Intra-European trade in services is hampered by national regulatory differences for service markets. The European Commission has proposed a new directive to overcome these regulatory barriers. This document assesses the effects of this new directive on trade and investment in services. We have developed an index for bilateral heterogeneity in product-market regulation, and apply it to the OECD Regulation Database. We show that the heterogeneity in regulation hampers bilateral service trade in the EU, and also bilateral direct investment. We investigate how the proposed EU directive could lower the intra-EU heterogeneity in product market regulation for services, and what effect this would have on bilateral trade and investment in the Internal Market for services. We find that commercial services trade in the EU might increase by 30-60%, while the foreign direct investment stock in services might rise by 20-35%.