How the European parliament got serious

A funny thing happened in the European parliament in Strasbourg last week. More than 600 deputies from all 25 member states of the European Union took a core piece of EU legislation and voted - by a very large majority - to change it drastically. They voted on almost 400 amendments, including one to change the core principle of the new law. When they had finished, instead of being denounced as a bunch of irresponsible populists, they were praised for their wisdom. Far from emasculating the legislation, they may well have saved it.

Not that everyone was pleased. There were 30,000 trade unionists demonstrating outside, many of whom wanted the entire document scrapped. After the voting was done, the main representatives of European business sounded even more upset than the unionists, because they thought the changes had gone too far to appease the workers. But the end result is that thanks to 18 months of painstaking work by the much-maligned parliamentarians, a compromise has been found to save the law from deadlock. If the member states can carry on the good work, there is a real chance of final agreement by the end of 2006.

The law in question is the EU services directive, known as the Bolkestein directive after Frits Bolkestein, the former commissioner for the internal market. It is the most important and contentious single piece of legislation currently being negotiated in the EU, pitting economic liberals against social protectionists, and old member states against new. For those who are still struggling to build the EU single market, it is an essential cornerstone: without it, all sorts of national barriers will remain, blocking cross-border trade in services. For those who fear that Europe has already gone too far in tearing down its borders, the directive is a threat to high social standards and decent wages.

If the law is eventually approved by the 25 governments - and that is still a big If - it should open up the cross-border market in services, create new jobs, bring big consumer benefits, make Europe more competitive, and help the new member states of central and eastern Europe compete head to head in the west. Yet the reality is that in the negotiating wrangle between the member states, the services directive has become hostage to deep political differences, pitting old member states such as France, Germany, Italy and Belgium, against the new "liberals" who want the borders dismantled as laid down in the Treaty of Rome. Both in the European Commission, where the directive was first drafted, and in the Council of Ministers where the 25 governments negotiate, no one has dared attempt to break the deadlock.

That is where the European parliament has suddenly come into its own. It marks another shift in power between the three central EU institutions. Last week's vote suggests that the directly elected MEPs, in spite of their multitude of ideological, national and historical allegiances, have started to coalesce as a serious and effective EU institution, just as enlargement has greatly complicated negotiations inside both the Council and Commission.

The key to the deal in the European parliament was agreement to abandon the core principle of the Bolkestein directive - that service providers should be allowed to operate in any member state provided they obeyed the rules of their (EU) country of origin. For trade unionists in countries such as Germany, France and Belgium, the "country of origin" has become a label for "social dumping". As long as those words remained in the law, it was deadlocked. So the parliament scrapped them.

Instead, the two main political parties in the parliament, the conservative European People's party and the left-of-centre Socialist group, propose a principle of "freedom to provide services", putting the onus on each member state to ensure free access to its territory. But they can still maintain national rules for health or the environment, for example.

For liberals, it is certainly less than ideal. But the parliament voted by 394 to 215 in favour - a left-right majority that cannot be ignored. José Manuel Barroso, the Commission president, has promised to redraft the proposal along the parliament's lines. Tony Blair has endorsed the parliament's deal as pointing the way forward.

It remains to be seen if the French government will drop its objections, based more on domestic hysteria than substance. But France alone cannot block a deal. Germany is likely to switch sides and back the parliamentary compromise, not least because the leaders of both EPP and Socialist groups are German members of the Christian Democrats and the Social Democrats, the two members of Berlin's grand coalition. Their deal in Strasbourg should help reconcile their parties on the issue at home.

At this moment in the EU negotiating process, everything is still to play for. But for once, the parliament is being taken seriously. "Normally we can safely ignore the parliament's first reading," says one Commission official. "That is not true any longer. We have promised to take full account of their views." If there is a deal by the end of the year, the key will have been forged in Strasbourg last week. It is time to pay more attention to the parliament.

Brussels briefing at www.ft.com/brussels