ROI-EU risks becoming sick man of the world if it doesn’t reform quickly: Mike Peacock

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. 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% 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

France is up first with elections in April. 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.

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

While the AfD has yet to win any governing majorities and should struggle to find coalition partners, its rapid rise in the past decade to become Germany’s highest-polling party cannot be dismissed – especially as its popularity could ​push the ruling party to slow down on reforms that appear to reduce national sovereignty. ACID TESTS

A palpable sense of urgency is present among EU officials. “Where projects are in Europe's strategic interests, we need to massively accelerate,” European Commission President Ursula von der Leyen said last month in ⁠her annual "State of the Union" address to the European Parliament.

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. A parallel drive to simplify a fragmented regulatory system could also yield significant gains. The International Monetary Fund's analysis in April estimated the reform agenda could raise European productivity by 20% over a decade, though that projection does rely on several optimistic assumptions.

A key component of this competitiveness agenda is energy reform. The European Central Bank estimates that rapid adoption of AI could lift EU productivity by up to 4% over a decade. However, building and running data centres and AI infrastructure is only feasible if underpinned by electricity flowing easily across EU ⁠national borders at competitive prices. ECB President Christine Lagarde recently warned that the bloc faced a choice between missing out on the AI boom entirely or finding itself overly dependent on foreign states – most notably the US and China – for vital technology components.

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.

(The views expressed here are those of Mike Peacock, the former head of communications at the Bank of England and a former senior editor at Reuters.) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global ‌financial commentary. Follow ROI on LinkedIn, and X.

And listen ‌to the Morning Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and finance seven ​days a week. (Writing by Mike Peacock Editing by Marguerita Choy and Anna Szymanski)