Reuters: EU risks becoming sick man of the World

Time is running out for the European Union to deliver the economic reforms set out by former European Central Bank chief Mario Draghi two years ago. If the bloc fails, it faces the prospect of long-term comparative decline, becoming an also-ran on the world stage, Reuters notes.

The bloc set the end of 2027 as its deadline for delivering key elements of Draghi’s blueprint, which include a complete single market featuring capital markets and energy unions, more common borrowing and fewer requirements for unanimous member state support for major reforms.

As of July, the European Union had delivered on only 15.7%, opens new tab of Draghi’s proposals in full, with about a further 40% partially tackled, according to the European Policy Innovation Council.

If you zero in on the most radical – and thus the most important – measures such as single capital and energy markets, the picture is even worse. The EU has successfully legislated on just 3% of those, according to French think tank Institut Montaigne. The European Commission can only push through these with all member states’ agreement – a daunting task.

Europe’s upcoming election calendar could make that much harder. Governments facing voters are unlikely to be keen to relinquish more sovereignty, and if these elections produce less reform-minded leaders, the fabric of EU integration could start to unravel.

Heading to the polls

The EU is already scrambling to finalise the bloc’s next long-term budget, covering 2028-2034, before these polls for fear that they could deliver a far-right government headed by Marine Le Pen. France is in the spotlight with elections in April.

While Le Pen’s National Rally has abandoned its ambition to leave the EU, it has still indicated, opens new tab that ⁠it wants to curb France’s contribution to the bloc’s budget, opens new tab and opt out of key parts of energy policy, while reimposing border controls.

Meanwhile, Spain is now coming to the polls sooner than expected. Spanish Prime Minister Pedro Sanchez called an early election for November 29 after parliament rejected the government's housing decrees last week amid significant public protests.

Votes in Italy and Poland come later in 2027. They could further complicate reform efforts as leaders may be loath to support potentially prudent reform measures, which require relinquishing national sovereignty, right before going to the polls.

Then there is Germany. While the country’s ruling coalition is in power until 2029, surging support for the far-right Alternative for Germany (AfD) – which has supported closer ties with Russia and severe immigration restrictions – could stall reform efforts in the bloc’s largest economy.

Germany, under Chancellor Friedrich Merz, has, up until now, been more ambitious in its reform agenda than most of its neighbours. Since taking office last year, he has loosened Germany’s “debt brake” – a fiscal rule that had long stymied growth – to allow for sharply higher defence spending and the creation of a €500 billion infrastructure fund. This was followed up with plans to upgrade the country’s electricity grid alongside pension, tax and labour reforms.

The spending has been popular, but reform measures, such as cracking down on workers’ sick days and welfare abuse, and gradually raising the state pension age, emphatically are not – as evidenced by recent election results.

“The main takeaway is that Germans don’t want reforms and want to stay either in a never-changing present or return to the past,” wrote Carsten Brzeski, chief economist at ING, after ⁠the ruling Christian Democratic Union (CDU) suffered heavy losses in regional elections amid the surge in support for the AfD.

Acid tests

A palpable sense of urgency is present among EU officials. Nevertheless, there appears to be little appetite for pooling power.

Draghi’s call for more euro zone common borrowing already looks dead in the water. The key tests will ​now be whether EU leaders can deliver a savings ⁠and investment union as well as an energy union.

Creating a single capital market could help the bloc tap the €35 trillion in EU household savings, which are dispersed across the 27 member states and often invested abroad.

Without progress, the productivity gap with the US will almost certainly widen, EU manufacturing will likely be further undercut by lower-cost ⁠Chinese competitors, and the bloc will surely have to continue sourcing critical tech inputs from abroad.

The risk-averse EU has long dragged its feet when it comes to reforms, but continuing to do so now may be one of the riskiest moves of all.

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