The European Union has spent the past two years discussing how to restore its economic competitiveness. The harder question is whether it can implement the reforms it already knows it needs before political fragmentation makes them even more difficult.
The warning was set out most clearly by former European Central Bank President Mario Draghi in his landmark 2024 report on European competitiveness. His recommendations included completing the single market, deepening capital and energy integration, increasing common investment and reducing the number of decisions that require unanimous agreement among member states.
The EU has set the end of 2027 as a deadline for delivering key elements of that agenda. But progress so far has been limited.
As of July, the European Union had fully implemented only 15.7% of Draghi’s proposals, while roughly another 40% had been partially addressed, according to the European Policy Innovation Council.
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Progress is even slower on some of the most consequential measures. The Institut Montaigne estimates that the EU has legislated on only 3% of the proposals relating to deeper capital and energy market integration.
The problem is therefore no longer identifying Europe’s weaknesses. It is overcoming the political barriers to fixing them.
Why Is Reform So Difficult?
Many of Draghi’s recommendations require EU member states to pool more resources, coordinate national policies or surrender elements of economic sovereignty.
That makes them politically difficult even when their economic logic is widely accepted.
A deeper capital market, for example, could allow European companies to draw on the bloc’s enormous pool of household savings rather than relying as heavily on foreign financing. A more integrated energy market could lower costs and make it easier to move electricity across borders.
But achieving either requires governments to accept greater coordination at the European level.
Common borrowing presents an even more politically sensitive issue. Draghi argued that Europe needs substantially more investment in areas such as defence, energy, infrastructure and technology. Yet proposals for expanding joint EU borrowing have faced resistance from governments concerned about fiscal transfers and shared liabilities.
The result is a familiar European dilemma: member states increasingly recognise that they need to act collectively to compete globally, while national political incentives continue to encourage them to protect their individual room for manoeuvre.
Could Elections Make Reform Harder?
The political calendar adds another layer of uncertainty.
France is scheduled to hold elections in April 2027, followed later that year by votes in Spain, Italy and Poland. Governments approaching elections may be reluctant to support reforms that impose short-term costs or require national powers to be transferred to European institutions.
France is particularly important because political changes there could affect debates over the EU’s budget, energy policy and integration.
The National Rally has moved away from its earlier position of seeking to leave the EU, but it has continued to advocate changes that would reduce some aspects of European integration, including limiting France’s contribution to the EU budget and seeking greater national control over energy policy.
That could complicate efforts to reach agreement on the bloc’s next long-term budget, which covers 2028 to 2034.
Why Does Germany Matter So Much?
Germany presents a different but equally important challenge.
The bloc’s largest economy has taken some significant steps to increase investment. Chancellor Friedrich Merz’s government loosened Germany’s constitutional debt rules to permit substantially higher defence spending and created a €500 billion infrastructure fund.
Berlin has also proposed reforms involving its electricity grid, pensions, taxation and labour market.
But political support for structural reforms is considerably less certain.
Measures affecting welfare, employment rules and retirement have generated resistance, while the Alternative for Germany has continued to gain support. Although the party has not secured a governing majority, its growing influence could put additional pressure on mainstream parties to avoid policies perceived as transferring power away from Germany or imposing unpopular domestic costs.
That creates a difficult political calculation for the government. Spending on infrastructure and defence can be presented as investment. Structural reforms, by contrast, can involve visible costs for voters long before their economic benefits become apparent.
What Would Successful Reform Achieve?
The potential economic gains are substantial.
A genuine European savings and investment union could help mobilise the roughly €35 trillion held in household savings across the bloc. Much of that capital is currently fragmented among national financial systems or invested outside Europe.
Bringing more of those savings into European companies could provide businesses with greater access to financing and reduce the bloc’s dependence on foreign capital.
Simplifying Europe’s fragmented regulatory environment could also improve productivity. The International Monetary Fund estimated in April that implementing the broader reform agenda could raise European productivity by around 20% over a decade, although that estimate depends on several assumptions about how effectively the reforms are implemented.
The energy market may be even more important.
Europe’s ability to compete in artificial intelligence, advanced manufacturing and other energy intensive industries will depend partly on whether electricity can be generated, transmitted and traded efficiently across national borders.
The European Central Bank has estimated that rapid adoption of AI could increase EU productivity by up to 4% over a decade. But the economic benefits of AI will be difficult to realise if European companies face persistently high energy costs or inadequate electricity infrastructure.
ECB President Christine Lagarde has warned that Europe risks either missing out on the AI transformation or becoming overly dependent on external powers, particularly the United States and China, for critical technologies and components.
What Happens If Europe Waits?
Europe’s competitiveness problem is not occurring in isolation.
The United States continues to attract investment in technology and artificial intelligence, while Chinese manufacturers remain highly competitive across a growing range of industries.
For Europe, maintaining the status quo therefore carries an opportunity cost. Every year of delayed investment can mean another year in which European companies operate with fragmented capital markets, higher energy costs and regulatory barriers that competitors elsewhere may not face.
That does not mean every proposal in Draghi’s blueprint is guaranteed to work, nor that deeper integration automatically resolves Europe’s economic challenges. Reform also involves difficult questions about fiscal discipline, national sovereignty and how the costs of adjustment should be distributed among member states.
But the central challenge is increasingly clear.
Europe has already spent years debating its competitiveness problem. The next test is whether its governments can translate that diagnosis into politically difficult decisions.
If they cannot, the EU may not experience a sudden economic collapse. The more plausible risk is a slower and more persistent erosion of its relative position, as productivity growth, investment and technological capacity fall further behind major competitors.
For a bloc that has long relied on gradual consensus to move forward, the biggest economic risk may now be the cost of moving too slowly.
With information from Reuters.
