Opening a Closed Shop

Why is Europe having such a hard time creating jobs? Ask Svatoslav Kodytek and Tomas Lenc, two florists from southern Bohemia in the Czech Republic. Soon after their country joined the European Union last May, they tried to open two shops across the Austrian border, in the quaint medieval townlet of Gmünd and in nearby Waidhofen. They planned to hire locals, but ran into roadblocks from the very start. First, Gmünd's labor office told them bluntly that no more flower shops were needed in the area. Undeterred, they set up their stores. Authorities then took two months to register their firm — compared with three days on the Czech side — and refused to license Lenc for flower arranging, despite his 15 years of experience.

Staffing was the final straw. Nobody replied to their ads for Austrian flower arrangers so they brought in Czech ones instead, making them partners in the business to circumvent a vetting process for foreign workers that can take six months. The authorities quickly swooped in and fined them €1,500 for illegally employing the florists. Enough was enough. At the end of last year, the two men shut down their Austrian operation just five months after opening the first store. "We were treated like interlopers," says Kodytek, 54, who, with Lenc, lost about €27,000 in the failed venture. The authorities "were not looking for a way to make it possible for us to function. They were looking for a way to stop us functioning."

The E.U. likes to boast about its internal market of 450 million consumers, but when it comes to the service sector — which accounts for 70% of the European economy — life is anything but a bed of roses. More than a decade ago, the E.U. knocked down the major barriers impeding the free movement of goods, but a patchwork of local legislation and practices continues to hinder the movement of services. From accountants, lawyers and realtors to hairdressers, midwives and plumbers, those who try to offer services outside their home country risk being strangled by red tape.

Some rules make sense. In Britain, for example, people installing gas boilers are required to undergo special safety training. But dozens of other regulations seem arbitrary or archaic. Several countries will only grant telecommunications service licenses to residents, for example. Belgium, for one, requires many types of service companies, including advertising agencies, to notify authorities any time they send people to Brussels to work for a client there, giving details of their names and how long they'll be working in the country. "You have to jump through all these hoops," complains Phil Murphy of Britain's Advertising Association.

Many rules were first drawn up for health-and-safety reasons. But now they're costing jobs — as many as 600,000 across the E.U., according to a study carried out earlier this year by analysts Copenhagen Economics for the European Commission. The study argued that removing the barriers would give a big boost to productivity and wages as well as increasing employment. Consumers would also benefit from lower prices as a result of greater competition. It's a grand vision, but putting it into practice is tricky. This month, the European Commission retreated on its proposed directive for liberalizing the service industry after furious opposition from the French and German governments. Charlie McCreevy, the Commissioner responsible for the internal market, told the European Parliament that the Services Directive in its current form "has not a snowball's chance in hell" of being approved by governments and the Parliament. E.U. heads of government are expected to discuss the issue at this week's summit in Brussels, but prospects for a quick fix are slight.