Report from the Commission - Economic Reform : Report on the functioning of community product and capital markets {SEC(2002) 1399 final}
Date: 2002-12-23
Institutions: European Commission
Subjects: banking, economic analysis, economic indicator, economic reform, economic situation, financial market, international competition, public contract, single market

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 23.12.2002
COM(2002) 743 final

REPORT FROM THE COMMISSION

Economic Reform : report on the functioning of community product
and capital markets

{SEC(2002) 1399 final}

EXECUTIVE SUMMARY.

The competitiveness gap between the USA and the European Union is widening and there is a
risk that the US economy will outperform the European economy during the downturn just as
it did during the economic expansion of the late 1990s.

Against  this  background,  this  fifth  report  on  the  functioning  of  product  and  capital  markets
first  takes  its  cue  from  the  Barcelona  European  Council  which  put  the  emphasis  on  the
implementation of policy guidelines.  It looks at  the  implementation of  the  economic reform
guidelines laid down in the conclusions of successive Internal Market Councils and concludes
that there is a wide gap between policy intentions and achievements.

Second, this report looks at  economic  reform  and  integration  indicators  and  identifies  some
economic  areas  requiring  urgent  reform  and  a  greater  effort  from  the  Member  States.  The
scope for integration seems  far  from  exhausted,  but  price  convergence  has  stalled,  which  is
bad  news  for  consumers.  The  services  sector,  including  financial  services,  must  be  the  top
priority for closer integration.

Third,  the  report  presents  estimates  of  the  benefits  that  economic  reforms  can  bring,
especially  in  financial  services  markets  and  of  actual  costs  borne  by  European  citizens  and
businesses now as a result of delays in the introduction of reforms. The potential gains – and
thus the costs of inaction – are huge.

The  overall  picture  of  implementation  is  mixed  with  approximately  50%  of  the  guidelines
issued by the Internal Market Council satisfactorily implemented and 50% showing less than
satisfactory outcomes. But 50 % is nowhere near enough to reach the Lisbon target and must
be improved.

Only  in  a  minority  of  cases  is  the  implementation  record  clearly  unsatisfactory.  But  these
include  major  planks  of  economic  reform  for  improving  competitiveness  identified  by  the
Internal Market Council as important and urgent, notably a new legislative package for public
procurement and the Community patent, both of which have yet to be adopted.

In summary, although some progress has been made  with implementation, the adoption and
implementation of economic reforms in product and capital markets remain sluggish.

Are  we  on  schedule  with  the  introduction  of  economic  reforms  in  order  to  achieve  the
competitiveness objectives established by the Lisbon European Council?

Using  the  past  10  years  of  Internal  Market  legislation  as  a  benchmark  for  the  timing  of
reforms,  we  can  conclude  that  despite  these  delays,  we  may  still  be  on  time  to  reach  our
Lisbon  deadlines,  but  only  if  adoption  of  proposals  currently  under  consideration  is  not
further delayed and if Member States transpose directives on time.

For  instance,  between  1993  and  2002,  in  financial  services,  the  average  period  from  the
presentation  of  the  Commission  proposal  until  the  last  Member  State  actually  implemented
the  directive  was  over  7  years.  We  cannot  afford  these  delays  in  the  future.  A  firm
commitment  by  Member  States  to  speed  up  the  introduction  of  reforms  through  swift
adoption and diligent transposition is essential for achieving our goals on time.

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The  procedures  for  the  adoption  of  implementing  measures  proposed  by  the  Lamfalussy
report and currently  applied for the  adoption of measures included in the Financial Services
Action Plan should help speed things up.

What do economic reform and integration indicators show about market performance?

Foreign direct  investment  remains  the  leading  driver  of  cross  border  activity  especially  in
services but it was severely hit by the economic downturn in 2001 and fell below 1999 levels.
Intra-EU  trade  in  goods  has  grown  faster  than  GDP  between  1996  and  2000,  but  it  lost
momentum  in 2001,  a  year  when  world  trade  fell  for  the  first  time  in  two  decades.  But  the
Internal  Market  still  has  further  potential  for  integration.  Even  Belgium  and  Luxembourg,
long-time  EU  members  with  traditionally  open  economies,  have  been  able  to  create  more
trade with other EU members and non-EU countries in recent years.

It is interesting to note that Internal Market rules have been able to create more trade without
generating relatively more « market friction » as reflected by infringement cases. The growth
path  of  trade  (measured  by  imports)  and  Internal  Market  rules  infringements  (excluding
transposition cases) diverged in recent years, with trade growing and infringements remaining
stagnant. In addition, intra-EU trade has not been created at the expense of trade with the rest
of the world. On the contrary, the EU has become more open to trade in recent years.

Indicators  have  confirmed  stagnation  of  consumer  price  convergence  and  this  is  a  serious
matter  of  concern  and  a  good  argument  to  speed  up  the  introduction  of  reforms,  not  least
because price convergence has been particularly positive for consumers. Goods showing high
price convergence tend to show lower price increases. An absence of price convergence and
higher than average price increases also go together.

The creation of the Internal Market for services is perhaps the most important mid and long
term goal for reforms. Now we know that the ability to benefit from the use and diffusion of
information  and  telecommunications  technologies  especially  in  services  sectors  and  in
particular  in  retail  distribution  and  securities,  is  a  major  factor  for  explaining  differences  in
the competitive performance of the USA and the EU economies.

The objectives of the  Lisbon European Council are not achievable  without  the  creation  of  a
real  Internal  Market  for  services,  especially  in  services  that  affect  the  competitiveness  of
businesses  across  all  sectors.  Some  of  the  benefits  of  the  Internal  Market  are  being
squandered  now  due  to  the  poor  performance  of  the  services  sector.  Independent  action  by
Member  States  is  necessary,  but  not  sufficient  for  making  significant  progress  in  this  area.
The development, adoption and implementation of the service strategy is therefore becoming
increasingly urgent.

Completing  work  in  the  financial  services  sector  is  particularly  important  because  it  will
boost  the  competitiveness  of  all  sectors.  Significant  progress  can  be  reported  in  the
introduction of reforms in this sector with ¾ of  FSAP measures already adopted.  Indicators
show that integration is making progress  too,  especially in  wholesale markets.  Today,  cross
border  activity  represents  60%  of  total  activity  in  the  unsecured  money  market.  However,
integration  continues  to  be  hampered  by  lack  of  harmonisation  of  rules  and  practices  on
collateral  use,  clearing  and  settlement,  accounting  practices  and  requirements  for
prospectuses. The potential benefits from full integration in these markets are huge. The one
off  macroeconomic  impact  of  pooling  liquidity  in  European  equity  and  corporate  bond
markets has been calculated at 1.1% of EU GDP in 2002 prices, or €130 billion, with gains in
terms of employment at 0.5%. Investment could also grow by 6%.

3

Retail financial markets show much lower levels of integration. The consumer loan segment
shows no signs of integration at all.

Benefits  from  providing  companies  access  to  liquid  markets  throughout  the  EU  have  been
estimated at between 0.74 - 0.92% of the value  added of the manufacturing industry.  SMEs
would be the main beneficiaries of more diversified sources of financing: a 10% drop in bank-
based  financing  in  favour  of  capital  market  financing  would  reduce  financing  costs  by  the
equivalent to 0.3% of EU GDP. Potential savings from the elimination of inefficiencies in the
financial  sector  caused  by  lack  of  integration  are  far  from  negligible.  In  the  EU  banking
segment  they  can  be  estimated  to  total  between  1.4  and  1.6  %  of  GDP.  These  costs  are
currently at least partially passed on to firms and consumers.

By  speeding  up  the  implementation  of  reforms  in  financial  services,  we  can  bring  these
benefits on stream sooner. Further delays will mean that these gains are being squandered.

Public procurement markets reforms are in the pipeline, but have been badly delayed. The
few indicators we have for measuring integration in this market show that little to no progress
has been made. For example, the number of cross-border award notices remained abysmally
low, accounting for just 1.26% of total award notices  in 2001. The  European  economy thus
continues to be deprived of the benefits that could accrue from the integration of such a large
and important economic sector. A mere 1% of savings as a result of more competition would
have released €14 billion in 2001 to be spent more  efficiently or to allow reductions in the tax
bill. This is  equivalent to approximately one third of  the  total net  financing  needs  of  public
administrations on that year.

Finally, the significant  efforts expended on reducing the  regulatory burden on SMEs  and
start-ups  should  be  complemented  with  the  full  and  effective  implementation  of  the  action
plan for better and simpler regulation. The annex to this  report, based on a questionnaire to
Member  States,  shows  that  the  “Internal  Market”  dimension  of  improving  the  regulatory
environment is often neglected. National administrations need to take into  consideration not
just the impact of regulation on domestic economic actors, but also on other EU actors trying
to exercise their Internal Market rights.

I.

INTRODUCTION

The competitiveness gap between the USA and the European Union is widening1 and there is
a risk that the US economy will outperform the European economy during the downturn just
as it did during the economic expansion of the late 1990s.

Against this background, this fifth report2 on the functioning of product and capital markets
first  takes  its  cue  from  the  Barcelona  European  Council  which  put  the  emphasis  on  the
implementation of policy guidelines.  It looks at  the  implementation of  the  economic reform
guidelines laid down in the conclusions of successive Internal Market Councils and concludes
that there is a wide gap between policy intentions and achievements.

1

2

See SEC(2002) 528 “2002 European Competitiveness report” for a detailed account of the evolution of
competitiveness.
The  Cardiff  process  of  economic  reform  has  been  the  subject  of  an  in-depth  review  by  the  new
Competitiveness Council. On 30 September 2002, the Council took note of the conclusions of a report
titled “Review of the Cardiff economic reform process from the internal market perspective.” This fifth
Commission report on the functioning of product and capital markets has been structured to respond to
this and other developments.

4

                                                
Second, this report  looks at  economic  reform  and  integration  indicators  and  identifies  some
economic  areas  requiring  urgent  reform  and  a  greater  effort  from  the  Member  States.  The
scope for integration seems  far  from  exhausted,  but  price  convergence  has  stalled,  which  is
bad  news  for  consumers.  The  services  sector,  including  financial  services,  must  be  the  top
priority for closer integration.

Third,  the  report  presents  estimates  of  the  benefits  that  economic  reforms  can  bring,
especially  in  financial  services  markets  and  of  actual  costs  borne  by  European  citizens  and
businesses now as a result of delays in the introduction of reforms. The potential gains – and
thus the costs of inaction – are huge.

It would be remiss if this report did not acknowledge the 10th anniversary of the removal of
frontiers in the Internal Market. This is a good occasion to draw lessons from the experience
of those past 10  years for the process of economic reform that still lies ahead. The adoption
and  implementation  of  Internal  Market  legislation  to  date  helps  us  understand  how  long  it
takes to achieve economic reforms, and highlights the risk of missing our targets due to delays
in the proposal, adoption and implementation of reforms.

The report conveys the following messages:

(1) 

(2) 

The  Internal  Market  still  holds  potential  for  growth  and  job  creation,  but  economic
reforms are needed to reactivate trade and integration as shown by stagnant price
convergence;

The analysis of potential benefits and costs of inaction show that reforms in financial
markets are urgently needed in view of their great potential and market developments.
Priority  should  also  be  given  to  the  creation  of  the  Internal  Market  for  services
because  it  is  essential  for  achieving  the  competitiveness  targets  established  at  the
Lisbon  European  Council.  The  rapid  adoption  and  diligent  enforcement  of  the  new
public  procurement  legislative  package  and  the  implementation  of  the  better
regulation  package  complete  the  list  of  priorities.  Parallel  progress  in  all  areas  of
reform is the key to succeeding in the broader effort of reforming product and capital
markets within the Community;

(3) 

The analysis of  implementation  shows that  some progress has  been  made,  although
the  adoption  and  introduction  of  economic  reforms  in  product  and  capital  markets
remain sluggish. Only a firm commitment  to speed up adoption and  enforce reforms
can guarantee meeting the Lisbon timetable for our competitiveness objectives.

The next section presents the  main  results  of  the  monitoring  of  overall  market  performance
using  price,  trade  and  foreign  investment  indicators.  Then,  the  results  of  the  monitoring  of
especially  relevant  markets  are  presented.  This  includes  public  procurement  and  financial
markets. Annex 1 of the report includes graphs, tables and technical material relevant for the
report. In addition, this year’s report includes two special annexes. Following the conclusions
of  the  report  on  the  Cardiff  economic  reform  process  conducted  by  de  Competitiveness
Council, annex 2 presents a more detailed analysis of the two topics selected by the Council :
measures  taken  by  Member  States  to  remove  barriers  to  integration  in  services  and  to
modernise  and  simplify national legislation and  administration  procedures.  As  in  last  year’s
report and given the special importance of services of general interest, annex 3 is exclusively
dedicated  to  them.  It  includes  updates  of  the  main  indicators  and  the  results  of  a
Eurobarometer reporting consumers’ views on the performance of these sectors.

5

II.

TAKING STOCK OF ECONOMIC REFORM.

The  Cardiff  process  has  produced  a  significant  number  of  orientations  to  foster  economic
reform3.  It  is  time  to  evaluate  the  extent  to  which  they  have  been  implemented.  That  is  the
purpose of this section.

The 60 main policy orientations issued by the  Internal Market Council in the context of the
Cardiff  process  are  summarised  in  tables  1  to  3.  Some  of  them  required  intervention  at  the
Community level, while others were addressed at the Member State level. In both cases, we
distinguish between those requiring action related to the production, adoption or enforcement
of legislation or regulations and those requiring non-legislative action such as monitoring or
the development of out-of-court conflict resolution mechanisms.

These  orientations  vary  in  scope  and  importance.  For  instance,  “the  implementation  of  the
Financial Services Action Plan” includes 42 measures and cannot be compared in importance
with others like the “enhancing cooperation for the collection of statistical data”. Furthermore,
some  proposals  are  revised  versions  of  previous  ones4.  Despite  the  limitations  this  implies,
these tables can give an overview of the evolution and results of the process.

To date, the majority of the items included in the  Internal Market Council conclusions have
been  legislative  or  regulatory  in  nature.  Although  23  of  them  were  not  legislative  or
regulatory, economic reform has relied heavily on the proposal, adoption and enforcement of
new rules. It is interesting to note that relatively few of the non-legislative orientations were
addressed to Member States (six out of 23).

In  the  tables,  we  have  also  summarised  the  implementation  status  of  each  orientation.  We
created 
than  satisfactory  and  clearly
unsatisfactory.  Undoubtedly,  this  is  a  simplified  and  rough  assessment,  but  it  is  helpful  for
obtaining a global picture of the outcome of the Cardiff process thus far5.

three  categories  of  results:  satisfactory, 

less 

The  overall  picture  of  implementation  is  mixed,  with  approximately  50%  of  all  cases
showing  fully  satisfactory  results  and  the  other  50%  showing  results  that  are  less  than
satisfactory or unsatisfactory.

The  overall  picture  from  this  assessment  seems  more  positive  at  Community  level  with  25
satisfactory results. Only 6 proposals show a clearly unsatisfactory outcome. However, some

3

4

5

The  focus  here  will  be  on  Internal  Market  Council  conclusions  only.  Recommendations  from  the
Cardiff  process  are  also  included  in  the  Broad  Economic  Policy  Guidelines  issued  by  the  ECOFIN
Council, which are analysed in detail in their implementation reports.
Only the first formulations of orientations that have been revised are presented here. The year of  first
formulation  is  included  in  the  parenthesis.  This  undoubtedly  masks  important  qualitative  changes  in
their nature. For instance, the 1999 conclusions  mentioned the need to integrate  energy  networks  and
make  them  interoperable.  However,  the  2001  conclusions  on  network  integration  elaborated  and
clarified the 1999 conclusions.
This  assessment  is  based  on  a  large  number  of  scoreboards  (e.g.  the  Internal  Market,  State  aid,
enterprise  policy, 
innovation  scoreboards)  Commission  communications,  FSAP  and  RCAP
implementation reports and other reports.

6

                                                
of the most important orientations show an unsatisfactory or less than satisfactory outcome6.
Box 1 presents a summary review of implementation by areas.

It  is  important  to  note  that  major  planks  of  economic  reform  that  were  included  in  Internal
Market  Council  conclusions  for  the  first  time  nearly  three  years  ago,  have  still  not  been
adopted: a new legislative package for public procurement (1999) and the Community patent
(2000). In view of all this…

…Are  we  on  schedule  with  the  introduction  of  economic  reforms  in  order  to  achieve  the
competitiveness objectives established by the Lisbon European Council?

The Internal Market experience offers some good benchmarks for the actual time required to
realise  economic  reforms  when  new  legislation  has  to  be  adopted  and  implemented  at  the
Community level. From these benchmarks, we can project out the time that will be required
before  proposals  currently  being  discussed  at  the  Council  or  Council/Parliament  will  be
effectively implemented.

We  have  selected  7317  Internal  Market  directives  proposed  and  adopted  between  1993  and
April 2002 and measured the following dimensions:

– 

– 

– 

Average adoption period, i.e. average time between proposal by the Commission and
adoption by the relevant legislative bodies at the Community level;

Average  legal  transposition  phase,  i.e.  average  time  between  adoption  at  the
Community level and deadline for transposition at the Member State level;

Average delay phase, i.e. average time between transposition deadline and date that
the last country has effectively transposed and enforced the directive8.

On average, adoption took 1.18 years and legal transposition took 1.10. This means that the
average  time  required  for  adoption  plus  legal  transposition  of  Internal  Market  directives
adopted between 1993 and April 2002 was 2.28 years9.

Adoption  took  longer  on  average  if  the  directives  had  to  be  adopted  by  the  Council  and
European  Parliament  (2.57  years)  than  if  they  only  had  to  be  adopted  by  the  Council  (1.72
years).  However,  this  is  not  the  case  for  all  sectors;  for  example,  co-decision  directives  for

6

7

8

9

Orientations  requiring  action  at  Community  level  show  the  highest  percentage  of  both  clear  success
(23 out of 40) and clear failure (6 out of 40). Results are less extreme for those requiring intervention at
Member State level.
We  calculated  the  average  adoption  phase  for  731  directives  (44%  were  Commission  directives,
30%  Council  directives  and  26%  were  adopted  by  the  Council  and  the  European  Parliament).  The
average  legal  transposition  phase  was  calculated  for  695  directives  because  36  did  not  have  a
transposition  deadline.  The  average  delay  phase  could  be  calculated  for  401  directives  because  full
transposition has not been achieved for 294 of the 695 directives. These 294 directives in turn fall into
two subgroups: a) the transposition deadline has not passed yet (115); and b) measures have not been
notified and/or because there are open infringement procedures for transposition reasons (179).
For  this  exercise,  a  directive  is  considered  effectively  transposed  and  enforced  when  it  is  completely
and properly transposed in all Member states where it is supposed to be transposed and there is no open
infringement proceedings for implementation reasons.
These  figures  are  better  than  those  for  Internal  Market  directives  adopted  between  1985  and  1992:
average adoption time for these directives was 1.7 years and legal transposition was 1.28 years.

7

                                                
pharmaceutical and chemical products took on average 1.68 years, whereas Council directives
for the same area took 2.58 years on average.

But undue delays in transposition beyond the established deadline are the major reason for
the  late  introduction  of  reforms:  the  average  delay  phase  nearly  doubles  the  total  time
required for adoption or legal transposition.

Transposition  problems  beyond  the  due  deadline  extend  the  average  time  needed  to  have
Internal Market directives effectively implemented by 2.21  years. This results in an average
global time path for the effective implementation of these directives of 4.49 years.

These  average  figures  vary  quite  remarkably  across  sectors.  Figure  1  shows  the  average
global time path by aggregated field of 403 post-1992 Internal Market directives10. Financial
service  directives  show  an  average  global  path  of  7.33  years.  Social  policy  directives,
environmental  directives  and  consumer  protection  directives  also  show  high  average  global
time  paths.  This  is  the  result  of  higher  than  average  adoption  time  (2.56  years  for  financial
service  directives)  and  total  transposition  time  (including  delay  period,  4.77  years  for  the
same sector (see table 4). Environment related directives show the longest delay phase  with
3.34 years (see table 5 and box 2).

These  figures  show  clearly  that  we  may  be  on  time  to  reach  our  deadlines  laid  out  by  the
Lisbon  European  Council  if  adoption  of  proposals  currently  under  consideration  is  not
delayed any  further,  and if transposition is not  prolonged  beyond  the  due  deadlines.  A  firm
commitment  by  Members  States  to  speed  up  the  introduction  of  reforms  through  diligent
adoption and swift transposition is necessary for achieving our goals.

Given these circumstances, it is necessary to ensure that the transposition phase does not go
beyond  the  technically  minimum  time  needed  for  effective  implementation  by  national
authorities11.

The  costs  of  delaying  the  implementation  of  these  and  other  reforms  would  be  significant.
The  sections  below  provide  some  estimates  of  the  potential  benefits  to  be  obtained  from
reforms.  Initially, we  examine overall market  performance  indicators  of  the  Internal  Market
and then we dive deeper and look at the performance of specific markets (financial services
and public procurement) particularly important for the European economy.

III.

RESULTS OF OVERALL MARKET PERFORMANCE MONITORING.

Implementation of economic reform measures is essential for achieving the long-term policy
objectives  defined  at  Lisbon  in  March  2000,  but  economic  reform  does  not  end  with
implementation. The European economy will only become more competitive if the measures
produce  the  intended  effects.  Price,  trade  and  cross-border  investment  data  show  to  what
extent economic reforms and Internal Market policies are effectively fostering integration and

10

11

In  fact,  when  we  consider  the  global  time  path  of  framework  directives  it  is  much  longer  than  for
the secondary directives considered here (see figure 1).
Significant  delays  have  already  accumulated  the  adoption  of  the  public  procurement  package,
the  Community  patent  regulation  and  the  sales  promotion  proposal.  However,  the  latter  two  are
regulations though and consequently do not require transposition.

8

                                                
competition,  expanding  job  creation  and  growth  potential.  A  look  at  price  convergence  in
private consumption is particularly telling of changes occurring in consumer markets.

PRICES: New evidence confirms the slowdown in price convergence identified last year.

Final  data  for  1999  and  2000,  and  preliminary  data  for  2001  show  that  the  clear  pattern  of
price  convergence  in  private  consumption  of  the  1990s  seems  to  slow  down.  However,  the
relative increase in price dispersion observed last  year is not confirmed. Price dispersion, as
measured by the coefficient of variation, was 14.7% in 1999 (14.5% in 1998) and increased to
15.3%  in  2000.  Preliminary  data  for  2001  bring  this  indicator  close  to  the  1999  level,
i.e.14.6%. What is causing the stagnation in convergence?

Where is there still room for convergence? In which countries and product markets has price
convergence  occurred  and  where  can  it  be  pushed  further?  A  look  into  the  convergence
patterns by countries and product categories will help answer these questions.

Member States show different patterns of price convergence.

While figure 3 shows that stagnation in price convergence is common to most Member States,
it also reveals four very different patterns in the price convergence that has occurred during
the 1990s.

– 

– 

– 

– 

There  is  a  first  group  of  countries,  composed  of  Austria  and  the  EU  6  founding
Member  States,  that  now  exhibit  a  very  tight  level  of  price  convergence  among
themselves. Price dispersion among these countries is minimal (2.9%).

A second group of countries has also undergone a significant process of convergence
in  prices,  but  remain  above  and  below  the  EU  average  price  levels  without  any
appreciable convergence. In this group, Finland is above EU12 average prices, while
Spain, Portugal and Greece have below EU9 average prices.

The three countries outside the eurozone, UK, DK and SW show prices above EU15
average  and  their  relative  price  levels  fluctuate  in  terms  of  price  convergence.  SW
and the UK seemed to follow a diverging trend in 1999 and 2000, but they converged
slightly  in  2001  according  to  preliminary  data.  Exchange  rate  fluctuations  can
probably explain in part this behaviour.

Ireland was among the below EU9 average group until the mid 1990s but they have
overshot the EU9 average in recent years (see figure 3). Ireland’s impressive growth
seems to have put upward pressure on prices shifting Ireland’s profile.

Prices of different goods and services have not converged at the same time or in the same
way.

In the early 1990s, some products/services showed extreme price differences across countries.
This  was  especially  frequent  in  countries  with  either  very  low  or  very  high  average  price
levels  (see  figure  4).  The  creation  of  the  Internal  Market  narrowed  these  extreme  price
differences between 1990 and 1995. Then, in the mid 1990s, “typical Internal Market goods,”
such as clothing, sports goods and household appliances, tended to experience the best price
convergence, but the  rate at  which  prices converged  slowed because  by  then,  extreme  price

9

differences  had  already  been  eliminated.  Other  product  categories,  such  as  fuel,  power,
tobacco and floor coverings, did not experience the same level of price  convergence, and in
some cases, even diverged.

But, have consumers benefited from price convergence? … Yes, in many cases…

Consumers only benefit from price convergence if prices converge toward price levels in low
price countries. If prices converge at high price levels (e.g., because of a lack of competition),
consumers will not benefit from the creation of an Internal Market. Table 6a shows that for a
large  number  of  goods,  prices  have  converged  to  low  price  levels.  Many  food  products,
including meat, fish, bread, oils/fats, beverages, beer and some  consumer electronics  goods,
show  clear  convergence  towards  low  price  levels.  For  example,  differences  in  the  price  of
cooking oil and fats were reduced by 44% and prices grew at an average annual rate of 1%,
well  below  the  inflation  rate  for  most  consumer  goods.  Actually,  this  positive  impact  of
convergence on prices is not negligible from consumers’ point of view. Products in table 6a
showing this good price performance, i.e. products showing high price convergence and lower
than average inflation, represent 25% of private final consumption (see table 6b)12.

… but not always!

However,  there  are  still  many  areas,  particularly  in  services,  where  integration  and
competition  could  produce  increased  price  convergence  to  the  benefit  of  consumers.
Automobiles,  glassware,  tobacco,  books  and  travel-related  insurance  are  among  them.  In
these  cases,  prices  are  now  further  apart  than  they  were  in  the  early  1990s.  Furthermore,
prices in these product segments have been rising faster than the rate of inflation. In addition,
most of the services included in table 6 have exhibited poor price performance, reinforcing the
case for the creation of a real Internal Market for services. Integration has not always resulted
in tangible consumer benefits in some goods/services markets, and it is on these markets that
our attention should be focused in the future13.

The  observed  slowdown  in  price  convergence  seems  to  result  from  the  exhaustion  of  the
initial shock-wave effects of the creation of the Internal Market and successive accessions The
slowdown has been observed in all countries except for the  UK,  Ireland and Sweden where
there is some trend towards divergence. There is substantial potential for further convergence
towards lower prices in several product categories.

What kind of action may be useful to push convergence further?

At  the  broadest  level,  the  strict  enforcement  of  Internal  Market  law  and  competition  policy
can  go  a  long  way  towards  the  prevention  of  fragmentation  in  the  Internal  Market  and  the
creation  of  healthy  competition.  Other  regulatory  reforms  such  as  the  opening  up  to

12

13

Of course, the evolution of prices depends on many factors besides integration. The evolution of factor
prices such as fuel or labour, technology, intermediate inputs and productivity have a significant impact
on the prices of goods and services.
The performance of services prices is a matter of concern both from the point of view of integration and
the  overall  evolution  of  prices.  In  this  context  it  is  important  to  remind  the  mandate  given  by  the
ECOFIN  Council  to  the  Commission  to  have  a  closer,  in-depth  look  into  the  causes  for  price
inflation/differentials across Member States and, in particular, in the services sector.

10

                                                
competition  of  network  industries  can  also  foster  competition.  The  greater  development  of
cross-border  shopping  by  consumers  and  e-commerce14  can  also  contribute  to  price
convergence by exerting downward pressure on prices. Of course, all sectors are not equally
open to cross-border shopping. However, the advent of euro coins and notes could also help
narrow price differences too.

Within specific goods and services markets though, we need to look more deeply at specific
factors that impact price convergence. In previous reports we have identified indirect taxation,
the  structure  of  distribution  networks,  market  power  and  inefficient  services  sectors  as
composing  a  significant  portion  of  residual  price  differences.  How  much  do  these  factors
account  for  the  remaining  price  dispersion?  The  car  market  offers  a  good  example  of  the
different ways in which integration can be pushed further.

One  study  of  the  new  car  market  determined  that  large  price  differences  persist  across
countries  regardless  of  whether  price  differences  are  measured  with  or  without  taxes.
Incomplete pass-through of taxes creates large pre-tax differences in the prices of new cars.
The study shows that pre-tax price differences on new cars could be reduced by 16 percent if
tax distortions were removed15.

The distortions due to differences in taxation spill over into the spare-parts markets as well.
As shown in box 3, there seems to be an inverse relationship between the price levels for new
cars and spare parts (both measured pre-tax). Pre-tax prices for new cars tend to be lower in
high  tax  countries  in  order  to  compensate  for  the  negative  effect  of  high  taxes  on  demand,
while spare-parts prices seem to be higher in those countries, thereby compensating for lower
revenues  from  new  car  sales.  As  a  result,  tax  differences  result  in  price  distortions  in  two
markets (market for new cars and market for spare parts) and total price dispersion increases
in the Union.

Two recent developments can trigger further convergence in the car sector.

– 

– 

The  recent  Commission  communication  on  the  taxation  of  passenger  cars
(COM[2002]  431)  recommends  that  registration  tax  levels  should  be  gradually
reduced, maintained at low levels and preferably abolished over a transitional period
of  five  to  ten  years.  Incorporating  this  recommendation  into  national  tax  systems
should help reduce fragmentation of the new car market.

Commission Regulation  (EC)  No  1400/2002  of  31  July  2002  on  the  application  of
Article  81(3)  of  the  Treaty  to  categories  of  vertical  agreements  and  concerted
practices  in  the  motor  vehicle  sector  will  curb  market  power.  It  will  also  help
rationalise and restructure car distribution and servicing.

A large potential for price convergence  lies in  the services sectors  which will likely require
even  greater  reforms.  Figure  5  shows  the  price  patterns  of  three  very  different  types  of
services: car insurance, dry cleaning and car rentals. In all of these cases, price convergence

14 

15

The green Paper on EU Consumer Protection (COM 2001 531 final) and its follow-up communication
(com  2002  289  final)  address  these  issues  in  particular  from  the  perspective  of  consumer  confidence
and protection and make proposals for strengthening this aspect of the Single Market.
See  ”Car  Price  Differentials  in  the  European  Union :  An  Economic  Analysis”  by  H.  Degryse  and  F.
Verboven for DG Competition, November 2000.

11

                                                
has been low to non-existent, and prices have been rising faster than the rate of inflation. It is
important to point out here that in addition to the benefits that would accrue to consumers just
from  being  able  to  access  services  at  cheaper  prices,  downward  price  convergence  in  the
services  sectors  (e.g.  distribution,  transport,  energy,  business  and  financial  services)  would
also  lower  the  cost  of  manufactured  goods  and  thereby  create  additional  benefits  for
consumers.

Enlargement offers possibilities for additional gains for consumers in the Internal Market.

The inclusion of new member states into the Internal Market has the potential to unleash new
competitive  pressures  within  the  market  and  deliver  even  greater  benefits  for  consumers.
Figure  8  shows  the  price  level  in  the  present  15  Member  States  and  in  the  accession  and
candidate  countries  with  respect  to  an  EU25-average.  The  ten  new  countries,  with  the
exception  of  Malta  and  Cyprus,  all  have  price  levels  significantly  below  any  of  the  EU15
countries. Thus,  price differences will  be  much  larger  in  an  enlarged  EU.  For  most  product
segments, price dispersion in the new EU25 will be higher than it was during the launch of the
Internal Market with the EU15 at the beginning of the nineties (see figure 9).

While we will undoubtedly see  convergence in  the  EU  25  during  the  coming  ten  years,  the
inclusion of new countries could also spark increasing convergence among the EU15. Within
the EU15, the low and high price level countries are geographically far apart from each other,
which slows down integration. However, in an enlarged EU25, high price level countries will
be  located  closer  to  low-price  countries.  Consumers  in  countries  with  high  price  levels  like
Sweden for example, could benefit considerably from increased competition from the  Baltic
States and Poland. Of course, this is a possibility that can be realized only if the opportunities
created by enlargement for all countries involved are fully exploited.

TRADE:  Integration  continued  increasing  steadily  between  1995  and  2000  …  but  lost
momentum in 2001!

Intra-EU  trade  flows  in  goods  have  consistently  increased  at  a  rate  greater  than  European
GDP  growth  between  1995  and  2000.  Furthermore,  the  intra  EU  goods  imports  share  of
national  apparent  consumption  has  been  increasing  (14  %  on  average  for  EU  15  in  2001).
However,  and  for  the  first  time  since  the  creation  of  the  Internal  Market,  intra-EU  trade  in
goods  as  a  percentage  of  GDP  did  not  grow  in  2001  over  the  previous  year,  because  GDP
grew faster than trade (see figure 10). This may be an isolated event of limited magnitude. In
addition, 2001 has been an exceptional year and world trade has stopped growing for the first
time  in  two  decades.  Nevertheless,  this  development  calls  for  a  more  careful  look  at  trade
evolution  and  shows  the  need  to  exploit  in  full  the  trade  creation  potential  of  the  Internal
Market.16.

The  trade  openness  of  EU  countries  towards  extra-EU  zones  has  increased  more  rapidly
than their openness towards each other.

Excluding  2001,  world  trade  and  extra  EU  trade  (exports  plus  imports)  have  been  growing
faster than intra EU flows. The value of EU imports from extra EU providers nearly doubled

16

Everything concerning trade and investment in the services sectors is discussed in the annex.

12

                                                
from  1995  to  2001.  This  pattern  has  been  consistent  in  all  EU  countries  (particularly  in
Austria,  Greece,  Germany  and  the  Netherlands)  (see  table  7).  This  has  two  important
implications. First, contrary to what has sometimes been alleged, economic integration within
the Internal Market is not creating a “Fortress Europe”; and second, this trade pattern (internal
+ external trade creation) means that every effort to remove remaining barriers to trade within
the Internal Market has the potential to create real welfare gains, because increased intra EU
trade does not substitute for extra EU trade.

Significant differences remain across countries in trade creation and trade openness.

Only 6 Member States, Germany, Austria, Belgium/Luxembourg, France and Spain, display
clear  signs  of  increased  intra-EU  trade  flows.  Finland  and  the  Netherlands  have  shown  a
moderate  increase  in  intra  EU  openness  in  the  1995-2001  period,  but  the  remaining  EU
countries have not exhibited remarkable changes in their intra EU openness or, as in the cases
of UK and Greece, have even reduced intra EU trade in the same period (see table 8).

Obviously, the relative openness of each individual economy at the outset of integration is an
important factor  for  evaluating  these  results.  One  would  expect  that  the  older  EU  Members
with  more  integrated  and  open  small  economies  would  have  exhibited  a  less  dynamic
integration pattern in recent years, whereas the biggest and least open economies would only
now be exploiting their trade integration potential. But this has not always been the case.

Among the countries with relatively good trade creation performance we find long-time EU
Member  States  with  a  highly  open  economies  in  1995  like  Belgium  and  Luxembourg
alongside « newcomers » like Austria, which had a relatively open economy at the moment of
accession. In the bigger and relatively closed economies with long (France and Germany) and
shorter (Spain) EU membership, significant trade volumes have also been generated in recent
years.  Other  countries  with  highly  open  economies  in  1995  show  some  symptoms  of
exhaustion  in  trade  creation  between  1995  and  2001.  Finally,  long  time  Members  with
relatively  closed  and  bigger  economies  (Italy,  and  the  UK)  and  more  recent  Members  with
relatively more open and smaller economies (Portugal, Greece and Sweden) exhibit relatively
worse trade creation performance (see table 9).

The cases of Belgium and Luxembourg show that the Internal Market still offers the potential
for  significant  trade  creation  for  long-time  members  with  already  highly  integrated
economies, as well as for new members like Austria. In fact, comparing the trade performance
of  the  three  most  recent  countries  to  join  the  EU  since  their  accession  in  1995  throws  very
interesting  results.  Their  trade  performance  has  been  completely  uneven:  among  the  three,
only Austria has met expectations, whereas Finland has experienced only a moderate increase
in intra EU openness and Sweden has experienced very little trade integration at the aggregate
level.

Trade has been created with relatively less “market friction”.

The  Internal  Market  has  succeeded  in  creating  more  trade  in  a  market  with  relatively  less
“friction”. Figure 11 shows that trade (imports) has been growing faster than the number of
Internal  Market  infringements  non-related  to  transposition  problems.  In  fact,  between  1988
and 1994, intra EU trade and infringements grew apace. However, after 1995 there is a clear
change in the trend showing that trade could grow steadily while the number of infringements
fell and then grew at a much lower rate.

13

This indicator of market friction can also be useful to complete the profile of Member States.
Figure 12 shows the ranking of countries taking into account their integration in the Internal
Market and the number of infringements non related to transposition. This index is high  for
countries  with  a  high  number  of  infringements  opened  in  the  1995-2001  period  and  low
imports and incoming foreign direct investment.

Intra  EU-trade  performance  could  be  improved  with  better  application  of  the  mutual
recognition principle.

In addition, convergence, including necessary harmonisation, of national measures is required
up to the point where mutual recognition becomes possible.

In the light of  experience,  these  harmonisation  measures  may  be  needed  in  areas  which  are
relevant to significant health, environment and consumer protection issues17.

The  correct  application  of  the  mutual  recognition  principle  still  presents  problems.  About  a
third of the infringement proceedings during the period 1998-2001 involved issues of mutual
recognition. However a number of measures proposed in the 1999 Communication on Mutual
Recognition  have  already  been  implemented.  In  addition,  the  notification  procedure  under
Directive  98/34/EC  is  proving  to  be  extremely  useful  as  Member  States  are  now  adopting
large amounts of technical regulations due to technological change and health and food safety
issues (in 2001 the Commission received 530 notifications of technical regulations).

The  recent  report  on  the  application  of  the  principle  of  mutual  recognition  evaluated  the
functioning  of  this  principle  based  on  evidence  provided  by  case  studies  and  infringement
cases…

…but what can be said about the overall impact of the principle of mutual recognition on
integration? How does it compare to harmonisation measures?

Convergence in unit export  prices is a  relatively rough indicator  of integration, but it offers
some comparison of the performance of trade in harmonised and non-harmonised products18.
Between 1993 and 2002, the dispersion of export unit values has been on average lower in the
EU than in OECD countries.

Over 80 % of the sample products exhibit lower dispersion in the EU than in the OECD at the
end  of  the  period  (see  table  10).  Export  unit  values  inside  the  EU  have  converged  more
intensively than in the OECD as a whole.  For  the vast majority of EU countries, more  than
50% of export goods show converging unit values (see table 11).

Non-harmonised  products  are  among  those  demonstrating  the  greatest  levels  of  export  unit
value convergence: 19 among the top 50 sectors in the export unit value convergence ranking
are  not  covered  by  any  kind  of  harmonisation,  6  are  harmonised  goods  and  16  of  them  are
covered by new approach directives (see table 12).

17

18

Eurobameter  57.2  –  Flash  Eurobameter  128  :  Public  opinion  in  Europe  :  Views  on  business-to-
consumer cross-border trade, 14 November 2002
M. M. Knetter and M. J. Slaugther «Measuring product-market integration» NBER, February 1999 and
Gil-Pareja,  S.  (2002):  “Export  price  discrimination  in  Europe  and  exchange  rates”,  Review  of
International Economics 10, 299-312.

14

                                                
But in those cases where the free-movement of goods principle doesn’t work properly, firms
and consumers pay a high cost.

For  instance,  in  the  lorry  sector,  the  main  difficulties  arise  from  the  compulsory  technical
rules  of  Member  States.  These  rules  often  create  unnecessary  extra  costs  for  traders  and/or
firms and negatively impact trade flows and prices, generating welfare losses for consumers
and producers. In particular, the impact is felt in the form of product modifications to achieve
compliance,  added  costs  for  testing  every  new  model,  and  delays  in  time  to  market  due  to
administrative procedures.

In the case of the lorry sector, Commission case studies have shown that the additional cost
for exporters to adapt their products to national requirements ranges from 1785  €  to  2500 €
per vehicle. Analysis of export unit values confirms that these additional costs are passed on
to consumers.

Despite  recent  developments  the  internal  market  program  still  hasn’t  exhausted  its  trade
creation potential as confirmed by the case of Belgium. Therefore, there is a strong  case for
eliminating  remaining  barriers  in  order  to  allow  other  EU  economies  to  fully  exploit  this
potential and benefit from the important economic gains that are now to being lost. The case
for further liberalisation is even greater for the services sector, where trade has not taken-off
yet (see services annex).

Recent figures show that foreign direct investment remains the main driver of integration
in the EU, but it was seriously hit by events in 2001.

Intra EU FDI flows increased by a factor of 15 between 1995 and 2000 and was seriously hit
by  events  in  2001,  falling  below  1999  levels.  This  sudden  and  important  downturn  in  FDI
activity shows the high volatility of these flows and their sensitivity to short term economic
conditions.

The analysis of the longer run trends shows that, unlike trade, there is a clear reorientation of
flows towards the EU area : in 1995, the share of intra EU flows was already higher than that
of extra EU flows and the gap has been increasing until 2000.

Leaving aside 2001, the ratio of trade to FDI has been rapidly decreasing. Several countries
which have shown only modest progress in trade integration have proven to be very dynamic
in intra FDI flows; in these cases FDI, and not trade, has been the main instrument for internal
integration (e.g. UK, Sweden). (See figures 13, 14, 15)

IV.

RESULTS OF THE MONITORING OF ESPECIALLY RELEVANT MARKETS

The  overall  assessment  based  on  general  market  indicators  must  be  complemented  with  an
analysis of the performance of some markets of special importance from the Internal Market
point of view.  In this section we look into the  situation in public  procurement  and financial

15

service  markets.  In  an  annex  we  present  an  update  to  last  year’s  evaluation  of  services  of
general interest19.

PUBLIC PROCUREMENT MARKETS

Total public procurement’s share of GDP has declined from 17.3 % in 1995 to 16,2% in 2001
(see  table  13).  However,  increasing  transparency  and  effective  competition  in  public
procurement  markets  remains  one  of  the  most  important  and  challenging  objectives  of  the
Internal Market. Integration of these markets could still yield large benefits.

One  percent  savings  in  public  procurement  as  a  result  of  more  competition  and  efficient
public  procurement  markets  would  have  resulted  in  total  savings  of  €14  billion  in  2001  for
EU  15.  This  is  equivalent  to  approximately  one  third  of  the  total  net  borrowing  needs  of
public  administrations  during  that  year.  The  potential  for  savings  in  this  area  is  therefore
important, especially in the current context of improving the quality of public spending.

Recent developments in this area have given us new reason for concern and added impetus
for the adoption of the package …

First,  the  percentage  of  public  procurement  that  was  published  in  the  Official  Journal  (i.e.
disclosed to the public) did not grow significantly in 2001 and remained at 15.8% (see table
14).  After  a  promising  4  percentage  points  increase  in  2000,  this  stagnation  in  the
transparency  of  public  procurement  markets 
is  a  serious  matter  requiring  further
consideration.  It  did  not  vary  significantly  in  any  country  except  Sweden,  where  the
percentage  of  public  procurement  that  was  published  increased  from  20  %  to  26  %,
continuing an impressive trend in that country.

Another indicator of market transparency gives additional reason for concern. The number of
invitations to tender that were published in the Official Journal have increased in recent years,
but the number of contract award notices that were published did not increase proportionately.
Market  transparency  is  being  reduced  because  relatively  fewer  details  are  known  about  the
results of procurement competitions. This continues a recent trend of a growing gap between
these two figures (see figure 16).

Finally,  the  number  of  award  notices  that  indicate  cross-border  procurement  remains  very
low. Direct cross-border procurement accounted for just 1.26 % of award notices in 2001 (1.5
%  in  2000).  This  figure  does  not  capture  indirect  procurement  through  affiliates  in  foreign
countries,  so  the  real  level  of  cross-border  procurement  is  greater  than  the  figures  suggest.
Nonetheless,  direct  cross-border  procurement  is  abysmally  low  and  has  not  increased  in
recent years.

The application of public procurement directives has been accompanied by a high rate of
infringements

19

The new methodology defined in the recent Commission Communication for the horizontal evaluation
of services of general interest will be applied from next year on.

16

                                                
The  compared  evolution  of  public  procurement  activities  and  the  number  of  infringements
related to public procurement gives further reasons for concern. The increase in the number of
procurement notices published in the Official Journal has been matched by the increase in the
number of infringements related to public procurement in recent years, although the number
of infringements seems to have peaked and started to decline  in 2000  (see  figure 17  and its
footnote). Unlike the trends in trade and foreign direct investment, increased transparency in
public procurement has resulted in more “friction” in the application of procurement rules.

Thus, the few indicators available of the evolution of public procurement give us no reason
to be optimistic.

This  provides  additional  justification  for  speeding  up  the  transition  towards  the  new
procurement  directives.  The  new  legislative  package  should  improve  this  situation.  It
consolidates  existing  directives,  streamlines  awarding  procedures  and  encourages  the
introduction of electronic technologies in public procurement.

After the introduction of  amendments proposed  by the European Parliament, the  package  is
currently under discussion at the Council where a political agreement is expected. Besides the
new  legislative  package,  other  ancillary  measures  could  also  improve  performance  in
procurement markets (see box 4).

e-procurement could facilitate cross-border procurement

The Lisbon European Council conclusions called for progress in introducing e-government by
the  end  of  2003.  The  introduction  of  fully  fledged  electronic  procurement  should  make  the
procurement process run more smoothly, significantly decreasing transaction costs, as well as
improving  efficiency.  There  is  evidence  in  Cardiff  national  reports  that  Member  States  are
making  efforts  to  incorporate  these  new  technologies.  This  should  contribute  to  increase
transparency and open up to competition public procurement markets to domestic as well as
foreign firms.

After  recent  and  significant  steps  taken  (“political  agreement”),  the  adoption  and  swift
implementation of the new legislative package is urgent now. Extended use of e-procurement
and other ancillary initiatives could pay significant economic benefits as well. Finally, better
monitoring of procurement, especially with respect to cross-border procurement, is needed.

FINANCIAL SERVICE MARKETS

With  the  physical  introduction  of  the  Euro,  both  retail  and  wholesale  financial  markets
within the eurozone use  one  currency  but  unfortunately  do  not  form  one  unified  market.
Many obstacles remain...

…and  not  all  of  them  can  be  removed  by  regulatory  action.  With  the  exception  of  the
unsecured  money  markets  of  the  eurozone,  EU  wholesale  financial  markets  still  exhibit
varying degrees of fragmentation (see box 6). The Financial Services Action Plan (FSAP), the
Commission’s  main  instrument  for  realising  a  single  market  in  financial  services,  has
addressed some of the major obstacles.

17

A  higher  degree  of  integration  has  been  reached  in  areas  where  a  common  market
infrastructure has been put in place and/or where regulation has been adapted, but there is
still some way to go in removing obstacles even in the wholesale markets…

In  the  unsecured  money  markets,  full  integration  has  been  reached  among  the  eurozone
Member  States.  Harmonisation  in  this  market  segment  includes  the  good  traded  (the  single
currency),  the  rules  applying  to  it  (the  common  monetary  policy)  as  well  as  the  trading
infrastructure (TARGET).

Indicators confirm that full integration has been reached. Since January 1999, there has been
full convergence of interest rates  in  this  market  and  cross-border  activity  represents  at  least
60% of total activity.

Convergence  of  interest  rates  has  occurred  in  the  government  bond  market  but  is  not  as
complete  as  it  is  in  the  unsecured  money  market  (see  figures  18  and  19).  Some  degree  of
fragmentation  remains  because  of  the  different  issuers:  the  different  levels  of  liquidity  and
creditor quality explain the remaining spreads in interest rates. However, cross-border activity
is clearly present in this market segment.

In  other  long  (corporate  bond  market,  equity  markets)  and  short  term  (secured  money
markets) wholesale markets, involving an exchange of liquidity for paper, many obstacles to
integration  remain  that  are  linked  to  collateral  use,  clearing  and  settlement,  accounting
practices,  requirements  for  prospectuses,  etc.  Even  though  these  difficulties  have  not
prevented  cross-border  activity  from  developing,  there  is  substantial  room  for  further
integration in these markets.

Recently adopted FSAP measures and others still in the pipeline address these problems….

The collateral directive20, is set to tackle problems related to the acceptance of the different
types of  collateral used throughout  Europe.  Once operational,  the  directive should  stimulate
intra EU cross-border activity by improving legal certainty in the use of collateral.

The  costs  for  cross-border  intra  EU  settlement  are  still  much  higher  than  for  domestic
transactions,  which  are  similar  to  US  levels.  Reducing  costs  for  cross-border  intra-EU
transactions to the level of domestic ones, would yield an estimated cost savings of 42% 21, i.
e. € 693  millions (see box 7). The Commission has recently launched a survey to determine
whether regulatory action is needed to reduce costs or whether markets will eventually bring
about these changes by themselves22.

Events in the financial markets over the past year have once more demonstrated how essential
it  is  to  have  reliable  information,  especially  in  times  of  economic  uncertainty.  If  investors
cannot  rely  on  the  accuracy  of  the  information  they  are  given,  they  will  shy  away  from
anything other than government bonds. In the aftermath of the accounting scandals in the US
that  led  to  the  failure  of  large  companies  like  Enron  and  WorldCom,  investors  have  grown
wary of corporate linked securities, leading to contractions in the sizes of the corporate bond
market, stock exchange capitalisation and the commercial paper market. This has negatively

20

21

22

Approved by the EP on 15 May 2002. The implementation is scheduled for the end of 2003.
IVIE Report (forthcoming) for the EU Commission.
The recent Euroclear-Crestco merger, effectively integrating 60% of EU settlement systems, is expected
to reduce settlement costs considerably.

18

                                                
impacted  pension  funds,  insurance  companies,  banks’  balance  sheets  and  venture  capital
funds (where the impact will most likely be felt at the end of 2002) (see box 8).

The  FSAP  includes  several  measures  to  make  financial  information  more  reliable  and
comparable  across  countries.  For  instance,  the  draft  prospectus  directive  [COM(2002)  460]
will provide investor protection because prospectuses will be approved across the Union only
if they meet common EU standards for what information must be disclosed and how. Firms
will  also  benefit  from  cheaper  and  easier  access  to  capital  throughout  the  EU  through
simplifying the requirements for issuing a public offer prospectus. With respect to corporate
accounting  information,  the  implementation  of  the  IAS  for  listed  companies  by  2005  will
harmonise  the  way  corporate  accounts  are  presented  and  provide  investors  with  clearer  and
more  comparable  information.  Extending  IAS  to  unlisted  companies  could  stimulate  cross-
border  intra  EU  venture  capital  investment  as  investors  will  be  able  to  make  better
comparisons between their investment options (see box 8).

The least integrated of all financial markets are the retail markets.

Tax  differences,  the  lack  of  harmonised  financial  products  and  information,  structural  and
regulatory national differences and the local character of the relationship between customers
and  financial  intermediaries  are  among  the  main  barriers  to  more  cross-border  activity  by
European citizens and SMEs. This also applies to consumer and mortgage loans and also to
private pension schemes and insurance policies.

The  evidence  available  shows  virtually  no  convergence  of  interest  rates  on  consumer  loans
(see figure 22). The perceived convergence of mortgage rates (see figure 23) is not resulting
from  intensified  competition  but  more  because  of  convergence  in  money  market  rates  (see
box 9). As a result, no significant cross-border activity is reported in these markets.

Because  of  the  “size  and  number”  of  customers  in  these  market  segments,  market-driven
changes do not come  about as fast as in the wholesale market. The physical introduction of
the Euro and the December 2001 Regulation on cross-border retail payments could accelerate
integration. The introduction of the Euro has enhanced the transparency and comparability of
products.  The  December  2001  regulation  sets  domestic  and  cross-border  payments  at  the
same  level,  starting  July  2002  for  electronic  payments  and  July  2003  for  cross-border  bank
transfers.

Other regulatory measures are being taken to help create an EU-wide financial market for
retail customers

– 

– 

23

The  Commission  proposal  for  a  revised  consumer  credit  directive  aims  at  full
harmonisation of rules applicable to all consumer credit (except home loans)23.

Eighteen months after the Commission proposal, an agreement of principle has been
reached regarding the directive on supplementary pension funds, which would allow
for the cross-border provision of pension schemes while providing sufficient security

To  improve  transparency  and  comparability  of  credit  cost,  the  proposal  includes  an  obligation  to
provide information covering three types of costs: the borrowing rate, which provides full transparency
on. the cost of the interest to be paid; the “total lending rate” which adds the overheads to be paid to the
lender and thus provides clear comparability of lender offers among suppliers and across borders; and
the Annual Percentage Rate, APR i.e. the total cost of credit to the consumer.

19

                                                
to subscribers. Once adopted, this proposal should allow for further development of
the pension fund market in Europe and contribute to the mobility of workers.

– 

The  Insurance  Mediation  Directive24  aims  at  improving  consumer  choice  and
protection  while  helping  insurance  intermediaries  market  their  services  across
borders. The directive will come into force in late 2004.

Even though many of the identified regulatory obstacles to more integrated markets are being
addressed by the FSAP, there is a clear need for faster implementation of regulation and its
adaptation to the changing environment.

Delaying the introduction of these reforms  implies  a  high  cost  for  European  citizens  and
firms.

– 

– 

– 

– 

– 

24

25

26

27

28

29

Providing EU companies with the same access to finance as US companies has been
estimated  to  boost  value  added  growth  in  a  range  of  industrial  sectors25  by  an
enduring 0.74-0.92 percentage points (see box 5).

The  one  off  macro-economic  impact  of  pooling  liquidity  in  European  equity  and
corporate bond markets26 has been calculated at 1.1 % of EU GDP (or € 130 billion
in 2002 prices) over the long run, with gains in terms of employment, consumption
and  investment  at  0.5  %,  0.8  %  and  6.0  %  respectively.  Even  when  taking  into
account  the  current  doldrums  of  the  equity  markets,  this  conclusion  is  not
substantially altered (box 5).

A  study  commissioned  by  the  EFR27  suggests  that  the  potential  for  higher  growth
through  financial  integration  could  be  0.5  %  of  annual  EU  GDP,  or  €  43  billion  a
year.

The European financial structure is  still  predominantly  bank-based. Dependence on
bank  finance  is  even  higher  for  unlisted  SMEs  without  an  external  rating.  Data
shows that the  own funds/total assets  ratio  of  EU  SMEs  is  on  average  much  lower
than  of  their  US  counterparts  (see  tables  d  and  e  in  box  9).  Estimates  show  that  a
10% drop in bank-based financing in favour of capital market financing would mean
a reduction in financing cost equivalent to 0.3 % of EU GDP28.

The  benefits  from  eliminating  the  inefficiencies  of  some  market  segments  are
substantial as well. In the EU banking sector alone, these inefficiencies are estimated
to total between 1.4 and 1.6 % of GDP29.

for 

study 

Economic 

Approved by the Council of Ministers on 30 September 2002.
CEPR 
at
DG 
http://europa.eu.int/comm/economy_finance/publications/economic_papers/economicpapers179_en.htm
London Economics study for DG Internal Market available at
http://europa.eu.int/comm/internal_market/en/finances/mobil/overview.htm
EFR: European Financial Services Round table.
IVIE forthcoming.
IVIE forthcoming.

Financial 

available 

Affairs 

and 

20

                                                
V.

SUMMARY AND CONCLUSIONS

This report shows that there is potential for future integration, points out some countries and
economic sectors where  that  potential  is  greater  and  presents  estimates  of  potential  benefits
from  several  economic  reforms  that  the  European  economy  has  been  awaiting  for  the  past
four  years.  In  many  cases,  especially  in  the  financial  services  sector,  they  are  of  the  same
order of magnitude as the Union’s entire economic growth for the past year. This is important
for policy making and priority setting purposes now  when  the  competitiveness  gap with the
USA is widening and labour productivity still grows more than twice  as fast in the US as it
does in Europe30.

It  is  not  just  a  matter  of  missing  “potential  benefits”.  Every  additional  year  of  delay  in  the
implementation  of  these  economic  reforms  is  costing  European  citizens  money  now.  This
report  demonstrates  that  the  rate  at  which  some  of  these  reforms  are  being  implemented  is
roughly equivalent to the rate at which prior Internal Market legislation has been implemented
during  the  last  decade,  showing  that  decision-makers  apparently  feel  no  sense  of  urgency.
This is not good enough.

The commitment to competitiveness made by the Heads of State and Government in Lisbon
in March 2000 and renewed in Barcelona calls for more rapid action. We can no longer delay
the adoption of pending proposals.

The  report  has  also  reinforced  the  conclusion  of  successive  European  Councils  that  a  key
obstacle to the implementation of structural reforms, that have been agreed to at EU level, has
been  late  transposition.  We  can  no  longer  afford  these  delays  in  the  crucial  stage  of
transposition,  especially  in  the  implementation  of  economic  reforms  included  in  the  Lisbon
strategy.

A  formal  declaration  by  Member  States  to  transpose  and  implement  structural  reform
measures  within  the  legal  allowed  timeframes  (i.e.,  without  incurring  lengthy  and  costly
additional delays) would be a credible message of their commitment to the reform process. In
addition,  each  country  could  reinforce  the  credibility  of  this  commitment  by  voluntarily
defining their deadlines and quantitative objectives. Each Member State could also pay more
attention to following up judgements of the European Court of Justice affecting the  Internal
Market and  ensuring that the necessary  amendments  are made  to  national  law.  This  process
could accelerate the implementation of reforms, thereby benefiting citizens.

The  creation  of  a  real  Internal  Market  for  services  is  perhaps  the  most  important  mid  and
longer term goal. The objectives of the Lisbon European Council are not achievable without
an  Internal  Market  for  services.  In  addition,  some  of  the  benefits  from  the  creation  of  the
Internal Market are being squandered now due to the poor performance of the services sector
in Europe. As shown in the Commission report on barriers to integration in services and in the
annex to this report, lack of integration in the services sector is depriving the EU economy of
substantial current and future benefits. Independent action by Member States is necessary but
not  sufficient  for  making  significant  progress.  Only  the  implementation  of  the  services
strategy can effectively contribute to accomplishing this goal at the EU level.

Completing work in the financial services sector is the most urgent objective. We have seen
that legislation in this area has been especially difficult to implement.

30

See SEC(2002) 528 “2002 European Competitiveness report”.

21

                                                
Consumers in particular ultimately pay the price for the existence on Internal Market barriers.
Thus consumers cannot benefit from a variety of competitively priced goods and services and
the better quality of life they might expect.

Public procurement is the third area  calling  for the  speedy  implementation of  reforms.  New
measures to open up public procurement are in motion, but implementing these measures will
take time. This is an additional reason to prioritise these reforms. More and better indicators
of  public  procurement  markets  would  help  to  better  assess  their  true  performance  and  any
progress that has been made in integrating them.

Finally, the significant efforts expended on reducing the regulatory burden on SMEs and start-
ups should be complemented with the full and effective implementation of the action plan for
better  and  simpler  regulation.  In  this  regard,  additional  efforts  are  needed  to  integrate  the
“Internal  Market”  dimension  as  pointed  out  in  the  annex  to  this  report.  National
administrations  need  to  take  into  consideration  not  just  the  impact  of  regulations  and
legislation  on  domestic  economic  actors  but  also  on  other  EU  actors  operating  within  the
Internal Market.

All  these  reforms  should  come  to  complement  reforms  already  underway  in  markets
providing services of general interest. Recent developments in these markets are presented in
a  special  annex  to  this  report.  It  shows  that  economic  reform  is  making  progress  in  energy
sectors although obstacles to market opening remain and the effects of these obstacles are felt
on price levels, particularly for households and small commercial users. The situation should
be  greatly  improved  with  the  adoption  of  the  energy  package  currently  under  discussion,
especially  after  the  agreements  at  the  Barcelona  European  Council  to  open  markets  to
commercial  users in  2004  and the recent  political agreement to open  them to households  in
2007. As a result of reforms in postal services, significant quality improvements are reported
at  Community  level.  Telecommunications  services  continue  rendering  dividends  and  this  is
reflected by increased consumer satisfaction especially with mobile telephony. The situation
in  transport  sectors  requires  attention.  The  transposition  and  implementation  of  the  rail
infrastructure  package  directives  by  15.3.2003  should  help  improve  performance  in  this
market.

22