The EU bureaucracy and the free market

The European Union is the largest single market in the world, governed by uniform rules set out in the directives and regulations. However, the interpretation of these rules is determined by the EU bureaucracy.
The EU bureaucracy and the free market

(Stuart Chalmers, CC BY-NC)

The bureaucratic rules are supposed to ensure fair competition, but not all of the member states are satisfied with them. One of the reasons why competition within the European Union is distorted are the persisting differences in the tax and social systems of the individual states, as well as the differences in the minimum wages and average wages.

Indirect taxes, such as VAT and excise duties, are harmonized, but this does not mean that they are identical in the individual countries. The standard rates range from 17 per cent in Luxembourg up to 27 per cent in Hungary. There is even greater variety in the reduced rates, which are usually applied to goods such as food, children’s products, medicines, and cultural goods. Although a zero rate is applied to exports, VAT affects the level of prices and, consequently, labor costs. The excise duty on unleaded petrol ranges from approximately EUR0.37 per liter in Bulgaria to EUR0.76 in the Netherlands. If transport has a significant share in the production costs, then countries with a high excise duty on petrol are disadvantaged.

Direct taxes are not subject to EU regulations, although there have been attempts to harmonize the rules relating to these taxes — such as the method of calculating the taxable amount and the scope of tax relief. That is due to the fact that the real amount of income tax depends both on the official rates and on the way in which taxable income is calculated. Official CIT rates in the European Union range from 10 per cent in Bulgaria, 10.8 per cent in Hungary, 12.5 per cent in Ireland and Cyprus, to over 30 per cent in Belgium, Germany, France and Malta. In Western Europe, the official CIT rate is higher than in Central and Southeast Europe (CSE), which is also seen by western politicians, trade unionists and businessmen as an example of unfair competition for investors who are moving jobs to countries with low taxes and social benefits.

The spread in the minimum wage among EU member states is high — from EUR261 in Bulgaria to nearly EUR2,000 in Luxembourg. The relationship between the minimum wages and the average labor productivity is less diversified, but also significant. Companies operating in the same industry in two different countries, where wage levels differ, can achieve a similar level of productivity through the use of the same machines and technologies. This gives some companies a significant advantage in the single market. Businesses operating in countries with high minimum wages as well as high social benefits, which contribute to higher labor costs, see this situation as unfair and speak of “social dumping” on the part of the poorer member states of the European Union.

Distortions concerning equal pay

The differences in labor costs resulting from the varied tax, social and remuneration schemes especially affect competition in the services market. A French employer cannot pay their employees less than EUR9.88 per hour. The statutory working time is 35 hours per week (151.67 hours per month). The rate of additional remuneration for overtime work is determined in collective bargaining agreements for the given sector. The overtime premium cannot be lower than 10 per cent.

If there is no collective bargaining agreement, the worker is entitled to a premium of 25 per cent for the first 8 hours of overtime, and a premium of 50 per cent for each subsequent hour. The overall working time cannot be longer than 48 hours per week. Meanwhile, in accordance with the law, a Polish company has to pay its employees no less than PLN13.70 per hour (EUR3.14), while the working time is 40 hours per week, and the premium for overtime work is usually at the discretion of the employer. Even if a Polish employer pays more than the minimum wage, it is usually still less than the official minimum wage in France (so-called SMIC). If there was complete freedom in the provision of services on the European market, then companies from the CSE would quickly dominate the markets of Western European member states.

In industrial production higher labor costs are compensated by higher productivity, lower transport costs and better access to the markets. For a new company from the CSE Europe it would require significant expenditures to enter international markets. But in the case of simple construction and renovation services or transport services, the West European employers do not have these advantages, and must deal with higher labor costs resulting, for example, from the French law. It’s therefore no wonder that France was the country most actively involved in thwarting the initiative of Frederik Bolkestein, the European Commissioner for Internal Market and Services. In January 2004, Mr. Bolkestein proposed the adoption of a new directive on services in the EU single market. The draft directive provided for the complete elimination of barriers in the field of services. The opponents of the Bolkestein’s directive pointed out that it contradicted Directive 96/71/EC of the European Parliament and of the Council of 16 December 1996 concerning the posting of workers in the framework of the provision of services. A compromise version of the Bolkestein’s directive was ultimately adopted in December 2006. It came into force in December 2009.

The Posted Workers Directive of 1996 provides that an employee posted to work in another country shall be subject to the laws of that country, which includes, inter alia, the minimum wage, the maximum working hours, the occupational health and safety provisions, the minimum length of the annual leave, and the conditions of accommodation. In March 2016, the European Commission adopted a draft amendment of the Posted Workers Directive. It included, among other things, the proposal to equalize the remuneration of the posted workers with the remuneration of local workers in the given profession. The draft harmed the interests of Polish companies providing services abroad and Poland fought against its adoption. In April 2018, the ambassadors of the EU member states adopted the final version of the revised directive. Poland and Hungary voted against the new law, but were unable to build a coalition of states that could block the directive. The maximum posting period was set at 12 months, with the possibility of extension by 6 months in certain cases. After this period, the posted worker will be subject to the labor laws of the host country.

The Posted Workers Directive does not apply to carriers whose working conditions are to be determined in a separate directive, known as the so-called Mobility Package. On 4 June 2018, the European Commission submitted a request to exclude transport from the scope of the Posted Workers Directive, and on 4 July 2018 all the reports of the MEPs concerning the Posted Workers Directive were rejected.

Distortions concerning the free market rules

Trade of certain goods and services within the European single market is often impeded due to the insufficiently developed infrastructure, as well as various political factors. This applies, among other things, to trade of electricity and natural gas, and to railway services. The European Union’s directives establish the principle of “third party access” (TPA) to the electrical, gas and rail infrastructure. This means that the owners of the infrastructure are required to provide access to their infrastructure to any company providing services. The EU principles also promote cross-border trade of these goods and services.

With regard to trade in electricity, these principles have been set out in Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC, and in Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on the conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003. However, numerous obstacles to cross-border trade of energy still persist. In particular, not all member states have non-discriminatory network access and effective regulatory supervision, and there are still isolated markets. The cross-border trade of electricity accounts for over a dozen percent of internal consumption (in Poland it accounted for less than 6 per cent in the H1’18). There are still significant differences in the wholesale electricity prices resulting from a different production structure (and consequently different costs), as well as the fact that governments provide state aid to support electricity production from renewable sources. The price differences (for example, the prices in Germany are several dozen per cent lower than in Poland) should be conducive to the intensification of cross-border trade. However, there are still obstacles to trade, such as the lack of sufficient connections between the energy systems of various countries, as well as the internal regulations in force in the individual EU member states.

Almost every single country in the European Union, including Poland, is striving to ensure its energy security by expanding its own electricity generation capacities, treating imports as a possible backup source of energy supply in emergency situations. As a result, the installed power capacity in the European Union is utilized to a lesser extent than in the United States. The billions of EUR in investment expenditures on the construction of new power plants could be allocated for other purposes if the electricity market in Europe functioned more efficiently.

The country most dependent on electricity imports in the European Union is Lithuania, which has been forced to purchase electricity from neighboring countries since the closure of the Ignalina Nuclear Power Plant in 2009. The plans for the construction of a new nuclear power plant (in cooperation with the Polish Energy Group, PGE) were torpedoed by an advisory referendum in which the majority of residents rejected the idea. Lithuania currently imports approximately 70 per cent of its electricity — a large part comes from Sweden via Poland. An alternative solution — the construction of a new nuclear power plant — would cost at least EUR5bn. According to Eurostat, in 2017, the average non-household electricity prices amounted to EUR0.0686 per kWh in Lithuania and EUR0.0651 per kWh in Poland, while the prices for households amounted to EUR0.11 per kWh in Lithuania, and EUR0.15 per kWh in Poland. Therefore, being dependent on electricity imports has little effect on the country’s development conditions.

Despite the EU law, the trade of natural gas is also far removed from the free-market ideals. Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC recommended the separation of ownership of gas infrastructure from the distribution activity (so-called ownership unbundling). However, the German government agreed for gas storage facilities to be acquired by subsidiary companies of Gazprom, which is the main supplier of natural gas to Germany.

In July 2017, the Court of Justice of the European Union in Luxembourg rejected the application submitted by Poland and the Polish Oil and Gas Company, PGNiG, in which they demanded equal access to the OPAL gas pipeline for all the interested parties. The OPAL gas pipeline is an extension of the Nord Stream pipeline in Germany. Pursuant to a 2009 decision by the European Commission, 50 per cent of that gas pipeline’s capacity was exempted from the application of the European Union’s laws concerning third-party access and reserved for a use by the Russian company Gazprom. The remaining 50 per cent of the pipeline’s capacity is made available through auctions in which Gazprom is allowed to participate, thereby preventing other entities from using the pipeline.

On the other hand, in 2010, the European Commission enforced the access of third parties to the Yamal gas pipeline, enabling the supply of gas from Western European markets to Poland using this pipeline. Under the EU pressure in 2011 Poland changed its rules regarding mandatory gas reserves for importers. However, the trading companies importing gas to Poland are still obliged to create reserves if the volume of their imports exceeds 100 million cubic meters of gas per year, which is one of the main obstacles to the functioning of a gas market in our country.

In December 2016, the European Parliament adopted the so-called 4th Railway Package (three directives and three regulations, together comprising two pillars — the Market Pillar and the Technical Pillar). The goal of the package is to increase the competitiveness of railways in domestic and international transport. The main principles of the package include: the organization of tenders at the regional and national level, the unbundling of the railway infrastructure managers and the carriers, activities aimed at the harmonization of the operational systems, which will enable the safe and uninterrupted operation of conventional trains and high-speed trains within the European Union.

However, the railways in the European Union still do not form an integrated and coherent system. The individual member states still use different security standards, as well as signaling and technical systems. The very process of applying for permits to provide cross-border services is complicated and time-consuming.

Distortions concerning the state aid system

One obvious factor distorting the functioning of the single market is state aid. A company receiving support from the government gains an advantage over its competitors. That is why the Treaty on the Functioning of the European Union (TFEU) generally prohibits state aid, unless it is justified by special considerations. Any state aid must be approved by the European Commission.

However, state aid is still frequently used in the member states. For example, in June 2018, the European Commission’s General Directorate for Competition recorded 40 such cases, including, among other things, a subsidy for the Erfurt airport in Germany, assistance in the restructuring of a company in Slovenia, a subsidy covering the costs of preventing and combating animal and plant diseases and the alleviation of damages caused by these diseases in the Kujawsko-Pomorskie voivodeship in Poland.

The Polish media have reported on the unequal treatment of various countries where state aid was used. The examples included the shipyards in Gdynia and in Szczecin. These shipyards were closed in 2009, when the European Commission rejected the application for further assistance following many months of negotiations with the EU Commissioner for Competition Neelie Kroes. At the same time, however, the European Commission approved state aid for German and French shipyards.

In 2003, and then in 2011, the European Commission developed the Framework for State Aid to Shipbuilding, which allows for such assistance, inter alia, when it is used to promote innovation or when it is intended for investments leading to the improvement of the infrastructure or the modernization of existing shipyards, not linked to financial restructuring in regions that require special support (for example, in the former German Democratic Republic). Additionally, the amount of such aid has to be limited. Polish shipyards didn’t fulfil the conditions set out in the Framework.

Distortions of competition

In the European Union, as in every market, there may also be instances of unfair competition, involving the collusion of several companies or the abuse of a dominant position on the market. The Treaty on the Functioning of the European Union prohibits such practices in Article 102. In accordance with Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, in cases concerning the abuse of a dominant market position, the European Commission may determine that an infringement of the fair competition rules has been committed and may impose remedial measures as well as fines.

In the years 1990-2018, the European Commission imposed penalties in the amount of EUR28.5bn for the abuse of a dominant market position, including fines in the amount of EUR6.8bn in the years 2015-2018. American companies were punished the most frequently. Microsoft was penalized several times, while the biggest fine was imposed on Google.

(Stuart Chalmers, CC BY-NC)

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