Dynamic effects of European services liberalisation: more to be gained

Europe’s market for services is fragmented by many regulatory barriers. The Services directive proposed by the European Commission aims to integrate national services markets by reducing these barriers. Several studies indicate that bilateral trade and foreign direct investment in services could boost substantially. GDP and consumption could increase by 0.5% to about 1% on average in Europe. The effects for the Member States vary depending on the size of the barriers in their services markets and specialization. These results take account of scale effects, and forward and backward linkages in the economy, but ignore the effects of more competition on productivity and innovation in the long term. This paper assesses the channels though which an integrated European services market may generate these dynamic gains. Improved market access will stimulate competitive selection and productivity growth. Through trade and investment, knowledge spillovers will increase and innovation will be fostered. These channels are illustrated with quantitative evidence.