ROI-Can Germany's Merz be the saviour of Europe?: Mike Peacock

By Mike Peacock

LONDON, Feb 11 (Reuters) - European Union leaders are meeting this week to discuss how to boost the bloc's competitiveness. While President Donald Trump’s withering description of Europe last month as a "decaying" region was unwelcome, it may be what finally prompts them to take much-needed action.

Germany has historically been a brake on EU reform, but Berlin now appears to be on board. Chancellor Friedrich Merz told the World Economic Forum in Davos last month that the EU now had no choice but to urgently pursue former European Central Bank president Mario Draghi’s blueprint for a competitive Europe.

“My impression is that my colleagues and partners in the European Council have really understood what is at stake,” Merz said. “The world has so fundamentally changed over the last month and years that this is now really the time to move ahead and to change things.”

Merz noted that only 10% of Draghi’s proposals had been implemented, and that much more was required.

He has since doubled down by teaming up with Italian Prime Minister Giorgia Meloni to push for simplifying EU regulations, deepening the single market for services and boosting cooperation on industry, energy and defence – all key elements of Draghi’s 2024 report.

Merz has already backed up his words with actions. Soon after taking office early last year, the German Chancellor moved to loosen Germany's long-standing "debt brake", clearing the way for sharply higher defence spending and a 500 billion euro infrastructure fund.

True, Berlin and its allies are still unlikely to back controversial reforms, such as extending common borrowing beyond one-off programmes – a vital component for generating more EU investment.

But Germany has a strong self-interest here, as the country has faced years of anaemic economic growth and is struggling to compete with China in key areas like electric vehicles.

So the direction of travel for Europe's biggest economy is clear. It wants meaningful reform, and that's a crucial first step for the bloc. But Berlin can only go so far. It needs the rest of the member nations to get on board.

FOLLOWING DRAGHI'S BLUEPRINT ... SOMEWHAT

Europe has recently taken some steps in the right direction, including making trade deals with Latin American nations and India that should help the continent build economic ties that skirt around U.S. hegemony.

But so far the heavy lifting has been done by European Commission President Ursula von der Leyen, not the EU heads of government - and they are the ones who could make or break progress on reforms moving forward.

Looking to this week's informal leaders’ summit and beyond, the deregulatory agenda has a good chance of advancing, argues Mujtaba Rahman, managing director for Europe at the Eurasia Group.

That is significant on its own, as the European Commission estimates that establishing one set of rules across the bloc, covering corporate law, insolvency, labour and tax law, could save businesses 37.5 billion euros a year.

Defence and industrial investment and cooperation will also move forward, Rahman predicted.

But a major obstacle remains. Too many member states, wary of relinquishing national control, still oppose crucial initiatives such as a capital markets union.

That would be a huge missed opportunity. Creating a single capital market would help put to work 35 trillion euros of EU household savings. That pool dwarfs the U.S. total, but is dispersed across all 27 member states and often invested abroad.

Merz used his Davos speech to throw his political weight behind the planned Savings and Investment Union. Now he'll need to use Berlin’s significant heft to convince more recalcitrant nations to move toward greater financial integration - and he'll need to do so quickly.

2027 YEAR OF ELECTIONS

The EU's window of opportunity to act is slim due to a number of upcoming elections, most notably the race for France's next president. The Merz-Meloni initiative highlights the need for new alliances to drive the bloc forward.

French elections will be held in spring 2027, and polling suggests Europe's second-largest economy could soon have a far-right leader opposed to any further EU integration. A new president could also try to roll back key areas such as the free movement of people. Elections next year in Italy and Poland could also be consequential.

Meanwhile, Merz's own position is precarious given the divisions in his coalition and the strength of the far-right Alternative for Germany (AfD) in recent polls.

That makes this week’s gathering of EU leaders in Belgium pivotal. If Merz and his peers can't advance serious reforms, insults from Washington will be the least of the bloc's problems.

(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.