European Integration Through the Market and Through Law

Building the European Single Market Through Legislation and Competition Policy

The adoption of the Single European Act in 1986 is often seen as the re-launch of the European project which had (arguably) been stagnating throughout the 1970s. By setting as its objective the actual enforcement of the four freedoms (the free circulation of persons, goods, capital and services) enshrined in the 1957 Treaty of Rome, the Treaty paved the way to Europe’s most tangible achievement, namely the creation of an internal (or single) market among the members of the then Economic Community. The liberalization of network industries (telecommunications, transport, gas and electricity, postal services) has been a cornerstone of this agenda through the adoption of a number of sectoral directives. At the outset, the liberalization was mainly focused on large producers and consumers in industry. The main purpose of liberalization was to end the monopolies, notably by separating the operating of the infrastructures and networks from production, distribution and supply. As reported in Table 2.1, these directives have included a revision clause, ensuring that, progressively, the entire set of activities in a given sector would be open to competition. Over the course of the 1990s and 2000s, liberalization has reached individual consumers in most sectors, thus driving enforcement of the free circulation of services across Europe.

The intertwined dynamics of technological change and globalization has often been a main driver of this process. This was particularly the case in telecommunications and broadcasting services, where the convergence due to digital technologies and internationalization called national monopolies into question. The EU Commission has been a strong policy entrepreneur, promoting the liberalization of network industries. This

Table 2.1 Sectoral liberalization directives in the realm of services of general interest


First EU directive

Latest texts adopted

Air transport

First air transport package

Regulation 3975/87/ EEC, Regulation 3976/87/EEC, Directive 87/601/EEC

Third air transport package

Regulations 2407/92, 2408/92 and 2409/92


First telecom package 88/301/EEC

Telecom reform package 2006/136/EC, 2009/140/EC


Directive 'Television without frontiers' 89/552/EEC

Directive on the pursuit of television broadcasting activities 2007/65/EC


First railway package Directive 91/440/EEC

Fourth railway package (2016)



First energy package 96/92/EC

Third energy package 2009/72/EC


First energy package 98/30/EC

Third energy package 2009/73/EC

Postal services

First Postal Directive 97/67/EC

Third Postal Directive 2008/06/EC

Local urban transport

Regulation 1370/2007 Tendering and attribution of contracts and concessions

Regulation 1370/2007 Tendering and attribution of contracts and concessions


2011/24/EU Patients' rights in cross-border healthcare


has sometimes led to major inter-institutional struggles and resistance from the Member States. In telecommunications, the decision by the Commission to use its exclusive competence in competition policy (based on Article 90 of the Treaty on the European Community) to impose competition has been contested by several governments but eventually supported by a ruling of the ECJ (Schmidt 1998; Heritier 2001). In the case of electricity, the Commission decided, for political reasons, not to use its exclusive competence. Debates have been lengthy and politically difficult as Member States, especially France and Germany, were keen to preserve their contrasting organization of production and supply (Matlary 1997). However, the dynamics of the multi-level negotiations coupled with the example of liberalization in the UK brought about a change of the major players’ position among the Member States and within industry (Eising and Jabko 2001). In the railway sector, a main objective has been to separate the management of the infrastructure, on the one hand, and services related to freight and passengers, on the other. The stress has been put on the creation of a truly unified European railway network through the suppression of technical barriers to harmonization. With regard to competition for passenger services, liberalization has remained limited mainly as a result of the still dominant position of large national companies. As mentioned above, sectoral liberalization directives include clauses on ‘universal service’ or ‘public service obligation’ aimed at ensuring accessibility, equality, continuity, security and affordability. It is in the domain of postal services that obligations related to the public nature of services have been defined in the most comprehensive and ambitious way. However, this did not prevent a major change in the nature and quality of services provided with, for example, many post offices closing and a sensitive rise in prices in several EU countries (Hermann et al. 2008). Water distribution is one sector where no liberalization directive has been adopted. Rather, directives for ensuring high levels of water quality have been adopted on the basis of the EU’s competence for the protection of the environment and public health. This is notably explained by the fact that in all countries of the EU, water is distributed locally with no cross-border interconnection at stake. In spite of attempts by the European Commission to steer liberalization in this realm, resistance to liberalization among MEPs, Member States governments and various interest groups has been important enough to deter any policy initiative (Bauby 2011, pp. 139-142).

Besides the sectors which have been addressed by sectoral liberalization directives, a significant number of welfare services are located today in a grey area in the sense that they are not the object of specific sectoral legislation. Notwithstanding, liberalization can occur (or has already partly occurred) as a result of other provisions in EU law, especially competition policy. This is, for example, the case in education, cultural services, social housing, complementary social protection schemes and a myriad of welfare and social services. In this respect, three sets of rules come into consideration. Firstly, the EU Services Directive[1] adopted in 2006 after heated debates (as we will see in Chap. 4) resulted from a consensus on the idea that the provision of services across national borders had to be encouraged. In so doing, the purpose of the directive was to facilitate access for foreign providers through administrative and regulatory ‘simplification’ (read deregulation). In the original draft, all services were included in the scope of application including welfare services, except those covered by sectoral directives. As a result of contestation emanating from left-wing political parties and unions, the final draft of the directive includes an exception for a number of welfare services, namely healthcare, broadcasting, social housing, childcare and support for families and persons in need as long as they are provided or supervised by the State (Article 2.2). This closed list thus leaves a number of services in the realm of possible liberalization, notably when they are provided by private providers. Undisputedly, competition within the internal market is the rule, while the exemption from competition rules is the exception.

Secondly, as part of its exclusive competence for competition policy, the EU Commission exercises a control of state aids for all services falling under the scope of competition within the internal market. State aids can be defined as any form of (mainly financial) support from public authorities to an undertaking. While state aids to business are normally prohibited, the provision of welfare services can enjoy an exemption. In that case, the Commission monitors whether such support is proportional to the task of general interest carried out and does not involve any ‘overcompensation’ which would distort cross-border competition within the internal market. In other words, the states are allowed to compensate companies only for tasks pertaining to service to the public (such as longer opening hours, coverage of territory or prices established on users’ income criteria) and which they would not carry out if they were to consider their commercial interest only. On the basis of the Altmark

jurisprudence from 2003,[2] the EU Commission has developed a complex set of rules to decide whether state aids can be granted in the name of welfare services or not.[3] For public financial support to SGI to be compatible with the EU competition policy, aids must be (a) provided to companies which are formally entrusted by public authorities to a clearly defined mission of public service, (b) that the amount of the financial compensation for these tasks must be calculated in advance on the basis of clear criteria, (c) that the compensation should not exceed the cost of the public service mission and (d) that these costs should be calculated according to the functioning of a well-run and efficient enterprise. When aids are deemed unlawful, they must be reimbursed. In 2012, the Belgian provider of postal services Bpost, for example, had to pay about €300 million of compensation back to the Belgian federal state due to overcompensation of the actual cost of public service obligation. In contrast, the Commission decided in March 2015 to allow a ?640 million funding package from the British government to support the national network of Post Office Ltd. The Commission assessed that the subsidy would only support the provider in facing the costs involved with its mission of general interest through services such as the payment of social benefits, basic banking services or the maintenance of post offices and mail delivery in rural areas. The interpretation of rules in respect of state aids has thus produced conflicting, and sometimes surprising results. In 2007, the Commission decided to scrutinize the tax exemptions granted by the Italian state to the Vatican as a possible matter of state aid. This decision was then attacked by Italy’s ministers for EU affairs (Wernicke 2009a, p. 127). Beyond anecdotal cases, the application of state aid rules has crucial implications for the financing of a whole range of welfare services. In 2005, two associations representing private hospitals in Brussels launched a procedure calling on the EU Commission to examine whether there was financial overcompensation on the part of the Belgian state for the public service obligation carried out by five public hospitals in the capital city.[4] Recently, the EU Commission has revised the regime of state aid rules and addressed numerous criticisms. Local and regional public authorities who often struggled with the complexity—and sometimes even a degree of legal uncertainty—of the EU rules have complained about the intrusion of the EU in the provision of mainly local welfare services which bear no consequence for European cross-border trade. The revised package of EU rules (dubbed the Almunia package) adopted in 2011 and 2012 provides for clearer and more flexible rules, especially as far as small-scale local services are concerned, by setting a threshold under which public funding cannot be regarded as a state aid. However, a number of problems remain, especially as far as the formal act of entrustment by public authorities, the method for calculating the cost of compensation for public service obligations, the articulation with public procurement rules or the definition of social services are concerned (van de Gronden 2013) (see also Chap. 4, Sect. 3.1).

To the extent that an increasing number of services are delegated from public authorities to separate providers, public procurement is a third type of horizontal rules which affect welfare services provision. In 2014, the Council and the Parliament adopted new rules on public procurement for various social services and utilities, as well as new rules on the award of concession contracts.[5] A main objective has been to ‘boost fair competition’ within the internal market by enlarging the possibilities for smaller companies or foreign providers to win public procurement bids by more transparent procedures (2014). Insofar as governments’ procurement expenditures stand for 18 % of the GDP, the liberalization of public procurement is seen as a means to boost trade and competition in the internal market. In tune with the consumer-centred perspective, increased competition shall ‘ensure best value for money’ to European taxpayers (ibid.). However, according to the Belgian socialist rapporteur Marc Tarabella, a majority of MEPs has sought to avoid that the ‘most economically advantageous tender’ means the lowest price at the expense of efficient regulation (ibid.). As a result, environmental and social aspects are taken into consideration in the new legal framework, including instances of subcontracting. Furthermore, public authorities remain free to choose whether welfare services shall be provided in-house or outsourced to private providers. However, the general philosophy of the new EU framework has raised fears regarding possible incentives for privatization in certain domains. While water distribution has been totally excluded from the scope of application of the new rules on procurement, obligatory social security services now do fall under its scope, which means that they could be outsourced and privatized where Member States decide to do so.

Although it does not specifically target welfare services, the building of the European common market has tremendously affected their provision by extending market principles and rules to virtually all service activities. In this framework, exemption from competition rules should remain an exception and therefore requires derogations. Change has mainly occurred through the sectoral liberalization of public utilities, horizontal services liberalization and rules on state aids and public procurement in the framework of competition policy. In these domains, the EU Commission enjoys strong competences and sometimes, as in competition policy, exclusive discretionary competence. Insofar, it has performed the role as an active policy entrepreneur, pursuing the achievement of a unified common market as well as a neoliberal agenda focused on the competitiveness of EU firms on global markets. However, this process has not happened without frictions. In fact, ever since the early days of the European Community in the 1950s, a tension has existed between market competition and the protection of public (or general) interest. This has been reflected not only in the development of primary law related to SGI in the successive European treaties but also in the way the ECJ has ruled on particular cases featuring such conflicts.

  • [1] Directive 2006/123/EC of the European Parliament and of the Council of12 December 2006 onservices in the internal market.
  • [2] Case C-280/00 Altmark Trans GmbH, 24 July 2003.
  • [3] These rules are known as the ‘Monti-Kroes package’ (from the name of the former Commissionersfor competition Mario Monti and Nelly Kroes) from 2005. For a comprehensive overview (including on the recent reform), see Szyszczak and van de Gronden (2013).
  • [4] The case is still pending. Whereas the Commission has decided in 2012 that there was no need toinvestigate the lawfulness of aids to the Belgian public hospitals, the General Court has ruled thata formal procedure should be open as the state aids under examination could well be incompatiblewith competition policy.
  • [5] Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 onpublic procurement and repealing Directive 2004/18/EC; Directive 2014/25/EU of the EuropeanParliament and of the Council of 26 February 2014 on procurement by entities operating in thewater, energy, transport and postal services sectors and repealing Directive 2004/17/EC; Directive2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the award ofconcession contracts.
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