to goods markets. The above-mentioned study has estimated the cost in terms of foregone trade flows resulting from imperfect compliance with Single Market rules by considering five different scenarios (see table 2.2): (1) Full transposition and elimination of transposition deficits of Single Market legislation; (2) Improvements in Member States’ compliance that eliminate the need to open proceedings; (3) Improved administrative practices and better Single Market rules application bringing SOLVIT cases to zero; (4) Increased efficiency of national administrations in the solution of SOLVIT cases to the highest standards, and (5) Reduction in the number of cases to the point of making unnecessary the issuance of Commission comments and detailed opinions on national notifications in the Technical Regulations Information System (TRIS). (i) Cost of imperfect compliance on trade Non-compliance with Single Market rules has a very negative impact in terms of foregone trade flows. The reduction in the frequency of cases of non-compliance (Member States’ infringements) would expand intra-EU15 trade by 7.45 % and trade between the EU15 and the EU13 Member States by 8.6 % (see table 2.2). Trade expansion could be particularly important in “Non-metallic mineral products” in this scenario where there is no reason to open proceedings. Transposition compliance and misapplications of Single Market rules identified in the SOLVIT context come next as potential sources of potential additional trade flows that could be gained from the improved functioning of the Single Market for goods and TRIS having a more limited positive impact. There are large differences across Member States in the potential trade that could result from improved compliance. Among the countries offering more potential we find both EU15 Member States and post-2004 Member States. Although Poland presents the highest potential yield from improving compliance, three EU15 Member States (Italy, Spain, and Greece) display potential impact greater than in several new Member States. Other EU15 Member States also show high potential from better compliance (France, Belgium, and Germany). As expected, the potential gains from the reduction of transposition issues are significantly larger in Member States that entered the Single Market after 2004. Cyprus shows the highest potential from improving its transposition record closely followed by Poland.



Table 2.2: - Single Market intra-EU trade potential of counterfactual policy scenarios across industries (trade flows changes in % expected after a reduction in non-compliance as expressed by the following indicators) Source: WIFO (2019) Note: Average general equilibrium import effects from EU trade with the EU15 and the accession countries in percent of the baseline scenario. See the definition of the scenarios in the previous page. (ii) Cost of imperfect compliance on competition and productivity Compliance costs in trade terms have knock-on effects on competition and productivity. As explained in the introduction of the report, the cost of trade losses carries over to competition in the form of higher concentration and markups and from there on to productivity. These costs are more visible to consumers and business than forgone trade. The economics of integration suggests that increasing imports leads to more competition and higher productivity growth. The key question is whether the Single Market has delivered these expected benefits. Increasing trade intensity between Member States contributed to increase competition with a positive impact on labour productivity. The WIFO (2019) study estimates first the relationship between of trade and competition and then the relationship between increasing competition and productivity growth. The results confirm that the trade creation impact of the Single Market has been positively correlated with increments in competition and labour productivity. Table 2.3 summarises the impact of trade expansion as a result of the Single Market programme on competition and productivity. Higher market competition and labour productivity have been observed in sectors such as “Wood and wood products”, “Pulp, paper and publishing”, “Chemicals and pharmaceuticals”, “Non-metallic mineral product”, “Transport equipment” and “Furniture and other manufacturing”. There is no negative relationship between trade growth and competition in any sector. This means that higher intra-EU trade is associated with more competition and higher productivity in these sectors. For the machinery sector there is a clearly positive relation between trade and competition, but this positive link is not carried over to productivity increases.

Table 2.3: Patterns of industry-specific trade, competition and productivity links – summary of results CR10 Competition => Productivity Intra-EU Trade Positive Negative Insignificant Trade => Competition Positive Wood and products of wood and cork Machinery Rubber and plastic products Pulp, paper, printing, publishing Computer, electronic, electrical and optical products Chemicals and pharma Non-metallic mineral products Transport equipment Furniture, other manufacturing Negative Insignificant Textiles, wearing apparel, leather products Basic and fabricated metals Food, beverages, tobacco Source: WIFO (2019) At Member State level the improvements in compliance with Single Market rules have a limited impact on competition but a slightly higher impact on productivity. All Member States would see a boost to productivity from compliance improvements (1.3 % on average). The estimated productivity gains are particularly important for Italy and Spain with 1.8 % and 1.7 % followed by France and Poland at 1.6 % and 1.5 %, respectively. However, an improvement of these indicators would not necessarily fully reflect the reality on the ground since an important number of deficiencies deriving from non-compliance at national level would not necessarily be captured in any of those categories (for example, national litigation has to be taken into account). Cost of imperfect compliance on safety and other public interests Imperfect compliance with EU rules on products is still an issue in the EU. Member States have the responsibility to carry out market surveillance to ensure compliance with Single Market rules on non-food products. Yet many goods sold on the EU market do not comply with these requirements. This means that their substantive characteristics are not in line with what is prescribed by EU rules and/or that mandatory markings, warnings, labels and other information are lacking, incomplete or incorrect. The exact share of non-compliant products cannot be quantified. However, the high shares of products found to be non-compliant during inspections carried out by market surveillance authorities as well as perception of businesses, consumers and workers’ associations suggest the problem is rather widespread. For instance, in the period 2014-2016non-compliance was found on average in 27 % of inspections conducted in the field of toys, 38 % in the field of construction products and 34 % in the field of electromagnetic and radio equipment, 45 % in the field of lifts, 47 % in the field of machinery, 48 % in the field of simple pressure vessels and pressure equipment and 61 % in the field of pyrotechnics. In 2016, 2017 and 2018 a total of 2 126, 2 201 and 2 257 notifications of dangerous products were submitted in the rapid alert system for dangerous non-food products ‘RAPEX’. In a public consultation organised by the Commission in the area of market surveillance, 89 % of all respondents considered the products in their sectoras affected to some extent by non-compliance across all sectors and Member States. Product non-compliance and subdued market surveillance reduces the Single Market’s ability to protect citizens. In practice, non-compliance means that citizens are exposed to potentially dangerous products or that there is other relevant harm to society (e.g. injury to workers, unfair transactions, pollution, etc.) depending on the specific product at stake and the degree of the non-compliance by the product. Thus while Single Market for goods legislation strives to achieve high standards of safety, security, protection of the environment and other public interests, the goal is only partly met due to inefficient market surveillance. Conclusions The Single Market for goods has so far delivered concrete benefits, yet there is still unexploited potential. Despite remaining shortcomings (e.g. in the area of mutual recognition), the important efforts to create a Single Market for goods in the last 25 years have delivered tangible results in terms of an increase in trade, competition and productivity in many of the sectors analysed. Further benefits could be attained if Member States improve compliance with existing rules and the application of available tools and procedures. In addition, a more efficient enforcement of market surveillance would eliminate the risk of distortion of competition from businesses marketing non-compliant products. Competition remains key to improve the performance of the Single Market. Eliminating impediments to market access, although necessary, may not be sufficient to ensure that expected benefits such as price convergence materialise. Effective competition in goods and services markets is needed to ensure that increases in productivity triggered by market broadening and efficiency gains are passed on to consumers, instead of solely beefing up businesses’ markups. It is clear that issues related to productivity and competitiveness are not necessarily the result of shortcomings in the functioning of the Single Market. They are often related to market behaviour and national regulatory interventions but they may effectively hinder the delivery of Single Market benefits. Precisely for this reason, there are complementarities between the reforms fostered by the Semester and the implementation of Single Market rules. The Single Market performance as regards the protection of public health and other relevant public interests is affected by product non-compliance. The system of national enforcement against non-compliant products could be improved. More resources, better coordination and a more efficient institutional set-up are necessary to ensure product requirements are respected and the level playing field among businesses restored.



b. services markets Low productivity growth in services constrains economic growth in both services and manufacturing, given the share of the services sector in the economy and its spill over effects. The importance of the services sector has continued to grow over the past decades and today services generate over 70 % of EU GDP. More than 70 % of EU workers are employed in services, 10 percentage points more than in the rest of the OECD. The manufacturing sector also relies heavily on services: on average about 25 % of direct cost in manufacturing are services inputs. When adding indirect linkages, the average service content of goods manufactured in the EU is close to 40 % of the total value of final manufactured goods. There is a growing trend of goods to be supplied with services attached, a phenomenon also known as “servitisation of manufacturing”. For citizens, services performance means the possibility to enjoy cheap prices, product diversity and ease of retail purchases, including cross-border. The Single Market has on average reduced trade cost by 21 % for goods, but only by 7 % for services, according to a study by Copenhagen economics. Low cross-border services integration and weak competitive pressures are among the factors that are holding back the performance of the services markets. The two are, to a significant extent, a result of the regulatory and administrative policies of the EU Member States. Difficulties in understanding and recognising skills and qualifications across borders, as well as the need for investing more in upskilling and reskilling of the labour force, are further constraining the upscaling of services. EU services exhibit low productivity Productivity growth in the EU services sector lags behind that of the US. The period after the crisis reflects a lost decade, where the divergence of EU productivity in services vis-à-vis the US has fully eroded the catching-up achieved before the crisis . The growing gap between EU and US productivity in services (see figure 2.1) is due to a number of factors: (i) drops in productivity levels across all EU services sectors in 2009, which did not happen to the same extent in the US, (ii) the significantly larger productivity increases in IT services in the US than in the EU, with much of these increases being driven by the large US tech giants, and (iii) the high productivity levels in professional services such as legal, accounting, architecture and engineering services in the US. “Behind most of these factors is a common denominator, namely the major difference in the size of the home market in the EU versus the US”. Firms in the EU have a smaller home market, particularly in the smaller Member States. Other factors explaining the growing gap between EU and US productivity in services include differences in taxation, pro-business attitudes, Information and Communication Technologies (ICT) diffusion, and rates of innovation. All are disproportionally correlated with the productivity of wholesale, retail and business services relative to the rest of the sectors in the economy .



Figure 2.1: Labour productivity comparison in purchasing power parities between the US and the EU for services (2000 = 100) Source: OECD statistics.

The weak productivity growth in services partly reflects intrinsic characteristics of the sector, but large productivity gaps between Member States suggest there is more to this. Indeed the share of EU countries that are well below the productivity frontier tends to be higher in services (both knowledge intensive and others) than in manufacturing. These cross-country differences are likely to reflect many factors such as differences in skills, digital adoption rates or the mix of specific activities within industry. These are in turn influenced by interrelated factors: the level of market integration, the level of competition and the type of regulatory policies. Limited mobility of ‘tech talents’ and researchers hampers knowledge circulation and innovation diffusion across Europe. Services integration proceeds at a slow pace In the period 2010-2018, intra-EU trade in services has grown faster than EU GDP. But intra-EU trade in services, albeit at higher levels than extra-EU trade, grew just in line with the extra-EU trade growth, by about 6 % on average. At the same time, intra-EU trade in services remains relatively modest in absolute terms, still only representing one third of intra-EU trade in goods with no signs of catching up. Figure 2.2: Evolution of integration in EU value chains (share of EU value added traded cross-border in total value added, overall economy, 2000-2014) Figure 2.3: Degree of integration in EU value chains per sector (share of EU value added traded cross-border in the total value added per sector in 2000 and 2014) 2000 2014 Source: WIOD database However the value added of services embodied in manufacturing trade is increasing faster. Trade measured as value added in the World Input Output database (WIOD) shows trade in services faring somewhat better than when measured via conventional measures of international trade. EU integration of value chains during the period 2000-2014 measured as the share of cross-border value added over total value added, trended upwards and has been only briefly interrupted by the crisis (figure 2.2). EU cross-border value added has increased about twice as much (2.3 %) as total EU value added (1.2 %), putting its share in total EU value added at almost 16 %. About 2 percentage points of this increase is accounted for by market services and less than 0.5 percentage point by manufacturing. But while market services had a stronger contribution, the sector remains much less integrated than manufacturing (figure 2.3). Figure 2.4: Proportion of total value added generated by intra-EU foreign affiliates (2016) Source: European Commission The Single Market in services also integrates through the cross-border establishment of companies. The Single Market in services does not consist solely of cross-border trade. Cross-border establishment is at least equally important, in particular given that many services are still less tradable and/or require (some) proximity to the client. Data on firms’ foreign affiliates shows that cross-border investments in services sectors, such as retail and wholesale services as well as business services, are generating a large amount of economic activity in the EU. Services account for only 43 % of the sales of affiliates around the world, but in value-added terms, this share rises to 60 %. In all services sectors the level of integration via cross-border establishment is also lower than that in the manufacturing sector (figure 2.4). Weak competitive pressures partly result from the regulatory policies of the EU Member States Although integration within the EU has led to considerable regulatory harmonisation among its members, remaining services trade restrictions affect market performance in many sectors and many Member States. Based on 25 member countries of the European Economic Area (EEA), the OECD Services Trade Restrictiveness Index (STRI) records restrictions to services trade within the Single Market of the EEA (see figure 2.5). More important than heterogeneity across sectors, however, is heterogeneity across countries. The average difference between the most restrictive and the most liberal country in each sector is 0.09. In some sectors, such as courier services, this spread is even larger. Figure 2.5: Intra-EEA OECD Services Trade Restrictiveness Index (STRI) sector profiles Source: OECD, 2018 – Note: Y-axis STRI indices take the value from 0 (complete openness to trade) to 1 (completely closed). While many regulatory restrictions are justified by the public interest, unnecessary restrictions hurt the proper functioning of the Single Market for services, according to some studies. Apart from the benefits for competition and (lower) prices and markups that a reduction of undue restrictiveness yields, such a reduction has been shown to strongly support ICT investment in services (where the EU lags behind the US), productivity of services and the competitiveness of EU industry.



Figure 2.6: Market entry rates (aggregated at EU level, 2016) Source: European Commission Competition in several services sectors is subdued on the back of low business dynamism. The intensity of competition varies significantly between different Member States and services sectors. For example, business services with a more restrictive regulatory environment, such as architectural, legal and accounting services, show significantly lower market entry rates (which is a proxy for business dynamics) than other services with less regulatory burden (see figure 2.6). Structural reforms to open up services markets would likely increase competition in the sector concerned, lower excessive rents and deliver benefits to consumers. If Member States were more ambitious in implementing reforms in the services sectors to reach the average of the five least restrictive Member States, the additional growth potential would be 1.8 % of EU GDP. Limiting service sector restrictions to the level of the three least regulated EU Member States (the UK, Denmark and Sweden) would probably increase the productivity of services and manufacturing by 5.3 % within two years of implementation. Figure 2.7: Increases in firm-level productivity due to reductions in barriers to conduct and entry, 2016 Source: OECD and World Bank Group, (2016), EU regular economic report 3, Growth, jobs and integration: Services to the rescue ( http://pubdocs.worldbank.org/en/930531475587494592/EU-RER-3-Services-to-the-Rescue.pdf ) Note: The chart shows the percent increase of firm-level total factor productivity (TFP) from reducing barriers to the average of the three least restrictive countries. Luxembourg is excluded as it is an outlier. Average refers to the average coefficient of four different TFP measures while high refers to the highest coefficient of the four different TFP measures. Business and professional services Business services account for a significant share of value added and cross-border trade has been on the increase. Intra-EU trade in services is mainly concentrated in five sectors: business services, travel services, transport, financial services (including insurance) as well as telecommunications, computer and information services. All have seen positive growth rates in recent years, with intra-EU trade in business services almost having doubled over the period 2010-2018 (see figure 2.8). Most cross-border trade in business services is generated by services such as management consulting, research and development as well as advertising and market research. At the same time, trade in highly regulated business services (e.g. engineering, accounting, legal and architectural services) still stands at very low levels. Figure 2.8: Intra-EU trade in services (intra-EU exports/GDP) in 2010 and 2018 Source: European Commission Despite growing trade in the provision of professional services in the Single Market, market performance remains hampered by national regulations. Regulated professions account for 22 % of the European labour force. Around 80 % of outputs from legal, accounting, engineering and architectural services are used as intermediate inputs for other sectors in the EU both domestically and cross-border, including important manufacturing activities. Restrictiveness of national requirements for some economically important professions (as measured by the Commission's restrictiveness indicator for professional services, see figure 2.9) shows a significant dispersion across Member States. Asymmetries in the mobility of high-skilled professionals and researchers stifle the diffusion of innovations and the impact of research and innovation investment on the economy. National reforms aiming to improve and streamline the regulatory framework for professional services have only achieved limited progress so far. Figure 2.9: Restrictiveness of national regulation for business professions, 2016 Source: European Commission Note: Restrictiveness indicator measuring the overall intensity of restrictions in national regulation as regards access to and exercise of certain regulated professions, quantified on a scale from 0 to 6.

Evidence shows that stricter entry and conduct requirements are not necessarily associated with higher service quality. Heavy and restrictive entry conditions, for example in the form of licensing or multiple administrative requirements, are often presented as being justified on grounds of consumer protection and ensuring the high quality of services to be provided. However, evidence shows that less restrictive access conditions are not necessarily associated with lower quality standards of the services delivered, as measured for example by surveys of consumer satisfaction and other indicators of well-being. On the contrary, several case studies find a positive correlation between higher levels of service availability and competition and some aspects of quality. Excess restrictions in professional services stifle competition and limit market entry. Regulation, while instrumental in certain professional services, can often be associated with significant economic costs through limiting market entry and competition, which manifests for instance in lower growth in the number of enterprises and higher incumbents’ rents (see figures 2.10, 2.11). Higher restrictions also impact cross-border mobility by imposing significant costs on non-national workers. Depending on the profession and under certain assumptions on labour demand structure, there could be between 3 and 9 % more people working in a given profession in the EU if access requirements were less stringent. Figure 2.10: Regression analysis between the level of restrictiveness and the growth in number of enterprises Figure 2.11: Regression analysis between the level of restrictiveness and profit rates Source: European Commission. Note: Horizontal axis represents the restrictiveness indicator and vertical axis represents the growth in the number of enterprises. Note: Horizontal axis represents the restrictiveness indicator and vertical axis represents profitability. Both are “de-meaned”, i.e. the value plotted represents the value of the variable less the weighted mean of all observations. Bubble sizes represent the respective weight of the sectors considered. The elimination of obstacles in highly regulated services would have a positive impact on the sector’s value added and employment, but also, through lower prices of input, on a number of other sectors both domestically and in other countries. A modelling exercise done with RHOMOLO (Box 1) illustrates the potential impact of reducing obstacles to entry in four important business services markets, namely legal, accounting, architectural and engineering services, by simulating a 'closing the gap' exercise, i.e. a scenario in which one or more EU Member States reduce their level of restrictiveness to the average of the 3 top performers. In addition, results from FIDELIO suggest that of the total benefits realized after 10 years, around 7 % are found in the price-dropping sector itself, 77 % in other sectors of the country itself, and the remaining 16 % in other EU countries. Obstacles in the recognition of skills and qualifications across borders and the need for upskilling and reskilling the labour force also impact the upscaling of business. It is important for employers to correctly interpret and value qualifications so that they can better understand their relevance and assess how people skills match business needs. In addition, while the need for high-level skills is growing, there is an oversupply of low-skilled labour across Member States. On average 20% of workers have low basic skills and many more lack transversal skills necessary to adapt quickly to the changing work environment. Box 1: A 100 % 'closing the gap' exercise for regulatory restrictiveness in legal, accounting, architectural and engineering services, using the RHOMOLO* model I The RHOMOLO simulation estimates the potential impact of reducing obstacles to entry in four important business services markets. The model predicts after ten years a positive gain of EU-wide gross domestic product (GDP) and employment of up to EUR 41 billion and slightly less than 500,000 persons employed with respect to the baseline scenario, respectively, if this occurred in all EU Member States. The effects would be lower if the change occurred in one country only (see figure 2.12). The impact on GDP and employment varies across Member States. In the short run, the change in GDP can be as high as EUR 2.4 billion in Germany or EUR 1.3 billion in Italy. After 10 years, however, all Member States experience an increase in GDP, the highest being recorded for Germany EUR 11.4 billion) and the lowest for Estonia (EUR 5 million). As for the change in employment, after 10 years it ranges from about +100 persons employed in Estonia to about +118,000 in Germany. In most Member States, the professional services sector experiences a decline in value added and employment, resulting from the relatively low substitution elasticities in intermediate inputs and consumption used in RHOMOLO. Thus, this sector experiences only a very modest rise in demand for its goods. The positive overall value added effects of reducing obstacles to entry in the four considered business services comes from the positive spill overs to the other sectors of the economy. In the short run, the largest contribution to the rise in EU value added can be traced to the sectors of manufacturing (EUR 3.5 billion) and public administration, education and health (EUR 2.7 billion). After 10 years, the largest contributing sectors are manufacturing (EUR 16 billion) and financial services (EUR 8 billion). As for employment, after 10 years the largest increases are recorded in the manufacturing sector (more than 200,000 persons employed) and in the public administration, education and health sector (more than 100,000 persons employed). *RHOMOLO (Regional holistic model) is a spatial computable general equilibrium model developed by the European Commission's Joint Research Centre (JRC). It is used for policy impact assessment and provides sector-, region- and time-specific simulations to support the EU policy on investments as well as reforms covering a wide array of objectives. All monetary transactions in the economy are included in the model as a result of agents making optimising decision. Goods and services are consumed by households, governments and firms, and are produced in markets that can be either perfectly or imperfectly competitive. Spatial interactions between regions are captured through costly trade matrices of goods and services and factor mobility through migration and investments. For further information see Lecca et al. (2018), RHOMOLO V3: A Spatial Modelling Framework, EUR29229 EN, Publications Office of the European Union, Luxembourg, JRC111861. For other estimations of benefits in professional services, see European Commission (2014), ‘The economic impact of professional services liberalisation’, Economic Papers, No 533. Specific results were reported for AT and DE in the 2016 Country Reports. Broader studies of the benefits of the Single Market in Services include Pelkmans J. (2019) Contribution to Growth: The Single Market for Services - Delivering economic benefits for citizens and businesses, study for the IMCO committee of the European Parliament, February 2020. Construction services Restrictive national regulation applicable to construction services results in little cross-border activity. Construction works undertaken by builders and developers account for 6.1 % of EU GDP and 7.3 % of EU employment. The construction sector was particularly impacted by the economic crisis and its recovery is proving slow in view of relatively low average productivity and persistent legal market access impairments. Figure: 2.12 Value added impact Employment impact for the total EU from a 'closing the gap' reduction of restrictiveness in accounting/legal/architectural/engineering services in DE, FR, UK, IT, ES, or all MS Source: European Commission. Figure: 2.13 Value added impact Employment impact for the total EU from a 5 % increase in labour productivity in the construction sector in DE, FR, UK, IT, ES, SE, or all MS Source: European Commission Lower prices for construction would generate similar benefits in terms of value added and employment. Using the RHOMOLO model to simulate the effect of a 5 % increase in labour productivity in the construction sector illustrates the potential gains in the construction sector, with up to EUR 39 billion in terms of EU-wide value added and 119 thousand jobs in terms of employment after ten years in the scenario in which all EU Member States experience the price drop (see figures 2.13). Again, FIDELIO results show that on average only 5 % of the benefits are realized in the construction sector itself, while 79 % accrue to other sectors of the same country and 16 % to other countries. Importantly, if only one country makes progress in the construction sector, benefits are lower than when more or all do it. Retail The retail sector has contributed to delivering the Single Market directly to consumers but still holds potential. Retail is important to the Single Market not only due to its size (4.5 % of value added and 8.6 % of employment), but also because of its linkages with other sectors of the economy (e.g. wholesale, manufacturing, farming, business services sectors). Brick-and-mortar retail is characterised by a dynamic cross-border expansion of large and medium-sized companies establishing in other Member States. The starting point for their development is the domestic market, however it is the cross-border expansion that is the condition to actually build scale. This can happen via establishing shops abroad (all ten biggest retail companies in the EU are multinational) or by cross-border online sales. Cross-border online sales are growing, but there is potential for further development. In 2017, 22 % of EU retailers were selling through e-commerce and yet only 10 % sell to consumers located in other EU countries. The most important obstacles to develop cross-border online sales are the risk of fraud and non-payment, differences in contract laws, as well as differences in national consumer protection rules. The extra need for IT skills is also an obstacle to the development of online sales, according to almost 42 % of retailers. Compared to other services sectors, retail shows relatively low profitability and a high rate of companies' births and deaths. This is mostly due to the constant need of retail businesses to adapt to market conditions in order to remain competitive and survive. However, both profitability and market dynamism vary significantly among Member States, indicating that there is a margin of improvement of less well performing countries. Concentration in the retail sector differs largely across Member States. For the grocery market, the share of top five retailers ranges from below 40 % (e.g. in IT and BG) to over 80 % (e.g. in FI and AT). This might impact competition. However, in the case of retail, competition is particularly important at the local level – how many and what types of shops consumers can choose from in their catchment area. Establishing adequate and proportionate regulatory conditions helps retailers to remain competitive and grow. A Commission analysis of the links between the Retail Restrictiveness Indicator (mainly its retail establishment-related parts) and retail performance concluded that in the retail sector, higher restrictions were linked with lower retail market dynamics (as measured by churn rates), higher retail market concentration and higher level of consumer prices, in particular of food (see figures 2.14). Also restrictions to retail measured by the OECD indicator on Product Market Regulations have a negative impact on labour productivity growth in the sector, possibly due to the reduction in competition that results from fewer entries and less firm fluctuation. They also seem to be negatively correlated with investment in information and communication technology.





Figures 2.14: Correlation between the level of restrictiveness of retail establishment and the churn rates of retail companies (a). Correlation between requirements linked to specific size thresholds and the level of consumer prices (b). Source: European Commission own analysis based on information from the retail establishment study, the Member States authorities, and Eurostat; Staff Working Document accompanying the Communication “A European retail sector fit for the 21st century”, SWD(2018) 236. Restrictions may stem not only from regulations, but also from business operators. An example of such restrictions are the territorial supply constraints. These are practices by which suppliers may limit retailers' possibilities to purchase products from whom and from where they want across borders. Another important example is contractual geo-blocking when manufacturers or copyright holders agree with retailers to prevent online shoppers from purchasing goods based on the shopper's location or country of residence. The Commission’s sector inquiry into e-commerce in 2017 showed that 38 % of the responding retailers selling consumer goods, such as clothes, shoes, sports articles and consumer electronics online, use geo-blocking. 12 % of those retailers report contractual restrictions on cross-border sales for at least one product category they offer. Almost 60 % of digital content providers who participated in the inquiry had contractually agreed with right holders to geo-block. Although there may be good reasons for certain economic operators not selling cross-border (differences in consumer laws, bottlenecks in cross-border delivery channels etc.), a significant number of operator-level restrictions may be unjustified. The Geo-blocking Regulation which came into force on 3 December 2018 should put an end to such unjustified practices in a large number of sectors which fall under the scope of the Regulation. In addition, the Commission has adopted a number of competition law decisions condemning geo-blocking practices by companies. Geo-blocking is sometimes also combined with resale price maintenance (RPM) practices which in particular target online retailers that sell products online at lower prices than those desired by manufacturers for a particular Member State. The Commission has fined a number of companies for such anti-competitive agreements. In those cases, RPM led to higher prices for consumers for a wide range of consumer electronic products. Conclusions Member States can improve the economic performance of the Single Market for services by ensuring that regulatory restrictions are adequate and proportionate. Insufficient integration may result from perfectly legitimate policy choices in many cases. This is why Member States should ensure that services providers and regulations do not create unjustified or disproportionate obstacles hindering the performance of the Single Market. The good functioning of the Single Market for services will strengthen competition and allow customers to access a wider choice and a better quality of services, including the more innovative ones. It should also contribute to lowering markups and prices. This will foster the competitiveness of the EU services industry, but also of the EU manufacturing industry, a large customer of services. Member States could complement this policy by designing actions to help services providers, in particular SMEs, to use new technologies and digitalisation efficiently and to encourage the development of digital skills. A good business environment is also key to foster the growth of firms providing services. c. Effective competition Without effective competition, firms and consumers will not fully benefit from Single Market integration. Since its inception, the Single Market has boosted trade flows within the EU through the elimination of trade tariffs and the reduction in non-tariff barriers, raising output and domestic demand. In parallel, it has increased market competition, reduced markups and lowered prices by opening-up domestic economies. Many sectors however continue to experience a lack of effective competition. This does not necessarily mean that companies in these sectors break EU competition rules. It however means that these markets perform below their potential. Competition, especially in services and network industries, remains one of the areas where Member States have made the least progress in implementing Country Specific Recommendations. Furthermore, technological development and the resulting changes in the structures of the European economy and of the economies of its key trading partners have resulted in increased pressure on competition. Competition rules are only as successful as their implementation and thus need to be implemented effectively in all sectors. Competition rules prevent Single Market partitioning by private operators and improve the functioning of markets in a wider sense. Competition policy can address anti-competitive conduct that restricts cross-border trade between firms in different Member States. Such restrictions can occur through anticompetitive agreements or abuses of a dominant position. In a recent case, the Commission fined the world’s largest beer company for hindering cheaper imports from one Member State into a neighbouring one. Market partitioning is however not the only source of insufficient competition as even integrated markets often show a weak degree of actual competition. The contribution of EU competition policy to the functioning of the Single Market thus goes beyond merely preventing market partitioning. Signs of weakened competition Following a period of relative stability, indicators of competition have deteriorated after the crisis. These trends are less pronounced in Europe than in US but still clearly detectable (see figure 2.15). The observed patterns include industry-level concentration which according to OECD data climbed over the past 20 year in both the US and Europe. Possible explanations include structural changes in the economy, in particular the rise of new technologies with more efficient production methods, as well as a weakening of competition. Figure 2.15: Change in the market share of the largest eight companies/groups Source: Bajgar et al., (2019) “Industry Concentration in Europe and North America” The trend involving higher concentration ratios and markups is also reflected in increased market power, especially among larger firms. Possible explanations include changes in business dynamics and structure of markets. This concerns winner-takes-most outcomes, also referred to as the “superstar firm” hypothesis, where the more productive firms increasingly reap the benefits of network effects and scale economies. The digitalisation of the economy increases the importance of knowledge assets. A few firms, especially in digital-intensive sectors, benefit from high and increasing markups and gain large market shares due to the intensive use of intangible assets, such as data analytics, and the difficult replication of successful business models, together with declining IT capital prices. Such outcomes are possibly also going beyond the digital economy. Firm markups have also increased, especially among the most successful firms. More generally, price cost margins (as a further markup indicator) remain comparatively higher in services than in manufacturing (figure 2.16). Figure 2.16: Mean price cost margins in manufacturing and services Source: Gradzewicz, M., & Muck, J. (2019). Globalization and the fall of mark-ups. Notes: 2014 data with fixed capital stock; averages over 18 EU countries. Market power can be effectively used by firms to partition the Single Market. New evidence has provided very precise measurements of price dispersion for products sold by firms with market power. On average, prices for a sample of goods vary 30 % around the average price across buyers. Although other factors contribute to explain this dispersion, it is estimated that one third of this variation is due to price discrimination by the seller across different buyers. It is interesting to note that this dispersion is lower within the Euro area suggesting that there is an effective impact of tighter integration on the ability of firms to price discriminate. However, this new evidence also indicates that price discrimination has increased with respect to the levels of 2000, i.e. a period of deepening in the integration process. Sectors suffering from competition problems Some sectors and markets seem to suffer particularly from competition problems. Especially in services and network industries, competition remains one of the areas where the Member States have been reporting limited progress in the implementation of Country Specific Recommendations. This finding corresponds to the results of a recent Eurobarometer survey on citizens’ perceptions of competition problems in EU Member States. The survey found that – across the EU – citizens thought that competition problems existed, in particular in telecoms (26 % up by 8 % since 2014), internet access (26 %), energy (23 % up by 5 % since 2014), transport services, and pharmaceutical products (both 20 %). Manufacturing sectors, such as the automotive industry, have also suffered from competition problems. Access to essential infrastructure remains a concern in the gas, electricity and rail sectors. Effective competition in these markets relies on competitors having access to the infrastructure, which is often owned and operated by the incumbent. Competition enforcement can play a role in this context, for example by intervening against curtailment by dominant operators of interconnection capacity between neighbouring Member States. The Commission furthermore intervened against a Member State for giving the state-owned electricity incumbent privileged access rights to lignite. The decision imposed divestitures of a significant share of lignite capacity to competitors. In a rail case, an incumbent in one Member States dismantled a section of a track connecting that Member State with a neighbouring Member State, thereby preventing an oil refinery from using the services of a competitor. The Commission considered the conduct abusive and imposed a fine on the incumbent operator.

Market functioning in sectors dominated by State Owned Enterprises (SOE) can be impacted by the quality of their governance. In several Member States, such enterprises dominate economic sectors such as transport and energy. SOEs often suffer from weak corporate governance. The IMF’s analysis shows that SOEs “systematically underperform relative to private sector counterparts in nearly all countries” and that “poor governance is at the root of the problem”. On SOE governance, the IMF concludes that the “scope for improvements is large…, be it more independent and professional boards in the companies, stricter financial reporting and auditing, or greater clarity on the fiscal links to SOEs”. Specific competition issues can arise in markets where patents play a key role or where profit generation shifts to aftermarkets. Standardisation is a crucial enabler of Single Market integration. In some areas, standards include patented technologies, such as in telecommunication. Special guidance exists to prevent competition problems to arise in this situation. In addition, a holistic policy has been developed to support innovation and standardization while improving access to standardised technology. Attempts to impede market entry by generic or biosimilar products on expiry of patent protection have been identified in the pharmaceutical and biotech sectors. In manufacturing, increasing revenue streams generated in aftermarkets affect the competition landscape. In mature manufacturing sectors, producers are under pressure to generate more value from aftermarkets and from activities, such as financing. Together, these trends lead them to focus on bundling the main product with finance and repair and maintenance options, all payable on a periodic basis. Those trends can generate competition issues, mainly relating to customer lock-in and the foreclosure of competing aftermarket providers. Enforcing competition rules at Member States’ level Member States and the European Commission share responsibility for promoting competition. Since the 2004 reform of EU antitrust rules, national competition authorities (NCAs) and national courts have the power to apply the EU competition rules to anti-competitive agreements and abuses of dominance affecting trade between Member States.Since then the NCAs have become essential enforcement partners of the Commission, accounting for more than 90 % of all decisions tackling conduct and agreements that infringe EU competition rules. From 1 May 2004 until 31 December 2018, NCAs adopted around 1 100 decisions under Articles 101 and 102 TFEU. These decisions protected competition by ordering termination of infringements, imposing fines or accepting commitments. National competition agencies have focused on manufacturing, network industries and digital markets. The NCAs have been particularly active enforcers in the manufacturing sector. This largely reflects the focus on fighting cartels, as they often concern intermediate and input goods in the manufacturing sector. It also includes active enforcement in the pharmaceutical sector. This sector remains a matter of priority and NCAs have vigorously investigated and sanctioned restrictive practices that lead to higher prices for pharmaceuticals. The NCAs also concentrated on network industries, such as telecoms, media, energy and transport supporting the liberalisation process or ensuring a more competitive environment in the post-liberalisation era. These sectors are often characterised by high market concentration and the presence of dominant operators and previous incumbents. Digital markets were a key enforcement area for NCAs. Alongside the Commission, the NCAs have become active enforcers in digital (or digitalised) markets and play an important role in tackling Single Market obstacles in the new economy. Considering the ever-increasing digitalisation of the economy, it is expected that competition in digital markets will remain in the focus of the enforcement activity of NCAs. Recent NCA's enforcement activity by sector broadly corresponds to the restrictions of competition identified in the European Semester process as well as in the Eurobarometer survey mentioned above. National competition enforcement is expected to intensify and to expand its range. The NCAs’ powers and independence have been reinforced through the adoption of the so-called ECN+ Directive in 2019, a development that can be expected to result in increased competition enforcement in the Single Market. For example, once implemented, the ECN+ Directive provides NCAs with an effective enforcement toolbox and powers to operate in a digital environment, where wrongdoing is increasingly implemented through a range of technologies (e.g. chats, cloud services, algorithms and AI). The Commission has encouraged the NCAs to develop their investigative capabilities further, using data analysis solutions in view of the continued digitalisation of the European economy. Finally, the NCAs also drive market reforms through advocacy activities. The NCAs carry out market research and studies and issue advocacy reports to the respective Member State governments supporting progress to a more competitive environment. Such studies and advocacy initiatives are also informative of the state of competition in individual Member States. Conclusions Weak competition in some sectors and markets forestalls consumers and businesses from reaping the benefits of the Single Market. Effective competition prevents market partitioning and improves market functioning and thus guarantees that firms and consumers fully benefit from Single Market integration. Competition problems remain in some markets, such as those relying on essential infrastructure, dominated by (State-owned) incumbents or characterised by winner-take-it-all economics. More generally, increasing market power and markups indicate that technological progress and structural economic changes do not automatically entail stronger competition. This in turn points to the existence of impediments to the diffusion of technology and knowledge. Up-to-date competition rules and their effective enforcement on EU- and national level thus remain vital instruments to safeguard market functioning across the Single Market. 3. specific market issues a. energy, infrastructure and environment The Single Market provides a unique opportunity for achieving environmental objectives. By creating a space where products and services are accessible freely across borders of EU Member States, the Single Market offers many opportunities to pool resources and knowledge, and to benefit from economies of scale to advance on major environmental challenges. Single Market instruments offer a large variety of benefits both to businesses and consumers with regard to efficiency and effectiveness in reaching environmental goals while providing for improved competitiveness and creating more jobs. These institutions offer a horizontal and joined action that could be more effective than fragmented approaches, even if some Member States chose to advance further than others. Single Market harmonization mechanisms can provide benefits in particular to the following concerns: safety of chemicals, energy efficiency and environmental performance of goods, uptake of secondary raw materials, as well as availability and affordability of environmental goods and services. Energy markets In the internal electricity markets significant progress with cross-border electricity trade has been made. Electricity can be traded via a central EU system (‘market coupling’) which already covers more than 80 % of EU electricity volumes. New electricity interconnectors have increased exchanges in regions previously not much connected (e.g. Baltic region, Spain). However, despite their physical contiguity, some regions remain less connected (e.g. Czechia, Hungary, Romania or Slovakia). Figure 3.1: Electricity market coupling Source: Agency for the Coordination of European Energy Regulators (ACER) However, problems with opening electricity markets persist. Market concentration remains very high in many Member States, making entry of new competitors difficult. State interventions such as capacity mechanisms (i.e. subsidies to generators for backup capacity) which are not open to cross-border participation or state-regulated prices hamper electricity trade between Member States. Furthermore, large parts of cross-border infrastructure still cannot be used due to national practices to block cross-border exchanges, and competition between operators from different Member States remains underdeveloped. Some countries still apply export restrictions, and according to the Agency for the Coordination of European Energy Regulators (ACER), more than 50 % of cross-border electricity lines are not made accessible by national grid operators for cross-border trade of electricity. Figure 3.2: Market share of the largest generator in the electricity market Source: European Commission Wholesale gas markets continued their positive development in terms of price convergence between markets, hub-based pricing and increased traded gas volumes. Concentration and traded volumes improved on almost all established and advanced gas hubs, i.e. mainly located in North-West Europe. However, liquidity is still heavily concentrated at some gas trading places, notably the “NBP” (UK) and “TTF” (Netherlands) hubs. This shows that not all Member States benefit from the internal gas market. Shortcomings in the functioning of competition remain, especially in South-East Europe which shows still more oil-linked supply contracts, little traded volumes, low but improving levels of interconnection and delayed or insufficient implementation of the implementing legislation that has been adopted to remove trading obstacles (so-called “Network Codes”). Some countries still apply price regulation elements to gas producers, which should be phased out to allow competition to flourish. Obligations for dominant companies to give access to gas (so-called “Gas release programmes”) could be a way to kick-start wholesale competition in less developed markets. Figure 3.3: Gas price convergence Source: Agency for the Coordination of European Energy Regulators ACER

Competition in energy retail markets remains limited. Competitive retail markets for electricity and gas play an important role in ensuring that consumers benefit from low prices, high standards of service, and a wide selection of offers. They are especially important for the emergence of new energy services that will help the energy system become more flexible and better adapted to renewable energy sources. Despite this, high levels of market concentration, growing gaps between retail and wholesale prices, and low levels of innovation are leading to persistently low levels of consumer satisfaction in the energy sector. New entrants to the retail markets for electricity and gas face a broad range of hurdles in establishing themselves and operating in the EU. For instance, energy suppliers and service companies in many Member States need to obtain a license from national authorities before beginning operations. They need to contract with transmission or distribution system operators to serve customers connected to the grid and get access to metering data. They may face sector specific billing or customer switching requirements. And access to the energy wholesale and short-term (“balancing”) markets requires some prior agreement with the market operator. Whilst these procedures are presumably intended to ensure that the system functions properly and customers benefit from high standards of service, they are sometimes excessively complex and time consuming to carry out, requiring payments or financial guarantees. They are also likely to bind the supplier or service company to operating according to certain conditions, some of which may unduly increase costs or make it harder to do business. Moreover, the procedures and processes around operating in the retail market can differ significantly from one Member State to another, impeding cross-border entry even for established energy suppliers and service companies within the Single Market. The cumulative weight of these and other problems in energy retail markets can have a significant negative impact on competition and, by extension, consumer welfare, and innovation. A major study into these issues will be published in 2020, which could pave the way for action to address them. Figure 3.4: Market share of three largest suppliers (CR3) and the number of main suppliers and number of nationwide suppliers in retail markets for households (2017) Source: European Commission While potential cost- and CO2-savings are significant, the connection of the EU’s energy markets across-borders is still hampered by national practices to prevent cross-border exchanges of electricity and gas. In terms of value, gas and electricity are the most important goods traded within the Single Market. The potential for cost savings and emission reductions is significant, notably when Europe is decarbonizing its energy production and the need for backup generation is increasing. Renewable electricity requires backup generation available in times of no wind or sun. Without inter-connected markets, each Member State will need to invest in its own costly backup generation (mostly fossil fuel plants). Connecting electricity markets is the best way to cope with the challenges to switch to renewables generation. Connecting markets can therefore avoid unnecessary investments into backup generation, thereby avoiding emissions and costs. Well-designed capacity mechanisms are needed to safeguard electricity baseload while promoting electricity market integration. In 2015 and 2016 the Commission carried out a first-ever sector inquiry in the State aid area. This inquiry looked into capacity mechanisms that aim at ensuring security of electricity supplies and may be necessary when the market alone does not provide sufficient incentives to invest in the capacity needed to meet peak demand. Subsequent State aid enforcement in this area has resulted in further integration of the Single Market. Member States are required to take into account foreign capacity in their mechanisms. This has an important impact in reducing the competition and trade distortions of the schemes. Member States are also required to commit to make their schemes responsive to demand, which increases competition and reduces the cost of the measures. Overall, between 2014 and 2019, the Commission has approved capacity mechanisms in eight Member States with the majority of those decisions requiring direct participation of foreign capacity. At the same time, the Commission’s decisions prepared the ground for the adoption of the 2019 EU Electricity Regulation that now defines common rules regarding foreign participation in capacity mechanisms to be developed, building on the Commission’s State aid practice in this area. Inefficiencies in energy taxation hinder the achievement of EU objectives. The EU harmonized framework for energy taxation contributes to avoiding double taxation or any distortion of trade and competition between energy sources, energy consumers and suppliers. However, a recent evaluation of the Energy Taxation Directive (ETD) identified overlaps, gaps and inconsistencies in the energy taxation framework that significantly hamper the achievements of EU objectives in the field of energy, environment, climate change and transport. The low level of minimum rates as well as optional tax exemptions granted by Member States in the framework of the ETD might contradict other policy instruments and hamper the good functioning of the Single Market. The mandatory tax exemption concerning international aviation and maritime transport conflicts with EU climate objectives. Transport infrastructure Transport is a key enabler for the EU’s Single Market. In 2018, transport services had a share of 5 % in the EU Gross Value Added. The sector represents 5.3 % of total workforce, about 11.7 million persons (2017). More than 50 % of the employment is in land transport, 15 % in courier services, 4 % in air and 3 % in water transport. Transport enables the free circulation of goods, passengers, services and workers. It ensures economic, social and territorial cohesion, and improves accessibility across the EU. For the competitiveness of a highly interconnected European industry, a well-functioning Single European Transport Area is crucial. The Trans-European Transport Network (TEN-T) in particular aims at ensuring cross-border infrastructure links, which are an essential precondition to complete the Single European Transport Area and to support the free circulation within the Single Market. EU and national transport infrastructure investment is and remains important to improve accessibility across Europe’s regions and their capacity to benefit from the Single Market. In a forthcoming paper, the OECD finds that building new transport infrastructure unlocks trade opportunities. It should lead to more competition which is good for the consumer. The OECD paper states that transport infrastructure traversing a region improves its accessibility, which in turn tends to lead to an increase in the region’s stock of firms, productivity growth, more jobs and higher wages. At the same time, economic activity from less well connected neighbouring regions might be displaced and drawn into the better connected region. The OECD estimates that a 1 %-improvement in accessibility increases GDP by 0.2 %, employment by 0.7 % and regional population by 0.6 %. The economic performance of the Single European Transport Area also depends on competition and market opening for transport service providers across the Single Market. The implementation of the Single Market in transport has achieved different levels of success in different modes. Aviation has been a success story. Air travel has substantially increased since the creation of the EU's Single Aviation Market 27 years ago. The number of daily flights has increased from less than 10 000 in 1992 to around 23 000 in 2016. In addition, passengers now have access to more destinations. In 2017 there were around 7 400 routes compared to less than 2 700 in 1992. The EU also managed to create a strongly competitive market in international road haulage, and there are promising signs in long-distance coach services. The integration of the rail market has for a long time been hampered by fragmented national rules and technical incompatibilities, delaying the transition to this less carbon-intensive public transportation mode. The measures introduced through the 4th Railway Package help the rail sector to complete market opening and improve the interoperability and safety of national networks. For instance, the measures facilitate cross-border rail services by saving firms from having to file costly multiple applications in the case of operations beyond one single Member State. They also ensure that European Rail Traffic Management System (ERTMS) equipment is interoperable and reduce the large number of remaining national rules. Finally, they increase transparency and reduce risks of discrimination against new operators and across transport modes, hindering the migration of users to more sustainable transport options. Digitalisation and the deployment of new technologies in transport contribute to making transport services faster, safer and more efficient. New technologies also mean new skill and regulatory requirements, and changing job profiles facing the workforce in the transport sector. Transport infrastructure still varies considerably across Member States. Road transport performance can be measured as a function of accessibility (number of destinations that can be accessed in a fixed time) over proximity (number of destinations within a fixed geographical radius). The following graph, summarising the findings of a recent European Commission working paper, shows that the transport performance is significantly higher in the Western and Southern EU countries, than in Central and Eastern Europe. Figure 3.5: Accessibility, proximity and transport performance by road per country, 2016 Source: European Commission Overall, the performance of the European transport sector in global comparison is very good. Several EU countries are among the top performers worldwide (e.g. Germany and the Netherlands). Yet, the situation in the EU is heterogeneous and potentially jeopardises transport connectivity in the Single Market. In particular, countries that have joined the EU since 2004 still need to catch up with the performance level of older Member States. At the same time, the weak performers tend to have the highest public investments in transport infrastructure as a share of their GDP. Returns on investments in transport infrastructure often become visible only in the long term. High quality infrastructures are essential to build a modern integrated system that can transport people and goods efficiently, safely and sustainably and strengthens the EU’s global competitiveness. Multimodality remains key for a more sustainable, low-emission, less congested and hence more competitive EU transport system.

The environmental impact of the Single Market There are increasing concerns about sustainability of growth and challenges of climate change. Growth has been resource intensive in the past. The demand for land, water, bio-diversity, mineral and bio-based raw materials stemming from economic activities has tripled since the 70s and is still growing. According to recent estimates, extraction and processing of natural resources account for around 90 % of biodiversity loss and 50 % of greenhouse gasses (GHG) emissions. Increased use of secondary raw materials can significantly contribute to easing this pressure. As a result, the Single Market must be adapted to new realities. The transition towards climate-neutrality, decarbonisation and more circular business models represents an unprecedented challenge for society and for industry. Energy intensive industries operate in a complex environment, often with interlinked value chains, and are exposed to increasing international competition. The recent evaluation of the Energy Taxation Directive concluded that initially the directive made a positive contribution towards achieving its main objectives of ensuring the proper functioning of the Single Market, avoiding double taxation or any distortion of trade and competition between energy sources, energy consumers and suppliers. However, the evolution of technological change, national tax rates and energy markets over the past 15 years has rendered the directive in its present form insufficient to tackle new challenges, including the environmental ones. Therefore, a successful transition to a sustainable growth environment requires that the Energy Tax Directive is revised to take into account the climate challenge. The Circular Economy has opened up new markets, new business opportunities, and given rise to new business models, both domestically and outside the EU. In 2016, circular activities such as repair, reuse or recycling generated almost EUR 147 billion of value added while standing for around EUR 17.5 billion of investments . The systemic transition towards a Circular Economy is expected to promote and support the creation of new circular business models, which can potentially apply to many areas and sectors of the Single Market. However, recycled and remanufactured goods often struggle with recognition and equal treatment with regard to requirements imposed on products placed on the market for the first time. This applies to a wide range of products, from simple reused printer cartridges to advanced and complex articles such as industrial machinery or medical equipment. The Commission has adopted an ambitious Circular Economy Action Plan in 2015 to increase the efficiency of the resource use in the EU. The EU waste legislation has been updated to support more recycling with higher recycling targets for Member States. This aims at substantially increasing the amount of recovered materials placed on the market. However, at present only less than 12 % of overall material use comes from secondary raw materials. In addition, without a harmonized framework for end-of-waste materials, these will not be able to circulate freely on the internal Single Market as easily as the virgin materials which they are intended to substitute. The need for a fully-fledged, well-functioning and harmonised Single Market for secondary raw materials and circular products has been recognized by the Council. Currently, harmonized EU criteria for recovered materials have been adopted only for iron, steel, aluminium, glass cullet and copper scrap. As a result, 55 % of steel manufactured in the EU comes from scrap materials. At the same time, many important waste streams, such as paper, plastic or wood do not benefit from the harmonized approach and their uptake by product manufacturers is severely limited. For instance, the signatories of the Circular Plastics Alliance were able to commit to incorporate only 10 million tons of recycled plastics into products, while 322 million tons of plastic waste is generated annually in the EU. Reaching the objectives of the European Green Deal, including the Circular Economy Action Plan and the Zero Pollution Strategy, as well as other environmental targets, would improve the Single Market performance. Environmental policy matters for the smooth functioning of the Single Market and industrial performance as it can be supportive of structural reforms and sustainable investments. Sector-specific aspects that affect the provision of basic public services indispensable for sustainability and the good functioning of communities and households require special attention. For instance, the functioning of industry value chains and the performance of sectors, such as repair, remanufacturing, recycling or innovative materials, require a better circulation of secondary inputs and products considered as waste in some Member States. However, national conditions, such as waste infrastructure, are often too diverse to allow for the smooth integration of these economic activities in the EU.



Figure 3.6: EU GDP impacts in the circular economy scenarios (% from baseline) Source: European Commission The EU Monitoring Framework for the Circular Economy shows that the transition has helped put the EU back on a path of job creation. In 2016, sectors relevant to the Circular Economy employed more than four million workers, a 6 % increase compared to 2012. Additional jobs are bound to be created in the coming years in order to meet the expected demand generated by fully functioning markets for secondary raw materials. In particular, by moving towards a more circular economy, GDP in the EU is expected to increase by almost 0.5 % by 2030 (see figure 3.6) and jobs by approximately 700 000. This happens mostly through additional labour demand from recycling plants, repair services and rebounds in consumer demand from savings generated through collaborative actions.



The role of standards: improving environmental performance and consumer protection Societal demand for sustainable development is an opportunity for companies to promote Circular Economy processes and new products responding to consumers’ interest in sustainable consumption. However, some harmonisation of the various green labels would be beneficial. Three out of ten citizens come across misleading environmental claims. There are more than 465 environmental labels worldwide, out of which more than 100 are active in Europe, however not all of them are equally reliable. A proliferation of rules, methods, initiatives, and labels can lead to fragmentation. This results in mistrust and confusion regarding the environmental performance of products which hampers a wider uptake of environmentally better products. At the core of the Single Market, standardisation plays a key role to further the EU sustainable development agenda. Standards are voluntary technical specifications. They are essential to steer businesses towards sustainable development goals as they act as bridges linking legal provisions with down-to-earth technical practice. As a second dividend, standards also contribute to competitiveness by reducing production costs and increasing market size. For these reasons, standardisation can help developing innovative products and production process that are based on recent technological progress and contribute to energy efficiency, enhanced recycling, and sustainable production. The clearest examples of the role of standards in promoting the sustainable development agenda are “Ecodesign” and the Energy Labelling policy framework. Priority areas highlighted in recent work programmes concern standards on the environmental impact in transport and energy use (e.g. hydrogen as alternative fuel, batteries sustainability, and tyre performance testing), green shipping, steel production, reduction of plastics waste and chemicals (fertilisers) testing.



Ensuring a good energy and environmental performance of products and processes is already possible thanks to the Single Market, including harmonised standards. The EU Eco-Design and Energy Labelling Directives provide a harmonised methodology to measure and promote best performing products, as well as to phase out from the market the worst performers. The labels and standards bring annual energy savings of around 150 Mtoe (million tonnes of oil equivalent), roughly equivalent to the annual primary energy consumption of Italy. For consumers, this means an average saving of up to EUR 285 per year on their household energy bills. This is supplemented by the EU legislation on ecodesign which sets mandatory minimum requirements for energy efficiency and circular economy for a wide array of consumer and industrial products. This eliminates the least performing products from the market, further contributing to the EU’s energy efficiency objective. Over the years, most of the existing 40 product-specific and horizontal ecodesign and energy labelling regulations have been complemented with one or more corresponding measurement standards. Most of these standards have become harmonised. Since 2009, ecodesign regulations and standards are delivering substantial energy savings and are thus avoiding the associated CO2 emissions. In addition, they are increasing material efficiency savings. The October 2019 package, that includes ten ecodesign and six energy labelling measures, will bring about annual energy savings by 2030 equivalent to the annual electricity consumption of Denmark. In the construction sector, the EU has introduced legislative measures to increase energy performance of buildings as well as labelling requirements on construction products. So far, EDD secondary regulations have been approved for five construction products. In addition, the EED, EPBD and RESD were all enacted in the context of the EU commitment to become a highly energy-efficient and low carbon economy. As buildings enshrine a large energy saving potential, all the three Directives aim – to a greater or lesser degree – at tapping into this potential. In the context of the Construction 2020 Strategy and specifically its thematic objective on resource efficiency, multi-stakeholder cooperation has resulted in awareness raising regarding the treatment of construction and demolition waste and the use of the built environment as a material bank. Circular economy in construction and the built environment offers opportunities not only in the material scale but also in the reuse of equipment, buildings and infrastructures through refurbishment and adaptive reuse. Emerging models with multip