Speech by Fritz Bolkestein, European Commissioner for Internal Market, Taxation and Customs, Making the most of the Internal Market after Enlargement, Euro-Czech Forum Conference "Business meets the new EU", Prague, 13 May 2004

Ladies and Gentlemen,

It is a pleasure and an honour for me to be visiting the Czech Republic at such a crucial moment in both the history of European development and that of your country. I should like to thank our hosts for organising this event.

Since 1 May, the EU is by far the biggest internal market in the world, encompassing 28 countries (with EFTA) and more than 450 million people. Other candidates are waiting in the wings: Bulgaria and Romania in the eastern Balkans and, in due course, the countries of the western Balkans. By the end of the year, the EU will have to decide whether to open accession negotiations with Turkey.

Until the fall of communism, Europe was cut in half. Walls and barriers, like the Berlin Wall, mutual suspicion and the threat of war separated the countries of Europe.

These divisions have now been definitively swept away. For the first time ever the peoples of Europe are united in a single peaceful enterprise, based on shared values of liberty, democracy, respect for human rights and fundamental freedoms.

Economic progress will be underpinned by our strong common currency, the Euro. The Euro has proven its strength on the international financial markets. The stability and growth pact remains a solid base to guarantee sound public finances and Member States are bound to respect its rules.

The new Member States also participate in the EU's economic policy co-ordination and surveillance rules from the date of accession. But they will need to achieve a high degree of sustainable convergence, assessed against the convergence criteria of the Treaty, before they can enter the Euro zone. The Czech Republic's government deficit in 2004 is forecast to be around 6%, which is well above the 3% reference value.

The remarkable achievement of enlargement has not been accomplished without enormous effort and sometimes blood, sweat and tears. Many of the Accession Countries, including the Czech Republic, have had to transform their economies from a command based system to a market system. All of them have had to take on board the imposing body of EU legislation, the so called "acquis communautaire".

This is all the more remarkable because the body of EU rules has been built up steadily over the last three decades, whereas the new Member States have had to perform the task of transposition in a relatively short space of time.

There is, however, still some way to go for the Czech Republic as its Internal Market transposition deficit last week was still in the double digits. But we are confident that before too long the situation will be mastered.

Implementing rules on time and correctly is a necessary condition for the Internal Market to work, but it is not enough. The task of making sure that the rules are correctly applied in practice, by the setting up of effective and well-resourced administrative authorities, is no less important.

As Commissioner responsible for the Internal Market, I should like to share some thoughts with you about our ambitions in this area and its general importance for economic development in the EU.

Today, economic growth is a priority for all Europeans. The "old" Member States must boost their flagging economies so that they can maintain existing living standards and continue to pay for their social security, pensions, healthcare and education.

If they want to do better than that and actually close the gap with the US in terms of living standards within the next 20 years, they will have to achieve, on average, an annual growth rate which is 1.7% higher than that in the US.

The "new" Member States, on the other hand, want to maintain the phenomenal growth rates which they have registered in recent years so that they can rapidly improve their living standards and "catch up" with the European average.

Fulfilling our aspirations to live a better life depends on our ability to face up to a double competitive challenge. To the West, there is the US which remains a formidable economic powerhouse. And to the East, we are coming under growing pressure from low-cost economies, such as India and China and also Russia, which are no longer satisfied to supply the world with textiles, tapestries and toys but are progressively moving into higher value-added activities, including the services sector.

Europe is a relatively high-cost part of the world. Of course, labour costs in the "new" Member States are significantly lower than those in the "old" Member States. But this may well turn out to be only a temporary advantage. In the medium to longer term, as wages rise, you risk being undercut by countries with even lower labour costs (e.g. in Asia or Latin America).

For all of us, then, the only way to remain competitive is by boosting our productivity. At the moment, we are lagging dangerously behind the US where the growth of productivity per worker since 2000 has been nearly four times as high as in the 15 "old" Member States.

Policy makers therefore have the responsibility to create the conditions, which will encourage companies to invest in new technology and innovate in order to become more productive.

The Internal Market has an essential role to play here. Firstly, because it gives you, as business people, access to a very large market which should encourage you to invest more because the returns are likely to be greater. And secondly, because it subjects you to much tougher competition - effectively forcing you to shape up and become more efficient.

The benefits of the Internal Market are already clear. It is now more than ten years since 31 December 1992 and the completion of the Internal Market Programme. Solid economic evidence shows that, in that time, the Internal Market has helped to create at least 2.5 million jobs and added some €900 billion to our prosperity. That is €6,000 per household on average.

Moreover, the recent enlargement has the potential to stimulate the Internal Market over and above what has already been achieved. Trade between old and new Member States has already been growing fast, increasing more than eight-fold between 1995 and 2000 (due mainly to the Europe agreements). And economic models suggest that, despite these increases, exports from the new Member States could still almost double, even at current levels of development.

For example, the exports of the Czech Republic to the EU-15 in 2000 were just 72% of what would normally be expected for a Member State of its size and geographical location.

However, we must not be complacent. There is much still to be done. Even now more than ten years after the abolition of our internal frontiers the Internal Market is still only a half-finished building. There are still too many obstacles holding it back. Unless these are removed, we may miss out on the enormous opportunities which enlargement offers.

There are particular causes for concern at the moment. Several important indicators concerning the Internal Market's functioning are beginning to "flash red." The growth in intra-Community trade, for example, has slowed to a snail's pace over the past few years. And the process of price convergence, which we saw in the 1990s, has stalled since 1999. These are all worrying signs that economic integration in the EU may be faltering. Enlargement will be a welcome shot in the arm. But more is needed.

So what are we doing to rectify this situation and ensure that the Internal Market continues to function well, and hopefully even better, in an enlarged Union?

Well, first let me say that our overall approach is reflected in the advice given by the famous Czech writer, Franz Kafka:

"Start with what is right rather than what is acceptable."

Our job is to propose measures that we think are right for the Internal Market, and then to persuade the Council and Parliament that what we suggest should indeed be accepted. This is not always an easy task!

Let me identify our key priorities:

First, establish a fully integrated financial market which is capable of channelling our savings into productive investments at the lowest cost. Financial services is the oil in the machine. We cannot seriously compete with the US and other industrialised countries unless we have a financial system which provides the liquidity in the market which our businesses need. The Commission's Financial Services Action Plan of 1999 is the reference document here. It proposes 42 measures to overcome current fragmentation. We are in the final strait line as 38 of those measures have already been passed. We now need to make sure that these measures are effectively implemented and applied on the ground. Then it is up to financial institutions to compete for market share and come out on top.

Second, create a genuine Internal Market for services. Services account for a much larger share of the EU's economy than manufacturing and agriculture combined but have so far been largely unaffected by Internal Market conditions. The Commission has just produced a proposal to change this. It is our most ambitious proposal for more than a decade. It will affect a large variety of services from retail and distribution to construction, tourism, advertising and consultancy. It will make it easier both to establish a business in another Member State and to provide services across borders.

Because of its sheer ambition and scope, it is bound to run into opposition in many, if not all, Member States. Indeed, this is one area where we have followed Kafka's advice to the letter! But I am hopeful that all parties will eventually realise that Europe needs an Internal Market for services if it is to prosper and create more jobs and that this proposal represents the best and possibly the only means of achieving it.

Third, while the focus has shifted to services, we must also improve the free flow of goods. Above all, we must strengthen the application of the mutual recognition principle. Mutual recognition was developed by the European Court of Justice when an importer of sweet French liquor (Cassis de Dijon) complained that he was prevented from getting the product onto the shelves in German shops. The Court ruled that Germany could not stop the product from being admitted on its market simply because it did not fulfil some local conditions. Mutual recognition, however, is not a blank cheque. Member States have a right to ensure that the product meets standards which are at least "equivalent" to those prevailing in their jurisdiction. This may concern, for example, safety and health requirements.

We know from experience, however, that establishing equivalence is not always easy. Perfectly acceptable products may get stopped and companies either need to amend them or pull them off the market. On the other hand, some dodgy products may slip through the net posing risks to consumers. We need to put the system on a stronger footing, for example, by getting Member States to notify any denials to the Commission and offering distressed companies an opportunity to appeal.

The fourth priority concerns public procurement which is everything that governments buy from staples to supercomputers, from paper to power stations. The government is a big shopper public procurement accounts for some 14% of GDP in the old Member States. But is government also a smart shopper is it getting value for money? The answer is: not always.

As you may know, the EU has a comprehensive legal framework in place to ensure transparency and non-discrimination of tenderers, irrespective whether they have an Czech or an Italian accent. This framework has just been modernised to take account of new and very promising developments such as e-procurement and public-private partnerships. We now need to focus on implementing these new rules and on improving compliance.

Recent studies show that the difference between applying or not applying procurement rules is as high as 34% of the final price paid. This should not come as a surprise: without competition and choice, the government will often buy a pig in a poke. On an aggregated level, this means many lost business opportunities as well as an enduring headache for Finance Ministers and, ultimately, tax payers. If EU public procurement rules would be followed as intended, no Member State today would have a problem fulfilling the criteria of the stability and growth pact.

Following on from this and this is my final point - is timely implementation and effective enforcement of the rules. This is important not only to ensure legal predictability, but also for level-playing field reasons. Member States (new or old) that do not fulfil their legal commitments cause direct harm to the economic interests of other Member States. If you are member of a club, you have got to play by the rules. While every infringement case is one too many, the Commission will not hesitate to wield the big stick and take Member States big or small to Court. You can rest assured that the Commission as referee will be impartial and fair.

Well, there is more of course and if you want to get the full picture I would advise you to read the Internal Market Strategy 2003-2006, which is a short ten-point plan to improve the Internal Market and make Europe better off. What we need now is the political will to implement these actions.

Here, I am less bullish. We have had some successes, but far too many key files are blocked in the EU decision-making process. Ministers these days never stop calling for more competitiveness and innovation.

But rather than making grand declarations, they would do better to adopt the necessary decisions to create the conditions within which innovation can take place.

For example, how can they say with a straight face that they want more R&D in Europe, while blocking the proposal for a patent providing Community-wide protection? And how can they say that the want to raise skills and mobility within the EU and then drag their feet when it comes to adopting the key proposal on the recognition of professional qualifications?

I will be very frank with you and say that, in my opinion, there is a problem with political leadership in the EU. For example, too many leaders of "old" Member States have become pre-occupied with the phenomenon of "deindustrialisation" or "off-shoring" and ways of stopping it from happening. They are wrong on two counts. First, we cannot prevent "off-shoring" from happening to a certain degree, it is inevitable, even desirable. Second, the policy measures which they advocate to stop it are outdated and ineffective. We do not need old-style sectoral industrial policies, as some are suggesting. Rather, we need to make the EU a more attractive place to business in and invest. And, of course, creating a modern, successful Internal Market is an essential first step towards achieving this goal.

However, although some of our leaders seem to be falling back on old ideas, I am not pessimistic. I believe that the arrival of the "new" Member States will re-energise discussions in Brussels. In many of the meetings I have attended recently where you were participating for the first time as full members I sensed a real breath of fresh air. This is not surprising. You have been living with rapid and relentless change for many years now. You are obviously less resistant to it. I am sure that your presence will help to move the discussion forward and revitalise our economic reform agenda.

Ladies and Gentlemen, let me conclude. The next few months will be busy ones in the EU. I look forward to the Czech Republic's full participation in these activities and to the unique contribution which you have to make

Thank you for your attention.