EU races to reform or risk long-term economic decline
The European Union is facing a critical deadline to implement economic reforms proposed by former European Central Bank chief Mario Draghi two years ago. Without swift action, the bloc risks long-term economic decline and becoming a secondary player on the global stage. The EU has set the end of 2027 as the target to deliver key elements of Draghi’s blueprint, including a fully integrated single market with capital and energy unions, increased common borrowing, and reduced requirements for unanimous member state approval for major reforms. As of July, only 15.7% of Draghi’s proposals have been fully implemented, with about 40% partially addressed, according to the European Policy Innovation Council. The progress on the most radical measures, such as single capital and energy markets, is even more dismal, with just 3% legislated.
The upcoming election calendar across several key EU countries could further complicate reform efforts. France is heading to the polls in April, with concerns that a far-right government led by Marine Le Pen could curtail France’s contributions to the EU budget and opt out of key energy policies. Spain has also called an early election for November 29, while Italy and Poland will vote in 2027. These elections could stall reform efforts as leaders may hesitate to support measures that require relinquishing national sovereignty. Germany, the bloc’s largest economy, faces rising support for the far-right Alternative for Germany (AfD), which could push the ruling coalition to slow down on reforms.
Despite the urgency, there is little appetite among EU leaders to pool power. Draghi’s proposal for more euro zone common borrowing appears to be 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 into the €35 trillion in EU household savings, which are often invested abroad. Simplifying the fragmented regulatory system could also yield significant gains, with the International Monetary Fund estimating that the reform agenda could raise European productivity by 20% over a decade. However, this projection relies on several optimistic assumptions.
Energy reform is a critical component of the competitiveness agenda. 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 centers and AI infrastructure is only feasible with electricity flowing easily across EU national borders at competitive prices. ECB President Christine Lagarde has warned that the bloc faces a choice between missing out on the AI boom entirely or becoming overly dependent on foreign states for vital technology components. Without progress, the productivity gap with the US will likely widen, and EU manufacturing will face further competition from lower-cost Chinese rivals.