Economic reform: report on the functioning of Community product and capital markets
Date: 2000-01-26
Institutions: European Commission
Subjects: capital market, economic integration, economic reform, report, single market

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 26.1.2000
COM(2000)26 final

Economic Reform: Report on the functioning of Community product and capital
markets

(Presented by the Commission)

TABLE OF CONTENTS

I. INTRODUCTION ............................................................................................................. 7

II. EVALUATING OVERALL MARKET PERFORMANCE .......................................... 9

A. MARKET PERFORMANCE: INTEGRATION CONTINUES TO BE A LEADING ....................
FACTOR FOR IMPROVING MARKET PERFORMANCE .................................................. 9

1. Economic integration: capital markets still lag product markets in terms of
integration .......................................................................................................... 9

- Product markets: trade and foreign investments ................................................... 9

- Capital markets ...................................................................................................10

2. There is a need to foster innovation and creativity in order to improve economic
performance.......................................................................................................11

B. MARKET PERFORMANCE: THE IMPACT OF INTEGRATION ON SOCIAL COHESION AND
CONSUMERS............................................................................................................12

1. Economic and social cohesion has benefited from greater integration .............12

2. The impact of integration on consumer retail prices: there is still scope for
improvement ......................................................................................................13

III. MONITORING HORIZONTAL ISSUES....................................................................14

A. IMPROVING THE BUSINESS ENVIRONMENT.............................................................14

1. Entrepreneurship and regulatory simplification ................................................14

2. Remaining technical barriers to trade ................................................................16

B. IMPROVING THE FUNCTIONING OF MARKETS.........................................................17

1. State aids ............................................................................................................17

2. Public procurement ............................................................................................18

3. Taxation .............................................................................................................19

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IV. FOSTERING ECONOMIC REFORM IN THE INTERNAL MARKET FOR
SERVICES .....................................................................................................................20

A. OPENING AND INTEGRATING SERVICES MARKETS .................................................20

1. Public utilities.....................................................................................................20

2. Financial services...............................................................................................22

B. IMPROVING THE REGULATORY FRAMEWORK FOR SERVICES ACTIVITIES ..............23

1. E-commerce........................................................................................................23

2. Distribution ........................................................................................................24

V. CONCLUSIONS ..............................................................................................................25

Economic Reform: Report on the functioning of Community product and capital markets
Statistical Annexes……………………………………………………………….. ..................28

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Executive Summary

This is the second annual report of the Commission on the functioning of product and capital
markets in response to the mandate from the Cardiff European Council. This Council called
on the Member States and the Commission to produce annual reports on matters within their
sphere of responsibility relating to regulatory reform of product and capital markets. This
process lends impetus to economic reform by providing input for the preparation of the Broad
Economic Policy Guidelines and serves as the basis for Commission proposals to update
target actions included in the Internal Market Strategy. The Cologne and Helsinki European
Councils have recently highlighted the importance of economic reform as a key component of
our employment strategy and our macro-economic stability policy.

This report is presented at a crucial moment for the European economy. In spite of a broadly
favourable global economic environment, Europe faces many challenges as it strives to
improve its overall competitiveness. Flexible, integrated, open markets are a precondition for
sustainable economic growth and long-lasting job-creation. The current economic upturn
provides a window of opportunity to carry out the economic reforms needed to develop
dynamic, efficient markets which encourage innovation and entrepreneurship. Reforms must
be implemented in a manner which recognises the specific challenges of each national
economy.

This report contributes to the process of economic reform in two ways:

it monitors and assesses product and capital market performances to identify

First
regulatory failure at EU level.

Recent trends in trade, investment and capital market integration are examined.

• Trade continues to be a dynamo for market integration.

• Cross-border direct investment and mergers and acquisitions remain the strongest vectors
for structural change in today’s Internal Market. Between 1997 and 1998 alone, the value
of
intra-EU foreign investment doubled. The value of cross-border mergers and
acquisitions between EU firms reached a new level in 1998. This trend shows no sign of
tapering off.

• Capital market integration is accelerating, even if there remains substantial scope for
integration of securities markets. The disappearance of exchange risk has spurred
institutional investors in particular to diversify their portfolio composition by increasing
the share of securities issued by companies in other Member States. Issuers of securities
are seeking to tap the potential for raising capital on an EU-wide basis. Investor’s appetite
for risk is changing and average European credit ratings are falling sharply. New financial
products and markets are emerging in the Union – for example, the total volume of
international bond issues in euros is now practically equivalent to the volume of issues in
US dollars Taken together, these developments herald the emergence of liquid and
this report
modern securities markets, at
highlights a number of legal, administrative and structural obstacles which continue to
fragment EU securities markets.

the service of EU companies. However,

There is further evidence of market integration: retail price convergence is continuing albeit
more slowly than in the early 1990’s. Price dispersion for private consumption between the
EU15 countries has fallen from 22,3% in 1990 to an estimated 14,7% in 1998. However,

4

convergence is not always towards lower price levels. Removal of market entry barriers is
therefore a necessary, but not a sufficient condition for translating integration into improved
market performance. The full play of competition must be sustained by enforcement of
stringent anti-trust policies.

The report also documents the way in which integration has helped the poorest parts of the
Community catch-up with the rest of the EU. The track-record of the peripheral regions of the
EU has disproved the theory that efficiency and social cohesion are contradictory policy
objectives.

Second, the report lists policy prescriptions needed to sustain economic reform.

Policy prescriptions to lighten and improve the quality of the Community’s regulatory
framework and to remove barriers to the efficient functioning of markets are set out. They
include:

•

•

•

•

•

•

•

the recommendation to Member States to reduce the general economic and regulatory
costs of creating new businesses and to review on a systematic basis the existing
regulatory framework with a view to improving its quality;

the proposal to consider the extension of the application of the New Approach to technical
harmonisation to new sectors;

the recommendation to member States to maintain the current overall downward trend in
the volume of State Aids and to make additional efforts to avoid sector specific (and
especially ad hoc) aids;

the full and rapid implementation of the Financial Services Action Plan to encourage
business and investment activities whilst improving the confidence of consumers and
investors, as well as stabilising the financial system;

in the utility sectors, the adoption and full implementation the Community regulatory
framework and the strict enforcement of competition rules;

the creation of a comprehensive framework for the free movement of Information Society
Services and the development of an integrated policy combining government and industry
regulation and rules for consumer protection are needed to enhance consumer trust and
confidence;

the elimination of restrictions impairing reform in the distribution sectors.

Implementation of this set of recommendations will contribute to a thriving entrepreneurial
economy capable of mastering technological progress for the social and economic enrichment
of the continent. The EU and the Member States need to:

1.

take advantage of the favourable current economic context to enhance competitiveness by
introducing economic reforms compatible with economic and social cohesion and other
social objectives;

2. provide the best possible competitive and regulatory environment. Here, public authorities
have three important tasks: 1) to guarantee high levels of market competition, so that the
necessary structural changes do actually impact on competitiveness and improve
consumer welfare; 2) to examine and, whenever necessary, adapt existing regulations to
provide a simple yet high quality regulatory environment; and 3) to ensure the active
participation of all stakeholders in discussions on efficient ways to further integration;

5

3. use Internal Market policies and national country-specific microeconomic policies to
advance economic reform and competitiveness. The Internal Market can serve as a
framework for reversing regulatory deficiencies which stifle competitiveness and growth
on an EU-wide basis.

Sustained economic performance is critical for sustained period of job-creation which is the
only successful and enduring answer to social exclusion. This report signposts the way
towards creating a regulatory climate which is conducive to enterprise-led job-creation. As
such, it forms part of the Commission’s preparations for the special Lisbon European Council
scheduled for March 23 and 24.

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I

INTRODUCTION

This is the second annual report on the functioning of product and capital markets produced
by the Commission in response to the conclusions of the Cardiff European Council of June
1998. According to the mandate from the Council, the report presents indicators of effective
market integration, including price differentials and the implementation of Internal Market
measures, with the purpose of monitoring economic reform efforts at the Community level
and setting out policies which aim to make product, service and capital markets more
efficient. The Commission report, alongside with the national reports produced by Member
States on their areas of competence over product and capital markets, provides input for the
preparation of the Broad Economic Policy Guidelines.

In the year that has elapsed since publication of the first report, the European Council has
repeatedly underlined the importance of product and capital market
reforms and
comprehensive economic reform for macroeconomic stability in the Monetary Union. The
Employment Pact agreed at the Cologne European Council has emphasised the role of the
Cardiff process of economic and structural reform in complementing the Luxembourg process
for employment and the macroeconomic dialogue. The Helsinki European Council has noted
the success of the Employment Guidelines and stressed the major importance of co-ordinating
economic, employment and structural policies to fight unemployment. The Helsinki European
Council confirmed that improving market performance is a key element in the process of
comprehensive reform. The Presidency conclusions stress the importance of economic
reform, and in particular liberalisation and tax reforms, to sustain the favourable economic
outlook. To safeguard and promote competitiveness, employment and living standards in a
world of free trade and constant technological change, Member States and the Community
must redouble their efforts to improve the efficiency of product and capital markets.
Moreover, EMU requires flexible markets capable of adjusting to economic shocks without
loss of jobs and competitiveness.

The European economy’s sound fundamentals and currently favourable economic outlook
provide an especially propitious context for economic reform to tackle some of the structural
problems which have impaired European competitiveness and employment performances in
the past. Low inflation rates, growing investment and income levels and better employment
prospects facilitate the introduction of economic reform. The European Union have a window
of opportunity to undertake structural reforms that can transform Europe into a fast growing
and high employment economy, capable of
responding to the challenges of global
competition. It is time to build on the macroeconomic stability brought about by EMU to
create a dynamic business environment where innovation and creativity thrive and
entrepreneurship can translate investment and technological opportunities into more new jobs,
whilst preserving the values of our society.

Streamlining and improving the process

Reinforcing co-ordination of economic, employment and structural policies is essential to
exploit in full the potential of the Internal Market and the single currency, but the costs of co-
ordination should be kept to a minimum. The ECOFIN Council has produced a report to the
Helsinki European Council reviewing the instruments currently available and the first year’s
experience of economic policy co-ordination in stage 3 of EMU, which has important
implications for the Cardiff process. It enhances the central role of the Broad Economic
Policy Guidelines in Economic Policy co-ordination and emphasises the need to ensure
coherence between the different Council formations. From a procedural point of view, the
most significant change has been the reduction in the number of reports produced by the

7

Commission. The Cardiff I and II reports produced last year will be replaced by this one
single annual report. In addition, the Commission will provide analyses for the peer review
exercise on national economic reform plans conducted in the Economic Policy Committee.
The special meeting of the European Council in Lisbon will reconsider existing arrangements
for economic policy co-ordination.

Adoption by the Internal Market Council of the new strategy for the Internal Market
[COM(1999)624] adds a further new dimension to this report. The results of the monitoring
process reported below and the conclusions of the appraisal of the functioning of product and
capital markets presented here will be the basis for future annual updating of target actions in
this new strategy for the Internal Market. For this reason, the report pays special attention to
certain issues at the core of the Internal Market such as price convergence or the construction
of a Single Market for financial services. This is also in line with the new orientations given
by the ECOFIN Council’s report to the Helsinki European Council.

Objectives and structure of the report

Following the mandate of the Cardiff European Council, this report’s main objective is to
present the most significant results of the monitoring and assessment of product and capital
market performance carried out by the Commission over the last year. This is essential to
identify the most costly obstacles to economic reform in terms of economic efficiency.

The report includes conclusions and recommendations outlining policy measures considered
to remove obstacles to the efficient
necessary to foster economic reform or helpful
functioning of markets. These include new initiatives needed to increase market efficiency or
foster economic reform, as well as already announced policy actions, which according to our
monitoring and assessment
implementation. Formulating precise policy
proposals is beyond the scope of this report. Country-specific economic policy guidelines will
be spelled out in the Broad Economic Policy Guidelines on the basis of input provided by the
national
reports on economic reform submitted by Member States and this report.
Conclusions and recommendations presented here will also feed into the review of target
actions for the Internal Market strategy.

require urgent

The structure and layout of the report builds on the main lines of the Cardiff I Report
approved by the Commission last year and welcomed by the Council. Modifications have
been introduced to take into account suggestions made by the Internal Market Council and
conclusions of the ECOFIN Council evaluation of the first Cardiff exercise carried out by the
ECOFIN. The scope has been broadened to include certain social dimensions of market
performance. Moreover, this year’s edition includes a large set of statistical indicators to
facilitate work in the next stages of the Cardiff process.

The report consists of three main sections. Section II presents an overall assessment of market
performance. It takes into account economic aspects such as market integration, necessary for
an efficient
resource allocation and growth, as well as other dimensions of market
performance, particularly benefits for consumers and economic and social cohesion as defined
in the Treaty. Section III reports the main findings from the monitoring of certain key
horizontal issues for product and capital market performance and economic reform. In
selecting these key issues, the Commission has taken into account the results of last year’s
Cardiff I and II reports as well as the report of the Internal Market Horizontal Questions
Working Group and the synthesis report of the first Cardiff exercise by the Economic Policy
Committee. Finally, section IV is dedicated to fostering economic reform in services. Special
attention to the services sector is justified by its economic importance in terms of employment

8

and value added, the specific problems raised by structural reforms in this sector and the need
to take action at the Community level to open and integrate services markets and improve the
regulatory framework for service activities1.

II.

EVALUATING OVERALL MARKET PERFORMANCE

Economic integration of product and capital markets is improving the performance of the
European economy by increasing market size, reducing costs and fostering competition. Other
economic factors and especially, innovation, creativity, economic and financial integration
need to play a greater role in the globalised knowledge economy of this new century. The
report focuses on these issues for the overall assessment of market performance from an
economic perspective.

A. MARKET PERFORMANCE: INTEGRATION CONTINUES TO BE A LEADING FACTOR FOR

IMPROVING MARKET PERFORMANCE

1.

Economic integration: capital markets still
integration

lag product markets in terms of

- Product markets: trade and foreign direct investment

The Internal Market programme of trade barrier removal and market
liberalisation is
continuing to intensify the integration of Member States’ markets. Since 1993, growth in
intra-EU manufacturing trade has significantly outpaced the growth of GDP. This is all the
more remarkable because manufacturing’s share of GDP has been shrinking (see Fig 1 &
tables 1 & 2). In the area of services, the integration of formerly regulated sectors, the
removal of remaining restrictions to trade and other structural changes often due to
technological change will surely allow for much more trade interdependence.

Trade remains a vital and permanent means of integrating Community markets, but in today’s
Internal Market, cross-border investment and mergers and acquisition activity, especially in
services, are the most dynamic factors driving integration in today’s Internal Market. Between
1997 and 1998 alone, the value of intra-EU foreign investment almost doubled, reflecting a
deliberate firm strategy of growth in order to exploit the profitable potential of market
opportunities, probably due to a large extent to the new impulse to integration provided by
EMU (see table 3).

Cross-border investment is often used to finance mergers and acquisitions (M&As) amongst
firms. Intense merger and acquisition activity is a strong indicator of firms seeking growth in
order to compete in the enlarged EU market, and recent EU M&A activity has been increasing
in intensity (see table 4). The value of cross-border M&As between EU firms in 1998 set a
record, and came on top of a rising trend that shows no sign of running out of steam -
indications so far suggest that 1999 will smash the 1998 record. In other words, there has been
a dramatic increase in the importance of M&As compared to trade as a force for market
integration. The sectoral breakdown of this growing cross-border M&A activity is changing:
services account for an increasing share of the total number deals (53% in 1998 compared to
42% in 1992).

1

The report is accompanied by a working document of the Commission services with analytical
information on capital market
the single market for electricity and price
convergence.

integration, banking,

9

Finally, it is important to note that extra-EU trade has grown faster than intra-EU trade since
1993. In other words, EU markets are integrating rapidly not just amongst themselves, but
also with non-EU markets. This refutes those who saw the Internal Market as an instrument to
build “Fortress-Europe”. A recent OECD study2 has confirmed it showing that the EU’s level
of openness to trade and investment is equal to or higher than the USA’s and far higher than
Japan’s.

Transparent and efficient merger control, both at national and Community level, is essential
to preserve competition whilst providing legal certainty to the firms. Such control should be
based on the strict application of competition rules and be free from domestic industrial
policy considerations. In this context, adopting the Take Over bids Directive is now an urgent
necessity. The European Company Statute could also facilitate the current process of
company expansion. The Commission will continue its vigilance against the emergence of any
new sector-specific obstacles to trade in goods and services.

- Capital markets

Indicators show substantial scope for further capital market
integration in Europe (see
Annex A). For example, European investors hold relatively low percentages of foreign stocks
in their portfolios. Furthermore, capital market integration has not yet reached the point where
it can smooth consumption and so act as a shock absorber mechanism for the business cycle
(see tables 5 & 6).

Nevertheless, things are changing quickly. Removing restrictions to the purchase of stocks
and bonds issued in other Member States and the advent of the single currency have all
spurred institutional investors to internationally diversify their portfolio composition. Issuers
of securities aiming at pan-European markets are benefiting from these new trends: the total
volume of international bond issues in euros is now practically equivalent to the volume of
issues in US dollars (see table 9), and the volume of derivatives contracts traded has
multiplied every quarter since mid-1998 (see table 8). EMU, the elimination of certain
regulatory constraints to create a single market for financial services,
improvements in
settlement mechanisms and, more recently, the implementation of the Financial Services
Action Plan are the main drivers of these structural changes.

Investors’ behaviour is changing accordingly. A more stable macroeconomic environment,
lower interest rates and the single currency seem to have increased the average European
investor’s appetite for risk. The average credit rating on the European corporate bond market
is falling as a consequence of an increase in the number of sub “AAA” rated issuers coming
to the market. This seems to indicate that firms’ access to finance is already improving.
However,
these changes also underline the need to increase transparency and review
supervision rules as called for by the Commission in the Financial Services Action Plan. This
is particularly important for the stability of the system and for individual investors, who have
an increasingly important stake in the soundness of capital markets through their participation
in pension or investment funds and the bond and stock markets.

In this new and favourable framework for capital market development, all firms especially
SMEs should be able to benefit from improved financial conditions. More diverse and
adequate sources of finance must be made available to respond to SMEs’ specific funding
needs. As underlined by the Cardiff European Council, venture capital is an important source
of finance for SMEs. Yet the dimension of European venture capital compares unfavourably

2

OECD, “Trends in market openness”, Economics Department working paper n. 221, August 1999.

10

with the USA3. Most European venture capital investment finances SMEs expansion: only a
minimal proportion is used as seed capital for start-ups which impede the creation or
expansion of new firms with growth potential. In the US, 60% of venture capital comes from
pension funds, whereas even in Europe’s most developed venture capital market, the UK, the
comparable percentage was 30%. Clearly, European institutional investors could play a
significantly greater role in venture capital markets.

Unnecessary regulatory restrictions for institutional investors should be lifted in order to
support the accelerating rate of capital market integration. At the same time, transparency,
supervisory and prudential regulations should be adapted to the new market realities along
the lines proposed in the Action Plan for Financial Services. This is essential to ensure
consumer protection and the stability of the financial system. Initiatives included in the Action
Plan for Financial Services and the proposals recently made by the Commission in this area
[COM(1999)493] should be implemented as soon as possible to improve access conditions to
venture capital, including seed capital, in Europe, especially for SME.

2.

There is a need to foster innovation and creativity in order to improve economic
performance and competitiveness

A better economic performance must be based on innovation and creativity to maximise
growth and employment in the future. Unfortunately, EU industry’s share of total RTD
spending is low by comparison with the USA and Japan (see table 10). Europe’s economic
performance is hampered by low RTD investment rates, fragmented RTD policies among
Member States. RTD spending, technological output (as reflected in patent applications) and
innovation have to be substantially increased to narrow the gap with its world competitors.
The Fifth Framework Programme will provide extra funding for EU R&D. The Commission
communication “Towards a European Research Area” proposes ways to improve co-
ordination and networking to co-ordinate the currently fragmented national systems of RTD
and unleash European RTD potential. However, it is down to the private sector to improve
technological performance.

Increasing expected returns from investment would give industry an incentive to invest in
technology and other forms of intangible capital. Intellectual property rights (IPR) have
always helped foster innovation and creativity, so recent modifications to international IPR
rules should contribute to that end. Improved standards of protection and better world-wide
enforcement of intellectual property rights will
incentives for
innovation and creativity.

increase firms’

further

Improving conditions prevailing in markets where IPR are traded is also essential to foster
innovation and creativity. Estimating the value of all EU markets for IPR is difficult.
International trade in technology accounts for 1 to 2% of GDP in the EU, and much of that
trade is between Member States. Good market performance in those markets will be a key
factor for competitiveness in the new knowledge-based economy.

3

See Commission Communication [COM(1999)493]: “Risk-Capital: Implementation of the Action Plan.
Proposals for moving forward” for further details.

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Existing and announced efforts to foster RTD and integrate the national systems of innovation
should be complemented by Community initiatives to protect intellectual property rights
(patents, utility models, copyright, designs and trademarks) to encourage innovation and
creativity and facilitate trade in the “single market for technology”.

MARKET PERFORMANCE: THE IMPACT OF INTEGRATION ON SOCIAL COHESION AND

B.
CONSUMERS

Social acceptability should also form part of any assessment of market performance, together
with economic aspects. Efficient market outcomes are only socially satisfactory if they
conform with social objectives and values. This report therefore takes into account the
promotion of social and economic cohesion and of consumers’ interests4 5.

1. Economic and social cohesion has benefited from greater integration

The Internal Market epitomises how the economic objectives of market liberalisation and
integration can be perfectly compatible with social values such as economic and social
cohesion in the sense of the Treaty. Economic and social cohesion among European regions
has improved considerably in the key period for the creation of the Internal Market.
According to the “Sixth Periodic report on the social and economic situation and development
of the Regions of the European Union”, GDP per head in the 10 regions with the lowest
income levels increased from 41 to 50% of the Community average between 1986 and 1996.
However, the extent to which there is a direct relationship between these aggregate economic
results and the Internal Market is difficult to establish.

Evidence provided in the Communication on “Structural change and Adjustment in European
Manufacturing” [COM(1999)465] contradicts some economists’ predictions that the Internal
Market would increase the gap between core and “peripheral” EU economies. Contrary to
those predictions, between 1988 and 1998, the geographic concentration of manufacturing
activities across countries has declined (see Fig. 2 & 3). In other words, peripheral and
smaller countries have grown faster than larger Member States. Moreover, the Internal Market
has permitted the exploitation of economies of scale and increasing productivity. Thus, closer
integration in Europe does not seem to have led to a “core-periphery” model at the Member
State level.

Growing integration therefore seems to have helped rationalise EU production and accelerate
growth comparatively more in the less favoured countries of the Union, diversifying their
industrial structures. The process has been underpinned by progressive reduction in the
relative disparities across Member States in the availability of technology, capital and labour.
Therefore, European economic integration does seem to be contributing effectively to the goal
of economic and social cohesion established in the Treaty. This trend needs to be monitored

4

5

Consideration of the environmental impact of market outcomes should also be taken into account. This
year, the Commission adopted a communication [COM(1999)263] dealing with the environment and
the Internal Market. The Council adopted a resolution on the same subject. Environmental issues will be
covered in future reports on the basis of this work. Some environmental aspects of the liberalisation of
the electricity market are briefly mentioned in the corresponding annex.
Another important aspect to consider and better understand is the relationship between labour market
and product and capital market performance, but this is beyond the scope of this report. The existence
of different policy instruments to monitor labour markets and product and capital markets (Luxembourg
and Cardiff) must not however obstruct consideration of their inter-relationships.

12

in the future, especially at the regional level, but data availability and difficulties involved in
measuring these structural changes may prevent reporting on an annual basis.

Improvements in efficiency have been compatible and should remain compatible with a
catching-up process of economic convergence. In the Internal Market strategy,
further
integration of other Community policies such as economic and social cohesion will be
pursued as a strategic objective.

2. The impact of
improvement

integration on consumer retail prices:

there is still scope for

Health and safety, choice, price, quality, accessibility and fair and transparent market
relationships are key dimensions of market performance from a consumer perspective. These
issues will be progressively incorporated in future editions of this report. This year we have
focused on the Internal Market’s effect on prices as a major source of benefits to consumers.

According to Eurostat data, price dispersion for private consumption between the EU15
countries has fallen, from 22,3%6 in 1990 to an estimated 14,7% in 1998. The trend was most
noticeable in tradable goods: food, footwear and household equipment. Price dispersion
remains high in non-tradable sectors such as construction, but it has been reduced in other non
tradable sectors such as recreation, education and culture. The pattern of convergence in
public utilities prices reflects developments in the process of liberalisation: in energy sectors,
where the pace of liberalisation has varied widely across countries, price dispersion is greater
now than in 1990, unlike the telecommunications, where prices have converged quickly
thanks to competition and technology (see tables 11 to 13).

Indirect taxation and fluctuating exchange rates explain a lot of current
levels of price
dispersion. VAT differences account for approximately 20% of price variation in final
consumption (see table 14). Exchange rate fluctuations contributed significantly to widening
price dispersion between 1992 and 1995 (especially in 1995), as Member States with already
relatively low prices experienced significant currency depreciations. As a result, price
convergence seems to stop after 1993. However, EU15 figures for the following three years
when exchange rates were more stable show continuing convergence, albeit slower than
between 1985 and 1995. Moreover, the six Member States least affected by exchange rate
fluctuations in the 1992-95 period display no widening of price dispersion (see table 15).

From the point of view of consumers’ welfare, it is important to examine the level to which
retail prices are converging. In a competitive environment,
integration would lead to
convergence toward lower price levels. In less competitive markets, convergence may be
towards higher price levels. Although it is difficult to ascertain these trends, there is evidence
that in markets where competition is intense, e.g. telecommunications, price convergence is
towards lower prices. However, this has not always the case in all sectors (see Annex B.
Further information can be found in the “EU Economy: 1999 Review” – SEC(1999)1950)).

Evidence on price convergence should be treated cautiously for different reasons. First, the
quality of the data available needs to be improved. Secondly, integration is just one of many
factors having an impact on price convergence. Market competition, the catching-up process
and factors such as efficiency in the distribution sector also drive the evolution of price

6

These figures indicate the coefficient of variation, which measures dispersion as a percentage of the
deviation in prices in all counties with respect to the average price for the EU.

13

dispersion. Therefore, price convergence should be considered a key issue for the process of
economic reform and not just as an indicator of economic integration.

Economic integration is not
the only driver of price convergence and therefore,
comprehensive economic reform is necessary to achieve further price convergence towards
lower price levels in today’s Internal Market. This will require combining national and
Community measures to foster competition, regulatory reform and further integration. Other
measures to enhance price transparency within markets to enable consumers and buyers in
general to bring about price convergence will be important, especially in newly liberalised
sectors. Efficiency improvements in the distribution sector will also play a key role.

III.

MONITORING HORIZONTAL ISSUES

The flexible markets needed by EMU require the elimination of remaining barriers to
integration in product and capital markets. Distortions of competition and obstacles to the
functioning of the Internal Market due to state aids, public procurement practices, regulations
or tax measures should also be removed. Identifying those remaining obstacles and evaluating
their relative impacts are major difficulties of economic reform.

Despite their limitations, summary indicators of economy wide regulation calculated by the
OECD can be useful for that purpose, as they should reflect the friendliness of regulations to
market mechanisms. Moreover, they permit to carry out cross-country comparisons. The
indicators highlight substantial differences across Member States, suggesting the need for
country specific solutions (see table 16).

In terms of overall product market regulation, EU countries seem on average, to perform
worse than the USA, but better than other OECD countries such as Japan or Norway. State
control over the economy (including variables such as government
in the
operation of private businesses or the size of the public enterprise sector) is, according to the
OECD, the main source of regulatory rigidities in the EU. But the EU is not an exception and
other OECD economies such as Korea, Switzerland and, especially, Norway score high
values for this indicator too. Trade and investment barriers are very low for EU countries.
Perhaps the most remarkable results are those provided by the indicator of barriers to
entrepreneurial activity, because differences across European countries are quite significant.

involvement

it

For policy purposes,
is necessary to examine at country and Community levels the
behaviour of the variables behind those summary indicators. Here below, we report on five of
those key issues for the functioning of markets. They have been selected attending to
Commission priorities and the conclusions from the first Cardiff exercise and include
structural issues with a direct impact on the business environment, as well as, policy-related
issues having an impact on market functioning.

A.

IMPROVING THE BUSINESS ENVIRONMENT

1. Entrepreneurship and regulatory simplification

Creating a new firm is still daunting in many Member States: complex economic and
administrative regulation, inadequate financing possibilities, inappropriate bankruptcy and
insolvency rules, limited information and advice, and insufficient training, amongst other
factors are just some of the difficulties inhibiting the creation and development of small
business. The impact is reflected in the overall rate of start-ups, significantly lower than in the
US, as well as in the survival rates of new firms over time. This situation calls for urgent

14

economic and regulatory reforms. Substantial differences in company registration procedures
across Member States (see Fig. 4 & 5) suggest that much can be done to improve the
situation, especially by exchanging examples of best practices such as:
• Establishing one-stop shops

substantially simplified
administrative procedures and the provision of advice and information. Most Member
States have either already established or intend to establish such centres (e.g. Spain’s
“Single Business Window”, Portugal’s Enterprise Formality Centres or France’s “Guichet
Unique”). Some Member States (e.g. the UK) also try to monitor progress after the start-up
phase.

start-ups. These have

for

• Reducing business set-up times. France is making efforts to speed up registration
procedures for new companies, whilst Portugal plans to reduce the period needed to start a
firm up from 6 months to 20 days;

• Reducing bureaucracy. Finland plans to introduce a single registration form. The Dutch
programme “Towards lower administrative costs” has already cut
the number of
regulations affecting business and established just one collection point for all employee-
related data.

€

8.000, but in Germany it is fixed at

Minimum capital requirements to create private limited companies can also be a major barrier
to new enterprise creation, particularly for SMEs. In 10 Member States, there is a minimum
capital requirement of
25.000. Conversely, firms
require no minimum capital in the UK or Ireland. Unfortunately, the European tendency
seems to be to increase minimum capital requirements (e.g. Greece, Finland). Meanwhile,
even if the direct costs of registering a private limited company do not appear prohibitive, the
overall costs (i.e. including fees paid to lawyers, accountants, agents or consultants) can be
420 in
much higher than in the US. Estimates range from
the UK,

3.400 in France,
500.

250 in Ireland. The US average is

300 in Spain and

2.200 in Italy to

€

€

€

€

€

€

€

The Commission is co-ordinating a series of actions with Member States aiming to achieve a
better EU regulatory framework. One way to achieve this objective is to require that proposed
legislation meet certain quality standards and, if appropriate, be subject to a business impact
analysis. Businesses can review a limited number of legislative proposals by participating in
the pilot Business Test Panel scheme.

A second Community initiative, SLIM, aims to simplify and improve the quality of existing
legislation. A recent review of SLIM sees it continuing to play a major role in achieving
better EU regulations provided some refinements are made to enhance transparency, improve
linkages with national exercises, and adopt recommendations faster. The review also
underlined the need to adopt a more focused approach to the question of legislative
simplification, by enhancing the strategic role of SLIM in the Commission’s general
programme of better regulation/regulatory reform. As a result, future SLIM exercises should
be undertaken in response to broad but well defined (better regulation) objectives established
at the Commission level, supported by the Member States.

impact on entrepreneurship and enterprise under one umbrella.

Finally, the BEST Action Plan drawn up in response to the recommendations of the Business
Environment Simplification Task Force (BEST) brings together for the first time the diverse
policy fields that
It
concentrates on the aspects that are most important to SMEs, e.g. new approach in education,
training and the workplace, better access to finance and innovation, and better public
administration.Member States should continue their efforts to reduce the general economic
and regulatory costs of starting new businesses. Systematic reviews of existing regulatory
frameworks should be carried out on a sectoral basis, paying special attention to those

15

sectors subject to specific regulatory regimes. The Commission will review and report on the
effectiveness of existing initiatives to simplify the regulatory environment. The SLIM
evaluation will be presented early this year.

2. Remaining technical barriers to trade

Last year’s report noted that certain technical barriers to trade remain inside the Community.
As foreseen in the Treaty, for sound reasons such as public health or safety, Member States
may sometimes require that products on their markets fulfil certain technical requirements.
However, in certain individual cases different national requirements could obstruct cross-
border trade in a way contrary to the Treaty. There are a number of Community instruments
to eliminate these technical obstacles to trade and their effectiveness needs to be assessed. In
fact, the EU has used three approaches to eliminate technical barriers to trade: application of
the mutual recognition principle in non-harmonised areas; detailed technical harmonisation
(the old approach); and legislative harmonisation limited to the adoption of the essential
requirements with which products put on the market must conform (the New Approach).

The Commission produced last year a Communication [COM(1999)299] and an extensive
first report on the application of the Mutual Recognition Principle in the fields of goods and
services. These documents provide concrete initiatives to be undertaken both by the Member
States and the Commission for a more effective application of mutual recognition7. Mutual
recognition is to be the subject of close monitoring in future biannual reports. As a
complement to that analysis, the impact of the New Approach to harmonisation of technical
regulation of products is briefly considered below.

Trade covered by the New Approach inside the EU has been gradually growing in importance
and now represents about 31% of total manufacturing trade. This suggests that the New
Approach may have been successful in opening up intra-EU trade. There are twenty New
Approach Directives, although two cover over 80% of New Approach trade – one covering
electromagnetic compatibility and one covering the safety of machinery. The first Directive is
becoming steadily more important in terms of the share of New Approach products which it
covers (see Fig. 6 & 7).

Fig. 8 shows the comparative evolution of electromagnetic product exports within the EU
against the evolution of total manufacturing exports inside the EU. The evolution is set at 100
in 1991 because the Directive came into force on 1st January 1992; if the Directive has helped
to facilitate cross-border trade in products incorporating electromagnetic components, then
this could only have arisen subsequently. The first year in which the Directive applied did not
seem to have any significant impact on intra-EU trade for such products. However, after
1993, once standards were available and the Directive was effectively enforced, intra-EU
exports of products covered by the Directive started growing, faster than intra-EU exports of
manufacturing products as a whole.

This does suggest
that the Directive is helping to improve cross-border trade in these
products. Cyclical factors affecting the sector cannot explain this upturn in intra-EU trade as
the investment cycle, a good proxy for internal demand for many of the products covered by
the Directive, shows no special change around 1993.

7

On 28.10.1999,
recognition.

the Council welcomed these commitments and adopted a resolution on mutual

16

Thus, evidence seems to confirm that the New Approach can be an effective instrument to
break down EU cross-border technical trade barriers. However, the effective implementation
of this instrument requires the simultaneous co-existence of three different factors: directives,
standards and effective enforcement.

The Commission and Member States should consider extending application of the New
Approach to new sectors. In cases where it is already applied, the development of standards
and effective implementation of directives is essential.

B.

IMPROVING THE FUNCTIONING OF MARKETS

1. State aids

Overall levels of state aids in Member States are still rather high, risking distortions to
competition in the Internal Market. The EU15 spent an annual average of more than
95
billion per year on aid between 1995-97 (approximately 1,2% of GDP). The trends are
encouraging, but some reasons for concern remain. One encouraging trend is the decline of
state aids as a percentage of GDP since 1990, particularly in Member States where state aids
represented over 1,5% of GDP in 1990. Nonetheless, for some Member States, the downward
trend seems to have halted between the period 1993-1995 and 1995-1997 (see Fig. 9).

€

However, as the Council concluded last year, the composition of state aids, not just their total
volume, need to be examined to clarify their impact on competition in the Internal Market.
State aids can usefully be grouped into three categories:

(1) Regional state aids, including aids granted under Article 87(3)a and c which accounted
for 0,3% of GDP in 1995-1997 (see Fig. 12). In principle, these aids are granted mainly
on equity grounds8.

(2) Horizontal state aids, principally, but not always, intended to foster efficiency in a non-
sector specific way by compensating for market failures (i.e. aids to innovation, energy
savings, SMEs, environment); these aids represented 0,1% of GDP in 1995-1997 (see
Fig. 10).

(3)

Sectoral state aids, aimed at traditional industrial sectors (coal, shipbuilding and steel)
and designed to support investment, these probably have the most distortionary impact
on competition. They represented ca. 0.16% of GDP. If aid to transport services is also
included, sectoral aid represented 0,67% of GDP in the period 1995-1997 (see Fig. 11).

Apart from Ireland where there was an increase in aid to the steel and railways sectors, all
countries have reduced or at least held constant their sectoral aids (as a percentage of GDP).
Some countries (e.g. Denmark) seem to be substituting sectoral by horizontal aids. In Greece,
regional aid seems to be replacing sectoral aid. Nevertheless, sectoral state aids still account
for a large share of all aids, a share which has been resolutely constant between 1990 and
1997. In other words, although the total overall amount of state aids has been declining, the
share of those aids which probably has the worst impact on competition is not changing (see
Fig. 14).

8

In principle, regional state aids should be more important in countries with greater income disparities.
However, as fig. 13 shows, there seems to be no direct correlation between the relative importance of
regional state aids and regional income disparities.

17

Ad hoc state aids may be particularly anti-competitive, so their use is a cause for concern.
They are sectoral aids not covered by any authorised scheme or framework and mainly
intended to accompany restructuring, often in response to short-term necessities. Although
down from 15,3% over 1993-95, overall ad hoc aid still represented some 13% of total
Community aid in the 1995-97 period (when there is a substantial increase in ad hoc aid to
industry in Spain (see tables 17 & 17a). Ad hoc aid to the financial services sector has been
growing steadily since 1993 and increased again by some 11% in 1997. Most of that aid was
granted in France, but Ireland, Italy and Portugal also pursued the same course. These results
are heavily biased by large cases, but future trends should nevertheless be carefully monitored
in view of the key changes currently underway in this sector.

The current overall downward trend in the volume of State Aids should be maintained.
Member States should make additional efforts to avoid sector specific and especially ad hoc
aids. The Commission will pay special attention to the evolution of such aids.

2. Public Procurement

Public procurement is a key area of the Internal Market, both in terms of its economic
importance, and as an instrument of direct economic influence for Member States'
administrations. The public sector’s purchases of supplies, services and (construction) works
are important to the EU economy (estimated at around 14% of GNP or over
1.000 billion in
1998, equivalent to more than half of Germany's GDP). It is therefore vital for the functioning
of the EU economy that public procurement markets are open to EU-wide competition. This
will give taxpayers value for money, improve the quality of the public services they receive
and permit the efficient allocation of resources.

€

Public procurement markets can only be efficient if all the parties involved (purchasers,
suppliers and public authorities) have good, relevant market information. The Commission is
currently discussing with Member States a preliminary set of nine indicators to measure
market trends and the impact of public procurement policy over time in fulfilment of its
commitment in the Communication on public procurement9.

These indicators provide annual estimates of total public procurement, the amount covered by
the public procurement Directives and the amount actually advertised in the Official Journal
as well as the number of entities publishing notices, the number of notices published and the
amount of cross procurement within the EU. Additional indicators will measure the quality of
published notices and compare prices paid by the public sector for the same or similar goods
and services across the EU. The value of these indicators as a measure of market openness can
be seen from the initial estimates for the period 1993-1998.

More than six times as many awarding authorities in the Member States published tenders in
1998 than in 1993. Whereas there were 30.863 invitations published by contracting bodies in
the EU in 1992, by 1998 this figure had risen to 73.688, covering a much wider range of
services, supplies and public works.

The total value of these tenders is difficult to estimate. Each tender awarded should result in
publication of a contract award notice. As some very large individual contracts can often
account for very significant amounts of public procurement, relatively small amounts of
missing data could significantly bias results. Bearing this in mind, the maximum estimated

9

Commission Communication of 11.3.98 [COM(98)143 final] Public Procurement in the European
Union.

18

total value of invitations to tender published in 1993 was
1998 (see Fig. 15 & tables 18, 19, 20 & 21).

€

59 bn, compared with

€

137 bn in

The number of notices published continues to increase, but publication of contract award
notices, as well as the quantity and quality of information they contain, could be substantially
improved. This will increase market transparency, including improved statistics to monitor
the aggregate development of public procurement. It will also be necessary to ascertain
whether increased transparency results in increased effective market competition in public
procurement markets. Developing price indicators for public procurement could usefully
contribute to that end.

As announced in the Communication on public procurement10, the Commission will shortly
present a set of measures to simplify, clarify and improve the functioning of the public
procurement regime. It will also provide indicators to measure market trends and the impact
of public procurement policy over time. The existing legal framework needs to be properly
implemented and enforced11.

3.

Taxation

The Commission has defined and proposed a co-ordinated approach to fight harmful tax
competition and the distortion effects it may have on resource allocation and tax systems in
different countries. On 1st December 1997 the Council agreed this approach, which includes
measures concerning company taxation,
the taxation of savings and the problem of
withholding taxes on cross-border payments of interest and royalties between associated
companies.

In the case of company taxation, the Commission proposed a "Code of conduct" to prevent
erosion of the tax base resulting from harmful tax competition (transfer of tax bases to other
countries). The prevention of the erosion of the tax base represents the medium term
prerequisite to reduce the fiscal burden on our productive system.

In the case of taxation of savings, the Commission has proposed a Directive which aims to
reduce economic distortions in the internal market due to the lack of effective taxation of
some cross-border interest payments within the Community. The proposal is based on the so-
called "co-existence model", which allows each Member State to choose between a
withholding tax of 20% or providing information to other Member States on interest
payments to non-residents. This proposal has no impact on current tax regimes applicable to
residents.

The proposal of a common system of taxation for interest and royalty payments follows the
neutrality principle for taxing capital, already used in the past for parent and subsidiary
companies. In all those cases, withholding tax at source can mean unnecessary financial costs
for companies and even double taxation in some cases.

In the context of the analysis of company taxation and the need to combat harmful tax
competition, the Council asked the Commission to present a study on company taxation by
mid 2000. This study will analyse differences in effective levels of corporate tax in Member
States and identify the main tax provisions that may hamper cross-border economic activity in

10

11

COM(98)143 final, of 11.03.98, Public Procurement in the European Union.
As of October 1999, none of the eleven directives covering public procurement had been implemented
correctly in all of the 15 Member States.

19

the single market. On this basis, an assessment should be undertaken of the effects on the
location of economic activity and investment. The results of this study should permit, on the
one hand, to better identify the influences of the tax basis on the effective levels of company
taxation, and, on the other hand, to highlight the taxation measures which could be proposed
in order
the internal market and hence to the
competitiveness of European firms.

to contribute to the integration of

Administrative co-operation plays a key role in non-discriminatory and single market oriented
tax systems. The main objective to protect national and Community financial interests when
they are under growing threat from fraud is behind the Commission's new proposal on mutual
assistance for the recovery of taxes, which also proposes that direct taxation be included.

Furthermore, the Commission has undertaken a total review of the function of VAT control
and administrative co-operation, which will be presented in the Third Article 14 report (under
regulation 218/1992). Such a function is essential for the competitiveness and neutrality - in
terms of taxation- of the single market and to protect legitimate trade.

Priority must be given to reinforcing the co-ordination of fiscal policies and administrative
co-operation in the tax sphere. This will promote tax systems favourable to employment while
preserving tax revenues and ensure the internal market's optimal performance. In this
context, business taxation has a central role to play. Member States are asked to attach the
greatest importance to the search for co-operative solutions in this field.

IV. FOSTERING ECONOMIC REFORM IN THE INTERNAL MARKET FOR

SERVICES

Services account for an increasing share of EU GDP and employ twice as many people as
industry and agriculture combined. Over the last decade, the sector’s record of growth and job
creation in almost all Member States has exceeded overall economic performance, so that the
share of services in the total economy has grown throughout the EU. Yet, employment in the
services sector in Europe is below US levels. The performance of certain key sectors such as
distribution or financial services is crucial to the European economy and this calls for special
monitoring of these markets12. Continued efforts to integrate and open service markets and
improving the regulatory framework for certain service activities are the main priorities for
the sector.

A. OPENING AND INTEGRATING SERVICES MARKETS

1. Public utilities

Progress in opening these key services to competition continues to reap significant economic
and social dividends. Entry into force by February 19th of Directive 96/92 made 1999 a key
year for liberalisation of Member States’ electricity markets. Only France and Luxembourg
failed to meet the deadline13. Moreover, most Member States have opted for those alternatives
proposed in the Directive leading to the most transparent and open market structures. Member
States have set themselves ambitious market liberalisation targets in terms of market shares
and segments open to competition. However, the ultimate objective for Europe’s energy

12

13

Unfortunately, analytical work is limited by the lack of statistical information. Steps should be taken to
remedy this problem.
Ireland has a 1 year derogation and Greece has a 2 year derogation.

20

markets is not just
liberalisation, but construction of a single European energy market,
although this poses certain additional problems. The economic benefits of liberalisation are
already being felt by business and households in some countries. For instance, in Germany,
Portugal, France, Belgium and Spain, electricity prices (without taxes) for households and
industry have fallen in anticipation of the opening of the sector to competition (see tables 22a
& b and Annex C).

In telecommunications, business and citizens benefit from a generally liberalised framework
since 1 January 1998. The market power of incumbent operators is shrinking in the face of
new entrants and growing competition; as a result, consumers are enjoying declining prices
(business charges down by up to 25%, residential users’ charges down by up to 40% between
1997 and 1999). Interconnection charges and the cost of leased lines are also dropping,
although their absolute level is still too high by international standards. Despite progress
made, the Fifth Report on Implementation of the Telecommunications Regulatory Package
[COM(1999)537] highlights some concerns. Amongst the most important are disparities in
the effectiveness of national regulatory authorities, the minimal harmonisation of Community
licensing and interconnection regimes, poor competition in the local access market and
possible barriers to entry arising from implementation of the regulatory framework for cost
accounting and the financing of universal service obligations (see tables 23 a & b).

The results so far of liberalising air transport are positive: entry has taken place satisfactorily
and there are now more, larger competitors in the market. The number of carriers has
increased from 132 in 1993 to 164 in 1998, the market share of incumbent national carriers
has been declining steadily and the number of routes with more than two operators has trebled
since 1992 (see tables 24 a & b). Liberalisation has brought benefits to consumers in terms of
better services at lower cost. However the trend for fares is not fully satisfactory; promotional
fares have become more widespread, but the more competitive market structure has not always
significantly reduced the prices of fully flexible fares. The Commission's Communication on
the European airline industry [COM(1999)182 final] shows that there are still large differences
in fares per Km across Europe and expresses concern about tariffs on certain routes. A special
monitoring procedure to follow the evolution of tariffs has been set up by the Commission.
The shortage and high cost of airport infrastructure and air space congestion remain the main
bottlenecks to further competition and negatively affect the competitiveness of the airline
industry as a whole. Small and medium sized airlines cannot improve their market positions
faster due to these barriers. Despite regulation 95/93 and Council Directive 96/67/EEC,
different regulatory practices across Member States in slot allocation and other areas such as
ground handling also hinder the development of fully competitive markets. Finally, it is
necessary to complete the single aviation market with a genuine external dimension in order to
eliminate the distortion of the internal market caused by “open skies agreements”.

Opening up the postal sector has been difficult. Directive 97/67/CE was adopted by the
Council laying out tariff principles, defining the framework for the provision of a universal
service and establishing transparency of accounts. By the end of October 1999, eight
countries, Belgium, Denmark, Greece, Finland, France, Italy, Sweden and the United
Kingdom have fully implemented the EU directive. There is partial transposition of the
directive in Germany, Austria, the Netherlands, Portugal and Spain. The Commission is
currently considering how to respond to this situation (see table 25).

There are certain features common to most of these processes.

– First, eliminating traditional structures for service provision often requires creating new
markets not needed in an environment of vertically integrated monopolists. Often, this is a
complex matter due to technical reasons (e.g. electricity generation), the need to use

21

common networks to provide services (e.g. electricity and telecommunication networks, air
traffic control) or the need to allocate scarce resources (e.g. airports). It requires the
development of new market designs to link suppliers and consumers and organise market
activities in the most efficient way.

– A second common feature is the existence of certain bottlenecks in the processes
(examples include network access agreements in telecommunications, air traffic control or
slot allocations at airports). Often, the existence of dominant
incumbents controlling
strategic assets lies at the heart of these problems.

– Thirdly, ensuring universal service obligation is essential to successfully reaching a
socially acceptable market outcome. Sometimes, designing funding arrangements capable
of preserving competition and the need to safeguard all stakeholders’ interests may be
difficult, but socially acceptable solutions should be found.

Member States should adopt and fully implement the Community Regulatory Framework in
the four sectors, but particularly in electricity. Strict enforcement of competition rules and if
necessary, development of the regulatory framework will ensure effective competition in
markets recently opened up to competition. This is essential whenever bottlenecks or the
provision of universal service obligations place incumbents in a privileged competitive
situation. Specific solutions will be devised to tackle special problems such as the monitoring
of air transport tariffs or network access pricing in telecommunications.

2. Financial services

European financial services are changing rapidly and deeply. In banking, a process of
convergence and structural consolidation is underway which is still far from complete.
Increased competition triggered by technological change, developments in the field of
regulation, the process of disintermediation and, more recently, the introduction of the single
currency, are affecting the structure of balance sheets and the performance of the entire
European banking system. Increased competition for savings in lending and deposits markets
have reduced profitability in traditional retail banking activities. However, income from non-
interest paying activities has increased considerably. Increased competition from Euro-
securities markets may reduce the size of corporate banking activities (see Annex D).

European banking profitability compares poorly with the USA, where regulatory reforms in
the second half of the 1990s boosted banking competition and the restructuring of the sector
(see table 27). New opportunities to exploit economies of scale and economies of scope have
driven European banks to consolidate, not necessarily at the expense of competition. The
number of banking sector mergers quadrupled between the mid and late 1990s. During the
first half of 1999, about 25% by value of all completed mergers and acquisitions involved
financial institutions. The focus has mostly been on domestic consolidation and restructuring.
Cross-border
particularly within
Scandinavian, Iberian and Benelux countries. Essentially, banks have been seeking to build
sizeable national groups able to compete in the European market (see table 28).

predominantly

consolidation

regional,

been

has

Technological change and the relative simplicity of certain products facilitates integration of
pan-European retail banking markets, but high fees for cross-border transactions hinder the
process. High cross-border transaction costs are mainly due to the underdevelopment of retail
payment systems across Europe. Changes at the inter-bank and intra-bank levels are necessary
to be able to achieve fully integrated retail payment systems for citizens and business. The
concerted strategy involving the ECSB, EU institutions, the Member States and the private
sector called for by the Commission in its 1999 Financial Services Action Plan is more urgent
than ever to solve this long-standing problem.

22

The market for insurance services is characterised by slow but progressive integration and a
strong move towards concentration. Integration is relatively slow in the life insurance industry
because of differing national taxation regimes. Different tax systems also hinder the creation
of a single market for pension funds. That is why the Action Plan for Financial Services calls
for a better co-ordination of tax arrangements governing supplementary pension provisions. In
addition, the Action Plan advocates eliminating unnecessary national restrictions to pension
funds’ investment activities so as to accelerate European financial market integration.

Increased demand for financial assets other than government bonds is stimulating the markets
for corporate assets, and there is scope for further growth in Europe’s stock markets. The
weight of European stock markets in total world stock market capitalisation was about 25% in
1998, well below the weight of North American exchanges.

Full and rapid implementation of the Financial Services Action Plan is imperative, especially
the following points:
– the development of retail payments systems is essential to facilitate the integration of pan-

European retail banking markets;

– bank governance and control should be strengthened by establishing common standards of

financial reporting throughout the Union;

– the review of national codes or corporate governance foreseen in the Action Plan should

also provide new directions on the possible ways forward;

– it is necessary to review existing arrangements in order to provide sound supervisory
structures adapted to the new market realities of the different segments of the financial
services sector;

– the Commission will put forward a proposal for a Directive on pension funds by mid-2000;
– finally, convergent rules, as proposed in the Action Plan, could facilitate the integration of

European stock exchange markets.

B.

IMPROVING THE REGULATORY FRAMEWORK FOR SERVICES ACTIVITIES

1. E-commerce

E-commerce has the potential to create EU-wide markets in previously non-traded sectors and
for firms previously tied to local markets – if the conditions are right. The provision of high
value-added content over the network, with its advantage in terms of speed and quality
compared to traditional means of dissemination, can be expected to be a major contributor to
the growth of traded on-line services.

The growth rate of e-commerce is highly dependent on competition conditions in the
information technology and telecommunication sectors. Although telecom liberalisation has
reduced tariffs substantially, line rental charges remain relatively high in some European
countries. As regards delivery systems, the level of penetration of ICT in enterprises varies
between countries and is particularly low in SMEs. This, combined with low levels of ICT
literacy, may ultimately be the limiting factor on the growth of e-commerce in Europe.

The 1997 Communication on e-commerce [COM(97)157 final] set out the objective of a
clear, predictable, coherent regulatory framework to allow e-commerce to flourish, whilst
safeguarding legitimate public interest objectives, especially those of consumers. The
development of consumer confidence in the new medium will be crucial for the growth of e-
commerce. Moreover, an adequate and effective intellectual property rights framework is
needed to protect and foster creativity.

23

In November 1998, the Commission adopted a proposed Directive [COM(98)586 final] on
certain legal aspects of electronic commerce in the Internal Market, laying out a regulatory
framework for e-commerce on which the Council reached agreement on a common position
in December 1999. It ensures the free movement of the Information Society services by
clarifying the application of key Internal Market principles (the country of origin principle
and the principle of mutual recognition). The principles established in the Directive apply to
financial services and capital markets, subject
to the very limited exemptions for the
protection of consumers including investors 14.

A coherent legal framework and effective cross-border legal redress need to be complemented
with extra-judicial cross-border redress systems based on transparent and recognised codes of
conduct (which are relatively more accessible to the consumer). Consumers need to be able to
sort out problems with on-line suppliers cheaply and easily. A recognised and trusted web-
trader audit system, entailing the granting of “quality seals”, backed up by a system of low-
cost, effective out-of-court redress would ensure consumer confidence. Such a scheme is not
for the Commission to run or even set up, but
it could support consumer associations
developing such schemes.

Much success has already been achieved in putting in place a comprehensive framework for
e-commerce in the Internal Market – directives covering transparency, legal protection of
conditional access services and electronic signatures have already been adopted.

Creating a comprehensive framework for the free movement of Information Society Services
within the EU requires the effective application of directives that have already been adopted.
In addition, the framework urgently needs completing, through the final adoption of the
directive on certain legal aspects of electronic commerce and that on electronic money.
Moreover, the Council should reach a common position on the IPR and distance selling
(including financial services data protection) proposals for directives. An integrated policy
combining government and industry regulation and rules for consumer protection are needed
to enhance consumer trust and confidence. Market conditions in other sectors having an
impact on e-commerce, such as telecommunications, must be monitored. A new strategy to
solve the problem of the application of indirect taxation in the field of electronic commerce is
required.

2. Distribution

Improving the efficiency of the distribution system is essential for the performance of product
markets. A more efficient and competitive distribution sector could lead to lower prices and a
wider variety of goods and services for consumers. Currently, the sector is characterised by
significant differences in productivity across countries. Enhanced competition and regulatory
reforms could improve its performance. Land-use restrictions for large scale outlets and
opening hours restrictions are two important sorts of regulations that limit competition in the
distribution sector. Recently, progress in achieving greater liberalisation of shop opening
hours has been balanced by a more restrictive stance on the expansion of larger retail outlets.

Planning rules (including planning limitations in inner city areas) can have a number of
impacts on the retail sector’s performance: they reduce the potential gains to consumer
welfare of larger outlets and they reduce innovation effects, especially the development of

14

The European Parliament has recognised the urgent need for this Directive and gave it strong support in
its first reading. A modified proposal was adopted in August 1999 (COM(1999)427 final). The Internal
Market Council of 7th December 1999 has reached a political agreement on a common position on this
directive.

24

modern retail formats. Countries with tight regulations generally have fewer new store
openings (e.g. Italy). There seems to be an increasing tendency to tighten retail planning rules
in traditionally more liberal countries. As a result, fewer large stores are opening in countries
such as Germany and the UK (see table 30).

Restricting opening hours limits consumer choice, but protects small owner-operated shops
which find expanding opening times more difficult (see table 29). Nevertheless, the overall
tendency is for more relaxed rules on opening times, as short opening hours are increasingly
recognised to reduce consumer welfare and conflict with a more general demand for flexible
working hours arrangements. Restrictions on opening hours appear to have softened in
Northern Europe especially, particularly in Denmark, Austria, the Netherlands and Germany.
Increasingly,
local authorities are intervening in deliberations to change
regional or
regulations governing shop opening hours.

National authorities should eliminate restrictions impairing reform in the distribution sectors.
The adoption and implementation of the proposed new Regulation on the application of
Article 81(3) to vertical agreements between producers and distributors should have a
positive impact on distribution.

V.

CONCLUSIONS

1. THE EU SHOULD TAKE ADVANTAGE OF THE FAVOURABLE CURRENT ECONOMIC
CONTEXT TO ENHANCE COMPETITIVENESS BY INTRODUCING ECONOMIC REFORMS
COMPATIBLE WITH ECONOMIC AND SOCIAL COHESION AND OTHER SOCIAL OBJECTIVES

Europe could enter a phase of long-term economic expansion if, by building on the
advantages provided by EMU, economic reforms are undertaken to create a more innovative,
dynamic and better performing economic environment. Our experience in constructing the
Internal Market demonstrates that improvements in efficiency, economic integration and
market competition are compatible with the kind of catching-up process of economic
convergence social cohesion requires; public utility markets can be effectively opened-up to
competition whilst providing affordable services of general interest; the interests of SMEs,
consumers and environmental protection can be preserved and often enhanced by the process
of reform. In the past, Europe has succeeded in associating growth and economic reforms
with an expansion of production, with an increase in prosperity and an improvement in living
standards when the capacity and willingness to change really existed. This is essential to gain
widespread political support for economic reform.

The challenge ahead for Europe will consist in reconciling the needed economic reforms to
improve competitiveness with the maintenance of a high level of employment and the
strengthening of social cohesion. Policies will have to be implemented to make these three
tasks compatible. The Union and the Member States have an opportunity in the special
meeting of the European Council in Lisbon on 23/24 March 2000 to further develop these
issues.

2.

THE EU AND MEMBER STATES SHOULD PROVIDE THE BEST POSSIBLE COMPETITIVE
AND REGULATORY ENVIRONMENT AND BRING TOGETHER STAKEHOLDERS TO DISCUSS
AND FIND EFFICIENT SOLUTIONS FOR FURTHERING INTEGRATION

Efficient markets require a predictable and transparent legal environment. Yet, markets rely
also on unwritten arrangements and practices to minimise transaction costs between suppliers
and users. They constitute the real “economic infrastructure” of markets and are essential for

25

markets to be efficient economic instruments. In some cases, creating a single market implies
they are adapted to their new
reviewing existing market arrangements to ensure that
geographic dimensions. This is clearly the case with new settlement and payment systems for
financial services or the creation of a single market for energy in Europe. In other cases,
notably electronic commerce, entirely new arrangements are needed to create a market ex-
novo. In all these cases, regulation is needed, but additional changes are essential to adapt the
economic infrastructure of markets to the new Internal Market-created conditions. Those
changes can only be introduced by industry or local authorities and private sector initiatives
must play the leading role in developing new and more efficient EU-wide market designs.
Economic reform must start from the grassroots in society. Nonetheless, public authorities
have an important role to play in three areas.

i.

ii.

First, as previous experience in areas such as telecommunications or technical
standardisation proves, the Community has a comparative advantage in acting as a
catalyst for change by bringing together stakeholders to discuss and find efficient
furthering integration. The current Florence initiative to develop
solutions for
integration with minimum public sector
technical solutions for electricity market
interference is an example of best practice in this context.

Second, both national and Community authorities must review current regulatory
arrangements wherever evidence exists of an excessive regulatory burden or
transaction costs hindering market efficiency. Public authorities must strive to provide
a simple yet high quality regulatory environment for consumers, producers and society
in general.

iii.

Public authorities must ensure high levels of competition so that market forces can
lead to efficient market outcomes, translating structural changes into consumer welfare
and enhanced competitiveness.

3. THE EU AND MEMBER STATES SHOULD USE INTERNAL MARKET POLICIES AND
NATIONAL COUNTRY-SPECIFIC MICROECONOMIC POLICIES TO FOSTER ECONOMIC
REFORM AND COMPETITIVENESS

Two main sets of instruments will be needed to carry out the necessary structural reforms in
full respect of the subsidiarity principle:
• Member States should find suitable microeconomic-policy solutions to their specific
structural and economic problems in product, capital and other markets. Just as the Union
has been able to combine cohesion with integration, so should Member States strive to
undertake reforms compatible with their own social values or economic characteristics.
• Economic reform requires reinforcement of the Internal Market as the cornerstone for the
EU’s microeconomic policies. Inclusion of microeconomic policy considerations in the
Broad Economic Policy Guidelines should be complemented by an additional impulse to
economic integration, as EMU demands.

4. A GLOBAL ENVIRONMENT OF MARKET OPENING WILL FACILITATE REGULATORY

REFORM

The potential benefits of EU economic and regulatory reform will be considerably greater if
they take place in a global environment of market opening and regulatory reform, especially
in certain service sectors. In certain areas like air transport, e-commerce or financial services,
the globalisation of competition calls for regulatory convergence at global scale. Europe could
use the leverage it has obtained from opening up significantly to world trade and investment
to foster opening in certain currently heavily regulated world markets – for example, in

26

financial services. Moreover, countries seeking accession to the Union will have to keep pace
with the process of EU economic reform and adapt their market structures accordingly in
order to enable their economies to take full advantage of enlargement.

27

Economic Reform:
Report on the functioning of Community
product and capital markets

Presented by the Commission in response to the
conclusions of the Cardiff European Council

Statistical Annexes

28

EVALUATING OVERALL MARKET PERFORMANCE
MARKET PERFORMANCE: INTEGRATION CONTINUES TO BE A LEADING
FACTOR FOR IMPROVING MARKET PERFORMANCE
Economic integration: capital markets still lag product markets in terms
of integration
Product markets: trade and foreign investments

Figure 1 - Evolution of EU GDP and manufacturing exports

220

200

180

160

140

120

100

Intra-EU12

Extra-EU12

GDP

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Source: COMEXT database - Eurostat

Table 1 – Relative importance of trade in manufacturing and services

Intra-EU manufacturing (exports
as a percentage of GDP)

Importance of manufacturing and services relative
to GDP (sectoral VA as a percentage of GDP)

Ave 88-92

ave 93-97

difference

EU12
B-L
D
DK
E
EL
F
I
IRL
NL
P
UK

11.6%
39.0%
14.4%
14.7%
6.0%
3.2%
10.5%
9.0%
35.1%
29.5%
16.9%
8.1%

13.1%
41.2%
11.4%
16.1%
9.8%
4.3%
11.2%
10.8%
39.7%
30.5%
16.7%
10.4%

1.5%
2.1%
-3.0%
1.3%
3.8%
1.1%
0.7%
1.7%
4.6%
1.0%
-0.2%
2.3%

1993

1997

Manufacturing Services Manufacturing
48.0
53.6
43.6
42.7
51.3
49.5
49.8
51.1
38.3
44.9
45.3
50.3

19.3
18.1
19.9
17.1
18.1
12.0
18.2
20.0
31.4
17.8
22.1
19.7

19.8
18.1
21.7
17.1
17.9
12.9
18.4
20.0
28.8
17.7
22.9
19.7

Services
48.8
54.9
45.7
42.0
51.4
52.3
49.7
51.9
38.8
46.6
43.1
52.2

Source: COMEXT and CRONOS databases – Eurostat

29

Table 2 – Evolution of intra-EU services trade relative as a percentage of GDP

(1992-1997) – Comparison with manufacturing 1997

1992

1993

1994

1995

1996

1997

Intra-EU trade in
manufacturing 1997

A

B-L

D

DK

E

EL

F

FIN

I

IRL

NL

P

S

UK

16.3% 16.9% 16.1% 17.2% 18.2%

18.1% 18.4% 19.7% 16.6% 17.3% 18.3%

4.7%

4.6%

4.5%

4.7%

4.9%

5.0%

:

5.7%

:

6.7%

:

5.2%

:

:

7.5%

9.0%

6.4%

7.4%

5.7%

:

:

8.0%

9.5%

6.1%

7.3%

5.7%

:

:

8.0%

8.4%

4.8%

8.1%

5.9%

:

:

8.5%

8.4%

4.7%

7.7%

5.8%

:

8.6%

5.0%

7.5%

6.0%

15.1% 14.8% 14.7% 14.1% 14.3% 14.9%

:

:

10.5% 10.4% 10.8% 10.7%

9.7%

:

:

:

:

4.5%

4.7%

4.9%

5.2%

5.4%

5.0%

40.8

93.8

25.6

40.0

27.3

17.9

26.8

35.1

22.4

79.8

74.1

45.4

39.5

24.6

Source: COMEXT and CRONOS databases – Eurostat

Table 3 - Foreign direct investment flows in the EU (millions Euros)

FDI by country of destination

Relative importance of FDI flows
(FDI/GDP)

average 1992-98

% of total

average 92-98

A

B-L

D

DK

E

EL

F

FIN
I

IRL

NL

P
S

UK

Source: Eurostat

1443
9008
7274

1269
4230

492

7434

1749
4486
1551

10483

1049
4636
11450

2.2%
13.5%
10.9%

1.9%
6.4%

0.7%

11.2%

2.6%
6.7%
2.3%

15.8%

1.6%
7.0%
17.2%

0.8%
4.1%
0.4%

0.9%
0.9%

0.5%

0.6%

1.6%
0.5%
3.0%

3.4%

1.3%
2.4%
1.2%

30

Table 4 - Merger and acquisitions’ activity

Number of Operations (Sector as target)

Industry

Services

1992

1995

1998*

57.6%

42.4%

54.4%

45.6%

47.4%

52.6%

Evolution in Value (EU, 1992=100)

100

114

256

* first nine months

Source: M&A database

Table 5 – Share of domestic portfolios invested in foreign equities

Capital markets

D
E 1

F

I

UK

1997

18.5

10.2

12.4

19.0

15.3

Average 1990-97

18.8

9.5

9.4

12.7

17.3

1 1996 and 1990-96 for Spain
Source: OECD Financial Accounts Statistics

Table 6.a – “Home bias”: Correlation of real private consumption growth rates,
1961-1998

B

D K

D

E L

E

F

IR L

I

L

N L

A

P

F IN

S

U K

U S

E U -1 5

B

1 .0 0

D K

0 .1 0

1 .0 0

D

0 .5 4

0 .3 4

1 .0 0

E L

0 .5 1

0 .2 7

0 .6 1

1 .0 0

E

F

0 .6 5

0 .2 5

0 .5 6

0 .4 7 1 .0 0

0 .6 3

0 .3 7

0 .5 6

0 .6 3 0 .8 0 1 .0 0

IR L

0 .3 2

0 .1 5

0 .1 3

0 .2 0 0 .2 0 0 .1 1

1 .0 0

I

L

0 .6 4

0 .1 0

0 .4 6

0 .4 7 0 .7 5 0 .7 2

0 .0 8

1 .0 0

0 .4 7

0 .1 4

0 .6 2

0 .3 6 0 .4 6 0 .4 5

0 .1 3

0 .3 2 1 .0 0

N L

0 .6 0

0 .4 5

0 .7 4

0 .6 4 0 .7 0 0 .6 7

0 .3 0

0 .5 4 0 .4 8 1 .0 0

A

P

0 .5 4

0 .0 7

0 .4 7

0 .5 0 0 .6 1 0 .5 1 -0 .0 7 0 .4 3 0 .3 2 0 .4 1 1 .0 0

0 .5 1 -0 .0 8

0 .2 4

0 .1 7 0 .5 5 0 .3 5

0 .1 3

0 .3 7 0 .4 3 0 .3 2 0 .4 6

1 .0 0

F IN

0 .3 7

0 .2 9

0 .3 0

0 .3 2 0 .4 9 0 .5 8 -0 .0 2 0 .4 7 0 .3 8 0 .3 2 0 .2 2

0 .0 8

1 .0 0

S

0 .5 1

0 .4 2

0 .4 5

0 .3 3 0 .7 3 0 .6 3

0 .1 1

0 .6 1 0 .5 3 0 .5 9 0 .2 9

0 .4 1

0 .6 3 1 .0 0

U K

U S

0 .1 9

0 .0 6

-0 .0 4 0 .1 0 0 .2 1 0 .2 3

0 .3 5

0 .1 5 0 .1 5 0 .0 1 0 .0 6

0 .0 6

0 .4 1 0 .2 1 1 .0 0

0 .2 8

0 .5 0

0 .2 8

0 .4 0 0 .3 1 0 .4 3

0 .3 9

0 .1 0 0 .0 3 0 .4 0 0 .2 1 -0 .0 5 0 .2 7 0 .2 7 0 .4 8 1 .0 0

E U -1 5 0 .7 6

0 .3 5

0 .7 5

0 .6 7 0 .8 7 0 .8 8

0 .2 5

0 .8 1 0 .5 8 0 .7 7 0 .5 7

0 .4 3

0 .6 0 0 .7 3 0 .3 6 0 .4 4

1 .0 0

Source: Ameco

31

Table 6.b – “Home bias”: Correlation of real GDP growth rates, 1961-98

B

DK

D

EL

E

F

IRL

I

L

NL

A

P

FIN

S

UK US EU-15

B

1.00

DK

0.51 1.00

D

0.70 0.59

1.00

EL

0.57 0.49

0.59 1.00

E

F

0.73 0.43

0.56 0.58 1.00

0.86 0.53

0.68 0.65 0.82 1.00

IRL

0.01 -0.02 -0.02 0.05 0.01 -0.04 1.00

I

L

0.74 0.39

0.52 0.46 0.69 0.77 -0.12 1.00

0.36 0.28

0.42 0.11 0.24 0.23

0.08 0.13 1.00

NL

0.76 0.57

0.72 0.54 0.56 0.72

0.12 0.55 0.38 1.00

A

P

0.70 0.41

0.68 0.53 0.61 0.72 -0.08 0.59 0.27 0.64 1.00

0.72 0.35

0.57 0.47 0.59 0.74

0.01 0.66 0.23 0.59 0.64 1.00

FIN 0.53 0.34

0.27 0.41 0.48 0.54

0.14 0.41 0.21 0.33 0.42 0.36 1.00

S

0.67 0.47

0.43 0.50 0.61 0.66

0.04 0.59 0.07 0.58 0.42 0.36 0.71 1.00

UK

US

0.32 0.50

0.32 0.38 0.34 0.39

0.10 0.30 0.44 0.38 0.25 0.49 0.40 0.39 1.00

0.29 0.51

0.44 0.38 0.35 0.41

0.03 0.32 0.28 0.43 0.13 0.36 0.20 0.21 0.59 1.00

EU-15 0.88 0.64

0.83 0.69 0.81 0.92

0.01 0.80 0.39 0.80 0.75 0.77 0.55 0.70 0.57 0.52

1.00

Source: Ameco

Table 7 – Total share issues (Initial public and secondary offerings) (million

€

)

1997

3195,1

1484,7

7843,8

830,7

NA

1663,8

17829,0

877,7

5142,8

2269,5

538,2

16688,7

609,5

1832,5

19688,4

80494,3

A

B

D

DK

E

EL

F

FIN

I

IRL

L

NL

P

S

UK
EU-15 1

EU-15

1 excluding Spain

1998

644,6

2462,6

20816,4

2468,6

10095,8

2203,0

26610,1

3017,5

10218,1

1194,3

3332,7

35361,1

3109,0

798,1

15548,6

127784,6

137880,4

% change

-79,8

65,9

165,4

197,2

NA

32,4

49,3

243,8

98,7

-47,4

519,2

111,9

410,1

-56,4

-21,0

58,7

Source: International Federation of European Stock Exchanges

32

Table 8 – Stock indices of Pan-European and national futures markets

Dow Jones STOXX 50 and DAX
Number of traded derivatives contracts

(Daily Average per Quarter)

III.1998 IV.1998 I.1999

II.1999

Futures on

DJ Stoxx 50 1

2229

4973

13685

18790

Futures on

DAX 2

30917

26344

58304

47328

Options on

DJ Stoxx 50 1

834

2113

3775

11117

Options on

DAX 2

130927

122203 126189 117866

1) DJ Euro Stoxx 50 and DJ Stoxx 50

2) including DAX odd lot

Source: Deutsche Börse

Table 9 - International bond issues

International bond issues (in billions of Euro)

EURO

USD

YEN

TOTAL

1997

192.8

454.2

114.2

886.8

1998

285.0

524.3

64.9

1014.7

19991

445.40

516.40

71.73

1033.50

1 Three quarters of 1999

Source: Bank for International Settlements, Quarterly Review, November 1999

33

There is a need to foster innovation and creativity in order to improve economic performance

Table 10 – EU Technological Performance indicators

Gross Expenditure on R&D
(GERD) as % GDP 1997

A

1,52

B

-

D

DK

E

2,31

2,03

0,86

EL

-

F

2,78

FIN

2,23

I

1,08

IRL

1,43

L

-

Annual Growth GERD 1997

2,80

n.a.

2,9

4,20

2,80

n.a.

15

14,30

1
-1,05

7,60

11,20

n.a.

NL

-

1
4,10

P

S

UK

USA Japan OECD EU

0,65

3,85

1,87

2,71

2,92

2,21

1,83

9,40

n.a.

-0,80

5,60

3,90

4,50

2,40

% of GERD financed by industry
1997

Inventiveness (N. of patents per
10,000 inhabitants) 1996

Rate of diffusion
(External/resident patent
applications) 1996

Innovation intensity: Percentage
of Turnover dedicated by
innovative firms to innovation
expenditures 1997-1998

Technology balance of payments:
receipts as a percentage of GERD
1997

Technology balance of payments:
payments as a percentage of
GERD 1997

49,30

-

61,6

50,20

44,7

-

62,90

-

44,30

69,60

-

-

21,10

67,70

49,50

64,30

74,00

62,30

-

2,33

0,88

5,25

2,53

0,59

0,39

4,32

2,25

1,24

2,22

2,14

1,59

0,09

4,72

3,11

4,03

-

5,82

2,62

11,07

26,72

6,76

37,99

8,11

3,39

24,36

9,52

-

9,69

-

37,68

8,87

27,71

12,61

9,46

0,58

4,28

8,01

3,50

2,20

4,1

n.a.

1,80

n.a.

4,30

3,9

n.a.

3,30

n.a.

3,80

n.a.

7

3,20

n.a.

n.a.

n.a.

3,80

5,97

16 23,96

87,48

21,95

2
72,17

28,19

-

-

17

20,47

23,40

-

-

1,76

1
6,71

9,30

1
14,34

1
3,41

2
14,24

-

-

-

-

18

97,60

33,20

4,61

2
18,86

15,89

5,62

3
96,50

92,37

0,71

15,72

4,44

2,96

Source : STI, OCED and Eurostat, Community Innovation survey, Statistics in Focus.

15

16

17

18

Data for 1996
Data for 1995
Data for 1993
Data for 1992

34

MARKET PERFORMANCE: THE IMPACT OF INTEGRATION ON SOCIAL COHESION
AND CONSUMERS

Economic and social cohesion

Figure 2 - Production and trade specialisation: 1988 to 1998 - (share of the largest five
sectors)

Production

1988

1998

Belgium

Trade

1988

1998

B elgium

United Kingdo m

De nm ark

United Kingdom

Sweden

Finland

Portugal

75

50

25

Denmark

Germany

Swe den

Greece

Finland

Spain

P o rtuga l

75

50

25

Germa ny

Greece

Spa in

Austria

France

Aus tria

France

Netherlands

Italy

Ireland

Netherlands

Italy

Ireland

Source: WIFO calculations using SBS and COMEXT

Figure 3 - Geographic concentration of production and exports

C o r e v e r su s p e r ip h e r y

1 9 8 8

1 9 9 8

C o r e

P e rip h e r y

C o r e

P e r ip h e ry

S h a re o f v a lu e a d d ed

S h a re in ex p o rts

H ig h in c o m e v e r s u s lo w in c o m e

7 0

6 0

5 0

4 0

3 0

2 0

1 0

0

6 0

5 0

4 0

3 0

2 0

1 0

0

H ig h

M id d le

L o w

H ig h

M id d le

L o w

S h a re o f v a lu e a d d e d

S h a re in ex p o rts

Source: WIFO calculations using SBS and COMEXT

35

The impact of integration on consumer retail prices

Table 11 - Trends of after-tax price dispersion 1985-1998 (standard deviation)

CATEGORY

1985

1991

1992

1993

1994

1995

1996

1997

1998

Private final consumption

21,9

18,8

18,8

15,9

16,4

18,1

16,0

14,8

14,7

Construction

19,2

22,1

20,7

21,4

22,0

22,5

21,8

23,3

23,9

Machinery and equipment

9,1

6,2

7,8

6,8

8,5

9,3

7,8

6,1

6,7

Source: 1985-1997 Eurostat; 1998 DG Internal Market estimates

Table 12 - Price dispersion in the EU15: Broad categories, 1990-1998

(co-efficient of variation)

1990

1991 1992 1993 1994 1995 1996 1997 1998

Private final consumption

0,21

0,19

0,18

0,16

0,16

0,18

0,16

0,15

0,15

Food, beverages, tobacco

0,26

0,21

0,21

0,17

0,18

0,17

0,16

0,17

0,17

Clothing and footwear

0,16

0,12

0,12

0,14

0,11

0,14

0,13

0,08

0,08

Gross rents, fuel and power

0,30

0,29

0,30

0,28

0,28

0,29

0,26

0,25

0,25

Household equipment and operation

0,16

0,17

0,13

0,11

0,12

0,14

0,10

0,08

0,08

Transport and communication

0,17

0,16

0,15

0,14

0,18

0,17

0,16

0,15

0,15

Recreation, education and culture

0,22

0,17

0,16

0,13

0,14

0,17

0,16

0,11

0,10

Construction

0,19

0,22

0,21

0,22

0,23

0,23

0,22

0,23

0,24

Machinery and equipment

0,06

0,06

0,08

0,07

0,08

0,09

0,08

0,06

0,07

Source: 1990-1997 Eurostat; 1998 DG Internal Market estimates

36

Table 13 - Price dispersion in the EU15: detailed sectoral split 1990-1998

(co-efficient of variation)

1990 1991 1992 1993 1994 1995 1996 1997 1998

Food

Bread and cereals

0,31

0,26

0,25

0,20

0,22

0,20

0,18

0,17

0,16

Meat

Fish

0,26

0,22

0,23

0,20

0,21

0,20

0,19

0,18

0,19

0,18

0,18

0,14

0,14

0,14

0,18

0,17

0,16

0,16

Milk, cheese and eggs

0,14

0,15

0,12

0,08

0,09

0,10

0,10

0,12

0,12

Oils and fats

0,37

0,25

0,28

0,22

0,22

0,13

0,11

0,15

0,15

Fruits, vegetables, potatoes

0,23

0,21

0,21

0,20

0,20

0,19

0,19

0,18

0,18

Other food

0,20

0,17

0,20

0,17

0,18

0,15

0,14

0,14

0,13

Beverages

Non-alcoholic beverages

0,36

0,33

0,25

0,19

0,21

0,24

0,25

0,36

0,35

Alcoholic beverages

0,59

0,44

0,40

0,31

0,34

0,36

0,37

0,29

0,29

Clothing and footwear

Clothing including repairs

0,17

0,12

0,12

0,14

0,12

0,15

0,14

0,07

0,07

Footwear including repairs

0,19

0,18

0,17

0,20

0,13

0,15

0,12

0,12

0,12

Gross rents, fuel and power

Gross rents

Fuel and power

0,37

0,38

0,37

0,33

0,33

0,34

0,31

0,30

0,30

0,13

0,11

0,15

0,17

0,17

0,18

0,17

0,17

0,17

Household equipment and operation

Furniture, floor coverings and repairs

0,14

0,10

0,12

0,08

0,09

0,13

0,10

0,09

0,08

Household textiles and repairs

0,25

0,27

0,27

0,26

0,18

0,20

0,17

0,16

0,17

Household appliances and repairs

0,14

0,09

0,07

0,13

0,12

0,16

0,14

0,10

0,10

Other household goods and services

0,27

0,24

0,21

0,15

0,17

0,17

0,16

0,15

0,15

Transport and communication

Personal transport equipment

0,26

0,24

0,24

0,22

0,19

0,21

0,20

0,19

0,19

Operation of transport equipment

0,21

0,21

0,18

0,16

0,16

0,18

0,17

0,16

0,16

Purchased transport services

0,26

0,27

0,27

0,27

0,28

0,27

0,27

0,27

0,26

Communication

0,35

0,34

0,30

0,31

0,30

0,18

0,19

0,18

0,18

Recreation and culture

Recreational equipment and repairs

0,18

0,13

0,09

0,10

0,12

0,14

0,13

0,10

0,10

Recreational and cultural services

0,28

0,25

0,23

0,21

0,20

0,20

0,18

0,13

0,13

Books, newspapers, magazines

0,27

0,22

0,17

0,14

0,15

0,18

0,18

0,18

0,17

Source: 1990-1997 Eurostat; 1998 DG Internal Market estimates

37

Table 14 – Estimated EU15 pre-tax price dispersion, 1990-97 (coefficient of variation)

with indirect
taxes

without
indirect taxes

Private final consumption

Food, beverages, tobacco

Food

Beverages

Tobacco

Clothing and footwear

Gross rents, fuel and power

Household equipment and operation

Transport and communication

Communication

Recreation, education and culture

0,15

0,17

0,14

0,36

0,32

0,08

0,25

0,08

0,15

0,18

0,11

0,13

0,14

0,11

0,26

0,31

0,09

0,24

0,07

0,12

0,19

0,09

Source: Eurostat and DG ECFIN

Table 15 - Price dispersion in 6 countries (Austria, Belgium, Denmark, France, Germany,

Netherlands) with relatively stable bilateral exchange rates (coefficient of
variation)

1990

1991

1992

1993

1994

1995

1996

1997

1998

Private final consumption

Food, beverages, tobacco

Food

Beverages

Tobacco

Clothing and footwear

Gross rents, fuel and power

Household equipment and operation

Transport and communication

Communication

Recreation, education and culture
Construction*
Residential buildings*

Non-residential buildings*

Civil engineering works*

Machinery and equipment

Transport equipment

Non-electrical machinery

Electrical machinery

0,11

0,14

0,10

0,25

0,29

0,10

0,10

0,09

0,15

0,27

0,10

0,09

0,13

0,12

0,06

0,06

0,11

0,08

0,08

0,10

0,13

0,10

0,23

0,31

0,07

0,09

0,09

0,14

0,27

0,09

0,10

0,11

0,12

0,16

0,06

0,19

0,06

0,04

0,10

0,14

0,11

0,20

0,27

0,07

0,10

0,09

0,13

0,27

0,08

0,13

0,11

0,10

0,14

0,09

0,20

0,07

0,08

0,09

0,12

0,11

0,14

0,21

0,07

0,08

0,04

0,11

0,24

0,07

0,09

0,10

0,09

0,08

0,05

0,10

0,05

0,06

Source: 1990-1997 Eurostat; 1998 DG Internal Market estimates

0,07

0,12

0,11

0,15

0,19

0,06

0,06

0,04

0,10

0,24

0,06

0,09

0,14

0,09

0,07

0,08

0,12

0,09

0,06

0,07

0,12

0,10

0,17

0,19

0,06

0,07

0,05

0,10

0,14

0,08

0,07

0,10

0,07

0,05

0,08

0,08

0,09

0,05

0,07

0,13

0,12

0,18

0,20

0,07

0,10

0,04

0,10

0,17

0,09

0,07

0,11

0,10

0,06

0,07

0,14

0,07

0,08

0,09

0,14

0,13

0,20

0,19

0,06

0,11

0,04

0,10

0,18

0,08

0,08

0,11

0,11

0,06

0,06

0,06

0,07

0,07

0,09

0,15

0,13

0,21

0,18

0,06

0,11

0,04

0,10

0,18

0,08

0,08

0,11

0,11

0,06

0,06

0,07

0,08

0,07

* Excluding France due to a break in the time series

38

MONITORING HORIZONTAL ISSUES

Table 16 - OECD Summary Indicators of economy-wide regulation in 1998

State
control

Barriers to
entrepreneurial
activity

Barriers to trade
and investment

Summary
indicator of
Product
market
regulation

EU COUNTRIES

2,92

1,83

1,36

1,98

A

B

D

DK

E

EL

F

FIN

I

IRL

NL

P

S

UK

2,6

3,4

1,7

3,1

3,4

4

3,6

3,3

4,4

1,3

3,2

3,5

2,8

0,7

OTHER OECD COUNTRIES

2,90

Australia

Canada

Czech Republic

Hungary

Iceland

Japan

Korea

Mexico

New Zealand

Norway

Poland

Switzerland

Turkey

United States

2,3

1,5

4,7

3,7

1,5-5,0

2,6

2,9

1,4

2,2

4,4

4,0-5,7

3

2,3-3,6

0,9

1,8

2,6

2,3

1,4

1,5

1,6

2,7

2,2

2,3

1,4-2,0

1,6

1,0-1,6

2,1

0,6

1,81

1,6

1,0-1,6

0,7-2,9

0,4-2,6

1,4-4,1

2,2

1,3-3,5

0,9-3,1

1,3

1,0-1,6

0,3-3,1

2,4

1,5-3,6

1,6

1,2

1,4

1,2

1,3

1,3

1,7

1,2

1,3

1,2

1,1

1,2

2,3-2,5

1,5

1,1

2,33

1,7

2,7

2,5-4,7

0-2,2

1,9

3

1,9-4,1

3,6

1

2,1-3,4

1,8-4,0

1,8

2,4

1,2

1,8

2,4

1,7

1,9

2

2,4

2,4

2,2

2,5

1,3-1,4

2

2,3-2,9

2,1

0,8

2,38

1,9

1,8-2,0

2,6-4,2

1,2-2,8

1,6-3,5

2,6

2,0-3,6

2,1-2,8

1,5

2,5-3,2

2,0-4,3

2,4

2,1-3,1

1,2

Source: OECD - "Cross-Country Regulation Patterns and their Implications for Sectoral Performance: A

Progress Report" - ECO/CPE/WP1(99)16) - 1 October 1999.

39

IMPROVING THE BUSINESS ENVIRONMENT
Entrepreneurship and regulatory simplification

Figure 4 – Time needed to register a company

s
k
e
e
w
n

i

n
o
i
t
a
r
u
D

30

25

20

15

10

5

0

Kingdom

Luxembourg
Denmark

United

Sweden
USA

Ireland

Finland

Belgium

Portugal

France

Austria

Greece
Netherlands

Germany
Italy

Spain

Source: Logotech study (“International comparison of the formal requirements and administrative

procedures required for the formation of SMEs – 1997) and Commission

Figure 5 - Total number of procedures necessary to register a company

30

25

20

15

10

5

0

Denmark

Luxembourg
United

Kingdom

USA

Belgium

Finland

Sweden

Netherlands
Ireland

Austria

Germany

Portugal

France

Spain

Italy

Greece

Source: Logotech study (“International comparison of the formal requirements and administrative

procedures required for the formation of SMEs – 1997) and Commission

40

Remaining technical barriers to trade

Figure 6 - Evolution of intra-EU12 manufacturing and NA trade

260

240

220

200

180

160

140

120

100

New Approach

Total manufacturing

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Source: COMEXT

Figure 7 - Share of intra-EU12 manufacturing trade covered by the New Approach,
Detailed Harmonisation and the Principle of Mutual Recognition

45.0%

40.0%

35.0%

30.0%

25.0%

20.0%

NA
Det Har
MRP

8
8
9
1

9
8
9
1

0
9
9
1

1
9
9
1

2
9
9
1

3
9
9
1

4
9
9
1

5
9
9
1

6
9
9
1

7
9
9
1

8
9
9
1

Source: COMEXT

Figure 8 - Products affected by Directive on Electromagnetic compatibility,
evolution of trade (1991=100)

intra-EU elmag

intra-EU manuf

EU invest

200.0

150.0

100.0

50.0

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Source: COMEXT

41

IMPROVING THE FUNCTIONING OF MARKETS

State aids

Figure 9 - Total State Aids as a percentage of GDP

3,00%

2,50%

2,00%

1,50%

1,00%

0,50%

0,00%

Austria

Belgium

Denmark

Germany

Spain

Finland

France

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Sweden UK

1990

1995

1996

1997

Source: European Commission - Directorate General Competition

Figure 10 - Horizontal State Aids as a percentage of GDP

0,6%

0,5%

0,4%

0,3%

0,2%

0,1%

0,0%

Austria

Belgium

Denmark

Germany

Spain

Finland

France

Greece

Ireland

Italy

1990

1995

1996

1997

Luxembourg

Netherlands
Portugal

Sweden
UK

Source: European Commission - Directorate General Competition

42

Figure 11 - Sectoral State Aids as a percentage of GDP

1990

1995

1996

1997

2,0%

1,8%

1,6%

1,4%

1,2%

1,0%

0,8%

0,6%

0,4%

0,2%

0,0%

Austria

Belgium

Denmark

Germany

Spain

Finland

France

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Sweden

UK

Source: European Commission - Directorate General Competition

Figure 12 - State Aids granted for regional purposes

1,2%

1,0%

0,8%

0,6%

0,4%

0,2%

0,0%

Austria

Belgium

Denmark

Germany

Spain

Finland

France

Greece

Ireland

1990 1995 1996 1997

Source: European Commission - Directorate General Competition

43

Italy

Luxembourg

Netherlands

Portugal

Sweden UK

Figure 13 - Regional income disparities in Member States and the use of regional
State Aids - 1996

)

P
D
G

l
a
n
o
i
t
a
n
f
o
%

(
s
d
i
a
e
t
a
t
s
l

i

n
a
o
g
e
R

0,8

0,7

0,6

0,5

0,4

0,3

0,2

0,1

0

EL

P

I

D

FIN

S

NL

UK

E

0

5

10

15

20

25

B

F

A

30

35

G D P per head - R egional disparity (standard
deviation)

Source: Eurostat and Directorate General for Competition

Figure 14 - Total EU state aids divided by objective (percentage of total)

Source: European Commission - Directorate General Competition

100%

50%

0%

1990 1995 1997

Sectoral
Horizontal

Regional

44

Table 17 – Ad-hoc State aid in manufacturing, financial services and air transport

1992

1993

1994

1995

1996

1997

Million
Euros

Million
Euros

% of
total
aid

% of
total
aid

Million
Euros

% of
total
aid

Million
Euros

% of
total
aid

Million
Euros

Million
Euros

% of
total
aid

% of
total
aid

Manufacturing

2422

6

5236

12

4353

11

3352

8

3663

10

3522

10

Treuhand aid*

5161

13

8774

20

10918

26

6623

16

4796

13

3602

10

Financial
services

Air transport

795

97

480

1920

2069

1924

2776

3082

974

805

Total

7583

14902

17671

13968

11909

11011

*

aid in Germany given via the Treuhandanstalt
Sonderaufgaben (BvS)

(THA) or

the Bundesanstalt

für vereinigungsbedingte

Source: European Commission - Directorate General Competition

Table 17a - State aid on an ad-hoc basis and Treuhand aid awarded in the
manufacturing, financial services and air transport sectors in the Member States -
annual averages 1993-1995 and 1995-1997

1993 – 1995

1995 - 1997

in Million
euros
-
30
9865
0
726
100
2538
-
1813
75
-
40
299
-
-
15487

A
B
D
DK
E
EL
F
FIN
I
IRL
L
NL
P
S
UK
EUR 12/15

in percent

-

64
0
5
1
16
-
12
0
-
-
2
-
-
100

in Million
euros
48
3
5632
0
1391
0
3372
-
1614
37
-
37
261
-
-
12396

in percent

0
0
45
0
11
0
27
-
13
0
-
-
2
-
-
100

Source: European Commission - Directorate General Competition

45

Improving the functioning of markets
Public Procurement

Figure 15 - EU trends

Total Public Procurement

1993

1994

1995

1996

1997

1998

Value of calls for tenders published in the Official
Journal.

1 200

1 000

800

600

400

200

0

160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00

1993

1994

1995

1996

1997

1998

Number of Calls for Competition Published.

80000.00

60000.00

40000.00

20000.00

0.00

1993

1994

1995

1996

1997

1998

Source: European Commission DG Markt

DG MARKT

46

Table 18 - Total Public Procurement (in

€

billion)

A
B
D
D K
E
E L
F
F IN
I
IR L
L
N L
P
S
U K
T o ta l

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

0 .0 5
1 .5 0
9 .2 9
2 .2 8
4 .3 7
2 .7 4
8 .3 0
0 .0 2
7 .4 3
0 .6 8
0 .1 2
2 .2 7
1 .2 5
0 .2 1
1 8 .4 3
5 9 .0 0

0 .5 8
1 .7 1
1 3 .7 6
3 .1 4
4 .3 8
4 .4 5
8 .9 6
0 .7 8
9 .2 6
0 .6 4
0 .0 9
2 .8 7
1 .1 4
3 .3 8
2 5 .9 4
8 1 .0 0

1 .4 9
2 .1 0
1 7 .1 0
3 .6 7
5 .2 7
4 .1 8
1 1 .1 8
1 .2 9
1 0 .3 1
0 .7 8
0 .1 1
3 .1 5
1 .8 1
4 .4 2
2 8 .2 3
9 5 .0 0

2 .5 0
2 .3 7
1 9 .0 8
3 .1 3
6 .7 9
4 .7 8
1 4 .5 0
1 .5 5
1 1 .6 6
1 .2 1
0 .1 6
3 .4 0
2 .2 7
4 .7 6
3 0 .0 3
1 0 8 .0 0

2 .4 0
3 .3 8
2 0 .3 8
3 .2 9
7 .2 5
5 .8 3
1 8 .0 0
1 .4 7
1 3 .9 5
1 .6 5
0 .2 1
3 .7 4
2 .0 6
5 .0 2
3 8 .2 8
1 2 7 .0 0

2 .7 7
4 .4 3
2 1 .5 4
3 .5 2
7 .8 5
6 .3 9
2 3 .5 4
1 .6 9
1 3 .9 2
1 .5 0
0 .3 5
3 .6 9
2 .1 6
5 .2 6
3 8 .2 7
1 3 7 .0 0

Table 19 - Value of calls for tenders published in the Official Journal (in

€

billion)

A
B
D
DK
E
EL
F
FIN
I
IRL
L
NL
P
S
UK
Total

1993

1994

1995

1996

1997

1998

60
553
7 360
859
1 538
922
5 773
16
4 855
278
86
627
474
122
7 340
30 863

590
711
10 554
1 180
1 863
1 128
7 106
468
6 647
379
72
986
667
1 664
9 692
43 707

1 378
856
12 543
1 566
3 093
1 225
9 329
751
7 533
505
86
1 115
926
2 273
10 622
53 801

2 231
1 109
14 038
1 298
4 134
1 352
12 008
851
7 933
652
107
1 281
1 138
2 327
10 568
61 027

2 187
1 594
15 190
1 294
3 980
1 534
14 985
822
8 445
750
141
1 406
1 167
2 372
11 377
67 244

2 488
2 187
15 939
1 334
4 156
1 680
19 691
894
8 068
792
199
1 379
1 291
2 529
11 061
73 688

Table 20 - Number of calls for competition published

A
B
D
DK
E
EL
F
FIN
I
IRL
L
NL
P
S
UK
Total

1993

1994

1995

1996

1997

26.33
15.55
269.81
16.86
55.42
9.95
124.40
9.91
103.51
4.80
1.71
31.37
9.22
25.19
178.19
882.00

28.26
16.49
280.67
18.02
53.55
9.98
124.34
11.32
99.73
5.38
1.67
32.38
9.35
30.46
203.62
925.00

28.70
16.41
293.81
19.65
53.74
11.87
125.10
12.79
92.55
5.71
1.80
33.87
10.14
30.81
205.71
943.00

29.33
15.84
294.06
21.31
52.78
12.60
124.03
13.33
103.71
6.02
1.87
34.47
11.53
35.95
214.35
971.00

30.30
17.29
281.53
22.18
53.29
13.47
123.17
14.66
107.51
7.01
1.84
34.76
13.45
36.60
241.08
998.00

1998

33.06
17.82
282.53
23.31
56.39
14.31
125.41
14.93
114.12
7.95
1.94
36.94
13.91
34.47
276.55
1054.00

Source: European Commission Directorate General for the Internal Market

47

Table 21 - Number of entities publishing

A
B
D
DK
E
EL
F
FIN
I
IRL
L
NL
P
S
UK
Total

1993

1994

1995

1996

1997

1998

45
117
310
49
35
239
32
183
13
77
64
148
n/a
n/a
802
2 115

196
429
2 423
214
264
1 537
114
937
25
331
166
171
129
612
1 640
9 189

215
623
2 727
338
393
1 988
109
1 177
32
465
286
170
254
665
1 607
11 049

236
551
2 972
338
487
2 657
113
1 229
34
478
373
203
236
596
1 702
12 203

404
470
2 995
381
547
3 017
123
1 193
38
509
314
223
274
542
1 720
12 750

419
527
3 114
396
715
3 186
130
1 276
40
573
413
236
270
606
1 694
13 595

Source: European Commission Directorate General for the Internal Market

48

FOSTERING ECONOMIC REFORM IN THE INTERNAL MARKET FOR SERVICES – Opening and integrating services markets - Public
utilities

Table 22.a - Telecommunications Transposition of Harmonisation Directives and Universal Service Obligation

Country

ONP Framework

Leased Lines

New Voice
Telephony

Licensing

Interconnection

Numbering

Data Protection

Universal Service Obligation

90/387/
EEC

Amended
by 97/51/EC

92/44/
EEC

Amended
by 97/51/EC

98/10/EC

97/13/EC

97/33/EC

98/61/EC

amending
97/33/EC

97/66/EC

A

B

D

DK

E

EL

F

FIN

I

IRL

L

NL

P

S

UK

ST

ST

ST

ST

ST

ST

ST

ST

ST

ST

ST

ST

ST

ST

ST

PT

ST

ST

ST

ST

1

ST

ST

ST

ST

PT

ST
1

ST

ST

ST

PT

ST

ST

ST

ST

ST

ST

ST

ST

PT

ST
1

ST

ST

ST

PT

ST

ST

ST

1

ST

ST

Not

transposed

ST

ST

ST
1

ST

ST

ST

PT

ST

ST

ST

1

ST

ST

Not

3
Transposed

ST

PT

ST

PT

ST

ST

ST

PT

ST

ST

ST

1

ST

ST

PT

ST

ST

ST

ST

ST

ST

ST
1

ST

ST

ST

1

ST

ST

ST

ST

PT

ST

ST

ST

ST

ST

ST

ST

ST

ST

1

PT

PT

PT

ST

ST

ST

ST

ST

2

ST

PT

ST

PT

ST

No funding arrangements

Royal Decree to be adopted by

end 1999

No funding mechanism. High

levels of consumer satisfaction
reported

No common financing system

Financing mechanisms set out in

1998

Not transposed

No funding mechanism

PT

ST

ST

Entrants have to contribute to

finance USO

No common funding mechanism

Yearly assessment of need to

share costs

Not transposed

No financing mechanism yet

Not transposed

No shared funding mechanism

PT

ST

ST

PT

No shared funding mechanism

Possibility of sharing USO costs

No plans of common funding

mechanism

2 USO providers. No need to
share costs. High quality service

Source: Fifth Report on the Implementation of the Telecommunications Regulatory Package.

PT: Partial Transposition; ST: Substantial Transposition
1 Recent legislation under examination; 2 Deferment requested; 3 Old Voice Telephony 95/62/EC is substantially transposed

49

Table 22.b – Telecommunications: Market structure and Performance

Local calls

Long distance calls

International calls

Digital mobile market

Estimated market share
of incumbents

Number of
operators (1)

Estimated market share
of incumbents

Number of
operators (1)

Estimated market share
of incumbents

Number of
operators (1)

First half 1999

1999

First half 1999

20
7
22
11
26
1 (10)
8
61
1
5
2
2
1 (10)
22 (8)
36

90-95 (7)
95-100 (2)(3)
95-100 (5)
90-95 (3)(4)
95-100 (3)
100 (7)
95-100 (2)(6)
65-70 (3)(9)
100 (7)
100 (5)
100 (7)
95-100 (4)(7)
100 (7)
95-100 (3)
80-85 (3)

A
B
D
DK
E
EL
F
FIN
I
IRL
L
NL
P
S
UK
(1) Actually offering
(2) This figure has been calculated for the local and long-distance
call markets together. Market share for the local call market only is
lilkely to be higher.

90-95
95-100 (4)(2)
60-65
90-95 (4)
95-100 (4)
100
95-100 (4)(2)
65-70 (4)(9)
90-95
95-100
100
85-90
100
95-100 (4)
80-85 (4)

1999

20
10
47
11
10
1 (10)
31
19
12
6
6
24
1 (10)
22 (8)
26

First half 1999

1999

90-95
90-95 (11)(2)
60-65
60-65 (11)
90-95 (11)
100
95-100 (11)(2)
85-90 (11)(9)
95-99
95-100
95-100
70-75
100
60-65 (11)
50-55 (11)

20
9
47
11
10
1 (10)
31
14
12
8
7
24
1 (10)
22
66

Market share of
leading
operators
(estimated) 1998
69
72
46
53
65
57
51
NA
66
60
100
64
50
49
34

Number of
operators

1999

4
3
4
4
3
3
3
4
4
2
2
5
3
4
4

(6) As of 31 December 1998

(7) Retail revenues as of 30 June 1999

(3) Retail revenues as of 31 December 1998.

(8) In Sweden, figures for operators actually providing voice telephony are estimated
using the total number of interconnections agreements (in place and under negotiation)

(4) Estimate

(9) For Finland, figure refers to the combined market share for both Sonera and the Finnet group

(5) traffic minutes as of 30 June 1999

(10) Portugal and Greece have been granted a derogation since January 2000 for the
introduction of competition.

(11) 1998 figure
Source: European Commission, Fourth and Fifth Report on the Implementation of the Telecommunications Regulatory Package.

50

Table 22.b – Telecommunications: Market structure and Performance (Cont.)

Average annual expenditure by
user type (EU15=100)

Prices in 1999 and variation since 1997 (2 )

Interconnection
incum bent leased
lines (50 Km ) - Index
(EU15=100)

Q uality (4)

Residential
basket

Business
basket

Local Call (3km )

National Call (200
km )

Internat. Call to
USA (10')

National
64 Kb/s.

National
2 Mb/s.

A
B
D
DK
E
EL
F
FIN
I
IRL
L
NL
P
S
UK
EU

1999 % 99/98
14%
9%
-8%
10%
-9%
-10%
-10%
6%
7%
8%
16%
1%
-7%
11%
6%
1%

120
112
85
76
136
115
88
85
102
117
68
86
153
69
88
100

1999 % 99/98 10 m in % 99/97
66%
11%
1%
-9%
59%
24%
-6%
-1%
0%
-21%
0%
-6%
-1%
13%
4%
7%

17%
12%
-8%
11%
-11%
-10%
-18%
6%
3%
-3%
19%
5%
-6%
19%
10%
0%

138
111
96
57
153
116
90
70
115
106
52
73
163
60
100
100

205
126
110
104
80
56
108
53
60
124
95
81
68
78
151
100

10 m in % 99/97
-40%
-22%
-35%
-35%
-18%
-28%
-28%
2%
-28%
-57%
0%
-33%
-34%
-40%
-6%
-31%

155
117
125
43
178
197
103
58
114
85
25
43
145
32
80
100

10 m in% 99/97
-34%
-20%
-67%
-29%
-27%
-20%
-55%
-33%
-50%
-40%
-63%
-89%
-49%
-2%
4%
0

148
145
60
115
110
148
74
138
88
71
67
22
103
125
86
100

1999
122
120
108
54
121
137
107
NA
120
85
45
127
79
61
114
100

1999
99
125
104
64
165
137
88
31
154
107
80
124
87
54
82
100

Num ber of faults
reported per
access line (1)

Billing acc uracy (9)

0.062 (3)
0.0469 (3)
NA
NA
0.0132 (7 )
0.279 (3)
0.064 (3)
0.084 (3)
0.156 /0.168 (10 )
0.12 (8 )
NA
0.027 (3)
0.052 (6 )
NA
0.0385 (10 )

0.6 (5)(3)
0.074 (3)
NA
NA
1.3 (7)
0.074 (3)
9.2 (3)
3.9 (3)
0.053 / 0.04 (10)(5)
5 (8)
0.5 (6)
NA
0.4 (6)
NA
NA

(1) Num ber of valid faults reported
(2) Source: Eurodata Study for the European Com m ission. Tariffs for USA refer only to Ninex-Bell Atlantic; tariffs do
not take into account special discounted packages, For other details on these figures see Fifth report, pp. 195 and
ss.
(3) 1998
(4) Figures are not com parable across countries.
(5) Num ber of bills m odified per 1,000 bills,
(6) Jan-Jun 1999

(7) June 1999

(8) Jan-Nov 1998

(9) no. com plaints per 1000 bills
(10) Jan-June 98/Jul-Dec 98

Source : European Com m ission, Fourth and Fifth reports on the im plem entation of the Telecom m unications regulatory package.

51

Table 23.a - Directive 96/92/EC: Summary of the regulatory stance of Member States and future market structure

State of
transposition
of the
Directive

System
adopted for
entry in
generation

Timetable for opening to competition

Minimum consumer or distributor size – Market share

1999

2000

2002

Later

Access to
network

Unbundling

Public service
obligations

Stranded
costs or
transitional
regimes

Authorisation

40 GWh-26,7%

20 GWh-31%

All distributs

9GWh-50%: 2003

Reg TPA

A

B

DK

FIN

F

D

EL

IRL

I

L

Transposed

Transposed

Transposed

Transposed

Not transp.

Transposed

2 yr. derog.

1 yr. derog.

Transposed

Not transp.

Aut/tender

-

Authorisation

100 GWh-90%

100 GWh-33%
20

1 GWh

Authorisation

Aut/tender

Authorisation

Authorisation

Authorisation

Authorisation

Authorisation

100%

100 GWh-22%

20 GWh – 31%

100%

-

-

30 GWh-30%

45%

100 GWh-23%

21

4 Gwh-28%

20 GWh-35%

NL

Transposed

Authorisation

P

E

S

Transposed

Transposed

Transposed

Aut/tender

Authorisation

Authorisation

UK

Transposed

Authorisation

20 GWh-33%
19

9 GWh

-27%

1 Gwh-46%

100%

100%

All by 2010

Reg TPA

All by 2003

Reg TPA

22

9 Gwh-40%

32% by 2003

66%

All by 2003

All by 2007

Reg TPA

Reg TPA

Neg TPA

Neg TPA

Reg TPA

Reg TPA

Reg TPA

Reg TPA

Reg TPA

Reg TPA

Reg TPA

Reg TPA

Legally septd. TSO

23

Legally septd. TSO
Legally septd. TSO1
Legally septd. TSO

Ind. Managed TSO

Ind. Managed TSO

Legally septd. TSO

Legally septd. TSO
24

No TSO

Legally septd. TSO

Legally septd. TSO

Legally septd. TSO

Legally septd. TSO
Legally septd. TSO1

Yes

Yes

Yes

Yes

Yes

Yes

Possible

To be defined

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

Yes

Source: European Commission DG TREN

TPA: Third Party Access; TSO: Transmission System Operators

19

20

21

22

23

24

+ 8% of distribution in order to reach the 27% market opening

Before the end of 2000.
19.2.2001.
As from 1.1.2000.
In parts of the country only, while in other parts of the country TSO are not different entities but are independently managed.
The electricity system of Luxembourg is regarded as a distribution system

52

Table 23.b - Electricity markets: prices by consumer type 1996-1999

Annual Consumption < 1200 kWh.

Annual Consumption < 7500 kWh.

HOUSEHOLD USERS

1999
Price
(with
taxes)
EU=100
102
136
130
155
99
54
101
78
48
88
117
93
101
100
98
100

A
B
D
DK
E
EL
F
FIN
I
IRL
L
NL
P
S
UK
EU

1999 Price
(tax free)
EU=100

1999 tax
component
as % tax-free
price

% diff
99/96
(tax free)

1999 Price
(with taxes)
EU=100

1999 Price
(tax free)
EU=100

1999 tax
component
as % tax-free
price

% diff
99/96
(tax free)

108
113
120
148
89
65
100
65
166
73
95
104
96
79
79
100

111
121
134
66
96
79
103
62
160
71
118
93
120
71
96
100

29
23
17
196
22
8
28
38
36
35
6
47
5
48
7
31

-5
-3
-3
3
-15
-10
-7
-17
4
-9
-1
-15
-5
n.a.
7
-7

101
139
138
86
102
63
98
73
45
97
138
92
119
90
118
100

27
22
17
124
22
8
29
32
31
12
6
26
5
39
4
25

-4
-6
-5
9
-15
2
-5
-14
-5
10
-1
-6
-5
n.a.
11
-4

53

Source: Eurostat

Table 23.b: Electricity markets: prices by consumer type 1996-1999 (Cont.)

INDUSTRIAL USERS

Annual Consumption < 50000 kWh.

1999
Price
(with
taxes)
EU=100
158
140
146
73
92
72
84
57
119
110
114
99
85
61
90
100

A
B
D
DK
E
EL
F
FIN
I
IRL
L
NL
P
S
UK
EU

1999 Price
(tax free)
EU=100

1999 tax
component as
% tax-free
price

% chg
99/96
(tax free)

154
141
140
50
93
82
85
53
107
120
132
88
100
60
94
100

26
21
28
79
22
8
21
31
36
13
6
38
5
25
18
23

-7
0
-17
2
-20
2
-13
-16
3
3
-1
-3
-14
-10
1
-6

Source: Eurostat

% chg
99/96
(tax
free)

1999
Price (tax
free)
EU=100

1999 tax
component
as % tax-
free price

Annual Consumption < 2 mill. kWh.
1999
Price
(with
taxes)
EU=100
133
118
121
118
101
83
90
70
133
98
103
91
90
58
93
100

125
121
130
79
102
96
95
64
106
108
120
94
106
57
98
100

31
21
16
84
22
8
16
36
55
12
6
20
5
25
18
24

-6
-5
-13
3
-18
2
-11
-19
1
8
-1
-6
-15
-16
10
-6

Annual Consumption < 50 mill kWh.

1999 Price
(with
taxes)
EU=100

1999
Price (tax
free)
EU=100

1999 tax
component
as % tax-
free price

% chg
99/96
(tax free)

129
99
132
139
109
84
92
67
117
102
88
101
84
58
n.a.
100

118
102
142
90
111
97
98
59
104
112
103
107
99
58
n.a.
100

36
21
16
91
22
8
17
41
40
13
6
18
5
25
n.a.
24

-18
-8
-11
1
-18
2
-10
-37
0
8
-3
-2
-18
-14
n.a.
-10

54

Table 24.a – Passenger Air Transport: Market Structure

Market Shares

First carrier in % market

Second carrier in % market

Frequency
1992

1997

ASK

1992

1997

Frequency
1992

1997

ASK

1992

A

B

D

DK

E

EL

F

FIN

I

IRL

L

NL

P

S
UK

EU

43.3

48.0

49.1

44.6

79.9

0.0

44.5

71.0

61.0

67.3

0.0

55.0

n.a.

0.0
23.5

64.9

52.9

43.9

37.6

49.6

0.0

33.5

76.2

48.7

39.1

0.0

42.0

n.a.

0.0
40.4

46.0

43.0

55.0

55.0

65.9

0.0

67.5

79.0

65.2

62.0

62.0

56.0

n.a.

0.0
38.0

48.0

53.0

31.0

49.0

42.3

0.0

48.5

71.0

50.0

42.0

0.0

49.0

n.a.

0.0
44.0

0.0

0.0

6.3

24.0

0.0

0.0

4.7

0.0

10.9

15.2

0.0

2.1

n.a.

0.0
8.9

8.7

2.6

9.6

24.3

11.4

0.0

5.9

9.3

10.3

21.7

0.0

4.5

n.a.

0.0
9.1

Source: European Commission DG TREN

ASK = Available seats / km

0.0

0.0

0.0

8.0

0.0

0.0

1.0

0.0

10.0

13.0

0.0

0.3

n.a.

0.0
9.0

55

Market entry and exit

New entries of

Closure

1993

1996

Total

1993

1996

Total

0

4

8

1

4

1

7

1

4

2

0

2

0

9
21

64

2

3

11

3

8

5

7

0

12

2

0

4

1

5
12

75

2

7

19

4

12

6

14

1

16

4

0

6

1

14
33

139

0

2

4

1

1

1

1

0

9

4

4

2

1

2

13

5

5

3

11

14

25

1

2

0

0

2

1

8
10

44

2

4

1

0

3

0

3
11

58

3

6

1

0

5

1

11
21

102

1997

48.0

4.0

4.0

13.0

8.0

0.0

4.0

1.0

10.0

25.0

0.0

0.5

n.a.

0.0
9.0

Table 24.b - Market Performance - Average Fare from main Capital Airports (

€

per km) - July 1997

Business

Economy

Promotion

Routeswith1
carrier
0,51

Routeswith2
carriers
0,53

Routeswith3
carriers
0,51

Routeswith4
carriers
0,61

Routeswith1
carrier
0,55

Routeswith2
carriers
0,50

Routeswith3
carriers
0,52

Routeswith4
carriers
0,68

Routeswith1
carrier
0,21

Routeswith2
carriers
0,21

Routeswith3
carriers
0,22

Routeswith4
carriers
0,32

0,51

0,57

0,75

0,32

0,21

0,51

n.a.

0,33

0,48

0,57

0,51

0,25

0,43
0,44

0,58

0,47

0,43

0,33

0,25

0,54

n.a.

0,34

0,49

0,34

0,48

0,28

0,41
0,42

0,52

0,34

0,44

0,27

0,25

0,53

n.a.

0,41

0,52

n.a.

0,49

0,29

0,48
0,46

n.a.

0,28

0,42

0,21

0,23

n.a.

n.a.

n.a.

n.a.

n.a.

0,49

0,28

0,43
0,80

0,51

0,57

0,67

0,30

0,21

0,47

n.a.

0,32

0,38

0,51

0,49

0,21

0,42
0,41

0,52

0,46

0,43

0,31

0,21

0,50

n.a.

0,32

0,41

0,29

0,46

0,25

0,42
0,38

0,39

0,34

0,39

0,25

0,19

0,46

n.a.

0,33

0,43

n.a.

0,43

0,27

0,43
0,40

n.a.

0,29

0,37

0,19

0,20

n.a.

n.a.

n.a.

n.a.

n.a.

0,47

0,28

0,37
0,62

0,22

0,27

0,24

0,16

0,15

0,20

n.a.

0,15

0,21

0,24

0,28

0,11

0,12
0,23

0,21

0,20

0,16

0,14

0,11

0,21

n.a.

0,14

0,19

0,13

0,21

0,11

0,15
0,18

0,12

0,15

0,18

0,14

0,11

0,18

n.a.

0,14

0,20

n.a.

0,20

0,16

0,17
0,17

n.a.

0,11

0,17

0,10

0,10

n.a.

n.a.

n.a.

n.a.

n.a.

0,26

0,15

0,16
0,21

A

B

D

DK

E

EL

F

FIN

I

IRL

L

NL

P

S
UK

Source: European Commission DG TREN

56

Table 25 - Postal services

Member
State

Transposition of
Directive 97/67/EC

Universal Service
Provider

Turnover
1998

Employment
1998*

Quality of
Service

Price 20g
Letter***

Post Offices &
Agencies

Number of
letters post
items
domestic
service

Partial

Complete

Partial

Complete

Partial

Complete

Complete

Complete

Complete

Not transposed

Not transposed

Partial

Partial

Complete
Complete

PTA

LA POSTE

DEUTSCHE POST

POST DANEMARK

CORREOS Y TELEGRAFOS

ELTA

LA POSTE

POST FINLAND

POSTE ITALIANE

AN POST

PTT LUXEMBOURG

TNT-POST GROUP

CORREIOS

SWEDEN POST
THE POST OFFICE

M EURO

1438

1723

14668

1358

1135

254

14239

1002

6014

494

396

7409

519

2709
10902

Number of
Employees**
38271

41637

253000

25485

64896

11135

287348

26448

181262

8647

1696

58209

16348

51793
212500

E+1 IN %

EURO

Number

(millions)

NA

84,2

94,4

94,5

60,9

NA

76,4

94,0

NA

84,5

NA

94,0

96,6

97,3
91,1

0,51

0,42

0,56

0,54

0,21

0,30

0,46

0,59

0,62

0,38

0,40

0,36

0,40

0,58
0,40

2436

1400

14500

1169

4093

1225

17038

1601

13967

1912

106

2387

3712

1800
18760

2868

3319

20000

1685

4227

na

25127

1541

5527

556

106

6710

1100

na
18090

A

B

D

DK

E

EL

F

FIN

I

IRL

L

NL

P

S
UK

* ITALY 1997

** DENMARK (full time equivalent)

***ITALY AND PORTUGAL PRIORITY MAIL

Source: European Commission DG MARKT

57

Table 26 - Five-firm concentration in major countries (1998)

Financial services

D
E
F
I
UK
EU
Japan
US

39.10
58.32
47.63
58.17
54.67
13.05
36.37
30.83

Source: City University and London Economics study with data from IBCA database.

Table 27 - EU bank profitability (% of total assets) 1991-1998

Germany

Spain

France

Italy

UK

Other EU countries

1991-94 1995-98 1991-94 1995-98 1991-94 1995-98 1991-94 1995-98 1991-94 1995-98 1991-94

1995-98

Profit before tax

0.6

0.5

0.9

1.0

0.3

0.4

0.6

0.6

0.8

1.2

0.4

0.7

Net interest
income

Non-interest
income

Operating
expenses

Loan loss
provisions and
other items

2.0

1.6

3.1

2.7

2.0

1.5

2.7

2.6

2.3

2.2

1.8

1.6

0.6

0.6

1.0

1.1

0.8

1.0

1.1

1.3

1.3

1.1

0.7

0.9

-1.7

-1.4

-2.7

-2.5

-2.1

-1.8

-2.7

-2.7

-2.4

-2.1

-1.6

-1.6

-0.3

-0.3

-0.5

-0.3

-0.5

-0.2

-0.5

-0.6

-0.3

0.0

-0.5

-0.2

Source: City University and London Economics study with data from IBCA database

Table 28 -– Distribution of banking mergers across the EU by type
Country

Number

Domestic-
Domestic

Foreign-
Domestic

Domestic-
Foreign

A

B

D

DK

E

EL

F

FIN

I

IRL

L

NL

P

S

UK

100

67

82

0

81

100

88

100

90

100

0

50

33

50

86

0

33

11

67

0

0

0

0

10

0

0

25

67

25

14

0

0

7

33

19

0

13

0

0

0

100

25

0

25

0

2

3

28

3

16

2

8

1

10

1

3

4

3

4

7

Source: City University and London Economics study with data from Thompson Securities Data.

58

Improving the regulatory framework for services activities
Distribution

Table 29 – Opening-time restrictions

A

B

D

DK

E

EL

F

FIN

I

IRL

L

NL

P

S

UK

Mon-Frid

Saturday

Sunday

Comments

6.00-19.30

6.00-17.00

Closed (exception
for family business)

66 hours maximum
a week

5.00-20.005.00-
21.00 (Fri)

5.00-20.00

24.00 hours off each
week

6.00-20.00

6.00-16.00

Free to open from 6.00 on Monday until
5.00 p.m. on Saturday

Closed

Closed

0.00-24.00

0.00-24.00

Max 8 Hours

72 hours maximum
a week

6.00-20.00
(winter) 6.00-
21.00 (summer)

6.00-18.00

Closed

Closed

24 hours off per
week

7.00-21.00

7.00-18.00

12.00-21.00

7.00-22.00
(closed at 13.00 once a week)

Closed (except
December and 8
Sundays per year)

No limitation except closing time at 13.00
once a week

Closed

6.00-20.00

6.00-16.00

6.00-13.00

Maximum 13 hours
a day

6.00-22.00

6.00-22.00

Open 12 Sundays
per year

6.00-24.00

6.00-24.00

8.00-13.00

0.00-24.00

0.00-24.00

0.00-24.00

0.00-24.00

0.00-24.00

10.00-18.00

Source: Instituto de Empresa - "Los Horarios comerciales en la Union Europea" - 1999

Table 30 - Construction of hypermarkets and superstores

1991

1992

1993

1994

1995

1996

1997

1998

459

139

119

8

19

89

46

20

65

48

31

64

50

53

23

74

15

39

18

45

59

37

16

44

94

21

21

37

34

19

21

21

D

F

I

UK

Source: Pellegrini - "Regulation and the Retail Trade" – Mimeo

59

Table 31 - Structure and productivity of retail distribution within the EU

Concentration
(Market share of
five leading groups
in food retailing)

Number of
enterprises
(thousands)

Average size
(number of persons
employed per unit)

Productivity
(turnover per person
employed)
€
(thousand
)

Austria

Belgium

Denmark

Germany

Spain

Finland

France

Greece

Ireland
Italy

Luxembourg

Netherlands

Portugal

Sweden

UK

1997
68

1991

66

76

61

50

89

61

38

54

25

93

68

52

95

57

123

30.1

422

454

399

185

20.9

536

3.5

98.1

132

265

1996
38.9

:

31.7

294 (1)

:

23.6

392

:

20.7

708

3.2

86

118

55

207

1991

:

1.5

6.6

5.2

2.2

4.7

1.6

5.2

3.5

5.2

6.7

1.1

:

8.8

1996
6.6

1991
:

1996
128.4

158

126

118

:

184.5

174

:

101

108

149

93

74

218

117

118

76

141

:

98

124

193

99

:

:

115

6.1

9.2

3.7

6.4

2.1

5.5

6.5

3.1

:

:

(1): Excluding repair of personal and household goods

Source: Eurostat

60