The euro area services sectors

In modern and increasingly globalised value chains, services are closely intertwined with other sectors of the economy and across borders. Therefore, where they show underperformance, this has consequences for the economy as a whole. Services are also relevant for the functioning of the economic and monetary union. With no exchange rate between themselves, the ability of euro area Member States to adjust to specific shocks depends on the ability of their economies to adjust through their production and prices. This adjustment is hampered if rigidities and distortions affect significant sectors of the economy. Indeed, given that services are traditionally less exposed to competition, they are more likely to suffer from rigidities which prevent them from reacting efficiently to economic signals. In some Member States, rigidities in services ñwhich are to a large extent non-tradable- can also be an important constraint on growth in domestic demand, thereby hampering intra-euro area current account rebalancing. This chapter shows that service sectors have both strong backward (demand) and forward (supply) interlinkages with manufacturing, and that these spillovers also create added value. Econometric estimates show that productivity growth in services contributes to the export performance of manufacturing. Evidence of underperformance in services sectors is presented in terms of a misallocation of productive resources across firms and relatively high mark-ups. These facets of underperformance are driven by a lack of competition. Indeed, product market regulation is for some countries and service sectors still relatively strict. By tackling structural bottlenecks, reforms to liberalise and enhance competition in service sectors can play an important role for growth and competitiveness. Although there is a general consensus on the need to liberalise service sectors in the euro area, little progress has been achieved over the last few years as only a few Member States have carried out significant reforms.