Even though there has been a steady shift towards more service production, we are still lagging behind other advanced economies such as the US and, to a lesser extent, Japan, which have higher production of services per capita. In particular, it is striking that service sector output per capita (in PPP terms) is 33% higher in the US than in the euro area, which is the main reason for a smaller difference in overall GDP per capita levels (26%)[27]. To a large extent this is due to old-fashioned restrictions that prevent competition in many countries in the euro area. The European Commission has estimated that an ambitious implementation of the 2006 Services Directive would have the potential to increase euro area GDP by around 2.5%. The latest estimates show that only around 0.8 percentage point of this has been realised – and this is ten years after the Directive entered into force. Also, bear in mind that these figures significantly underestimate the gains from a wider service market reform, given that some of the most important sectors – for instance health care – are completely excluded from the Directive. Another factor in services that is sometimes overlooked is that of scale. In today’s fragmented service market in Europe, there is insufficient pooling of resources to drive large-scale R&D initiatives, new distribution platforms and to increase competition between market participants. We therefore need to take a step back and consider what can be done to complete the European Single Market for services.
Measured against the OECD’s top three performers, the euro area is lagging far behind in both product and labour market efficiency, with no euro area country in the top three and with the largest euro area countries often underperforming the euro area average[17]. 2  BIS central bankers’ speeches  In recent years we have seen a number of important reforms, particularly in those countries that carried out economic adjustment programmes. The main focus has been on reforms in the labour market. The nominal and real labour market rigidities that we have traditionally lived with in Europe have resulted in what is being called the “European unemployment disease”: persistently high unemployment rates and a limited ability to adjust to economic shocks. You get a very telling picture if you plot the unemployment rate in the euro area and in the US over several decades – say, from the 1970s. Every time there is a downturn in economic activity, the unemployment rate goes up in both regions. However, whereas the US quickly readjusts when the economy picks up, the euro area takes much longer to do so and once the unemployment rate actually starts falling it almost never seems to return to that previous low. The end result is that euro area unemployment has risen steadily for 40 years. [18] That said, there is solid theoretical and empirical evidence showing that greater flexibility results in much lower equilibrium unemployment rates[19].