RPT-ROI-2026 is the EU's make-or-break year for economic reform: Mike Peacock

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By Mike Peacock

LONDON, Jan 20 (Reuters) - European Union leaders meeting in Davos this week can be forgiven for fixating on the multiplying threats to the world order - such as U.S. President Donald Trump's bid to acquire Greenland - but they cannot afford to do so at the expense of their long overdue economic reform.

It's been more than a year since former European Central Bank President Mario Draghi produced an ambitious roadmap for euro zone reform, yet little progress has been made. That’s a big problem because without rapid acceleration soon, reform may simply never happen, leaving the EU lagging ever further behind the U.S. and China.

Draghi’s blueprint calls for 800 billion euros ($930 billion) of investment annually for several years to boost regional innovation, competitiveness and security. He cited IMF calculations that reducing internal barriers to U.S. levels could cause sluggish EU productivity to leap about 7% in seven years.

But even the prospect of a productivity burst hasn’t been enough to jumpstart the slow-moving, consensus-driven EU machine.

Only 10% of Draghi's proposed measures have been implemented thus far, according to a report by the Brussels-based European Policy Innovation Council last September.

The European Commission is trying. Its president, Ursula von der Leyen, launched a multi-pronged strategy last year aimed at pursuing many of Draghi’s recommendations. But EU heads of government ultimately set the pace of change, and several have been less eager to move quickly.

For instance, some newer eastern EU members oppose extending majority voting while Germany and the Netherlands have pushed back against expanding mutual borrowing.

The opposition of a single leader can scupper the best-laid plans, and that’s precisely why now is the time to act. France's presidential election in 2027 may deliver a far-right leader who would likely oppose any further EU integration and who might even seek to reverse it.

If that occurs, all bets would be off.

UKRAINE FUNDING DEAL POINTS THE WAY

To determine how best to move forward, the bloc’s leaders need look no further than last month’s EU deal to fund Ukraine's war effort against Russia for the next two years. It could point the way for Europe’s wider reform drive.

While EU leaders failed last month to deploy some 200 billion euros of frozen Russian assets to keep Ukraine afloat, all but three of the 27 agreed on a 90 billion-euro loan.

That outcome underscores a key Draghi observation: the EU’s frequent requirement for unanimity paralyses progress.

To counter this, qualified majority voting could be extended to more policy areas. As a last resort, like-minded nations could even go it alone on some projects, Draghi said.

Von der Leyen made a similar plea in her State of the Union speech last year, saying: “It is time to break free from the shackles of unanimity.”

Unfortunately, a sweeping change would mean altering the EU Treaty, and that would require – you guessed it – unanimous backing by EU leaders.

But addressing the unanimity conundrum may be necessary regardless of the challenge if any other meaningful reforms are to be passed.

The Ukraine deal hits on another previously touchy subject: joint EU borrowing. The loan – which Kyiv will likely not be required to repay -- was mutually underwritten by 24 nations.

That’s after all 27 EU members agreed in 2020 to jointly borrow 800 billion euros for the bloc's pandemic recovery plan. That was sold as a one-off crisis measure to placate states like Germany and the Netherlands. But the Ukraine bailout shows there may be more appetite for mutual financing than previously thought.

NOBODY’S PERFECT

December’s Ukraine deal offers another lesson: don’t let the perfect be the enemy of the good.

The bloc certainly won’t be able to address all of Draghi’s prescriptions, but leaders can tackle the parts of the report that don't challenge the bloc’s biggest taboos.

For starters, the EU could complete the long-discussed capital markets union and simplify a regulatory system that is fragmented across 27 states.

The European Commission has made progress on establishing a single rulebook for the bloc, covering corporate law, insolvency, labour, and tax law. But businesses complain the progress here is too slow.

The EU’s proposed savings and investment union would create a single capital market that could attract more of the 35 trillion euros of EU household savings that are dispersed across member states and often invested outside the bloc.

Experts warn that, even with political backing, this plan would take years to implement, but that’s no reason not to get the clock running as soon as possible.

The bloc’s next long-term budget, which will cover 2028-2034, represents another opportunity for making progress. The proposed 2 trillion-euro package is intended to boost competitiveness, but it risks being diluted by key member states such as Germany.

Europe has a history of acting just in time. But given everything EU leaders face today – the bloc’s productivity, investment and innovation deficits as well as a crumbling world trade order, an aggressive Russia, and an increasingly unreliable U.S. – they are behaving with remarkably little urgency. Time is short.

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.

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($1 = 0.8625 euros)

(Writing by Mike PeacockEditing by Marguerita Choy and David Gregorio)

((Marguerita.Choy@thomsonreuters.com))