Hurrah! Europe Is Fighting Over Economic Policy

“Guess what: Europe has a unique opportunity to become a serious place again. Yes, really.

 

The European Union finds itself in the middle of an enormous fight over how to repair the Continent's ailing economy and restore its global stature. Leaders were set to gather in the Belgian countryside this Thursday for a "competitiveness retreat" focused on boosting economic productivity. This confab is supposed to set the stage for a formal summit next month that might generate some real policy ideas. Brussels already is pushing ahead with snippets of deregulation here and there.

 

Give credit where it's due. Inertia is the easiest and most likely choice in any polity, and sometimes not even a crisis is enough to dislodge a dysfunctional status quo. This is a particular risk in Europe for two reasons.

 

First, the Continent's economic crisis -- chronically anemic growth, sagging productivity and innovation, demographic decline, looming welfare-state bankruptcy -- still doesn't feel all that crisis-y to the ordinary voter. Europe's decline is obvious in comparison with the U.S. or Asia, if you happen to be a European who travels to either of those places.

 

The decline is less noticeable if you live your daily life in a relatively clean, safe and functional German, Italian, Czech or Spanish town.

 

Second, fixing most of Europe's economic problems will require a painful overhaul of European politics. Institutions will have to change, particularly at the pan-European level, as national governments cede some new powers to Brussels but reclaim other responsibilities. More to the point, European voters will have to become accustomed to realistic trade-offs between national economic security and defense on the one hand and the welfare state on the other.

 

If anyone anywhere in Europe is willing to touch that third rail, give them a round of applause. But with that faint praise out of the way, here's the scoffing: Europe's unfolding debate about economic revival is more exciting than it should be precisely because even at this late date there's more debate than is reasonable about the nature of Europe's problems.

 

Those troubles boil down to the fact that it is too hard to start and run a business in Europe. It is too difficult to secure regulatory approvals to open the business and regulatory permits for whatever product or service the business wants to sell, too difficult to raise capital, too difficult to trade across European borders, and too difficult to earn an economic return after taxation.

 

This has been the gist of every serious analysis of Europe's economy for the past several decades, the most recent of which was prepared in 2024 by former European Central Bank President Mario Draghi. It's the gist of every serious attempt at a solution, such as Brussels's decision last year to narrow the scope of various environmental regulations to reduce their effect on business. Momentum is growing for something called the "28th regime": A single pan-EU law governing business incorporation to operate alongside the existing 27 different national rules, vastly simplifying business formation.

 

If Europe's economic problem is well-defined, the political fix hasn't been. So the important positive development now is the emergence of a political alliance in support of the reform Europe needs -- between German Chancellor Friedrich Merz and Italian Prime Minister Giorgia Meloni.

 

 They head into this spring's European economic negotiations focused on deregulation, slim-lined bureaucracy and freer trade with the rest of the world.

 

Such an agenda suits Mr. Merz's natural freer-market instincts. It also responds to the central demand of his base among German businesses for relief from red tape, and it would align Europe's policy priorities with his aspirations for Germany's economy, which is Europe's most important. Ms. Meloni's participation suggests euroskeptic insurgent-right politicians can be persuaded that a more modest, growth-focused EU is politically saleable to their voters. It's an intriguing prospect.

 

The roadblock, as usual, is France. Emmanuel Macron, who you might be surprised to learn is still the French president, insists on a vision of European economic reform that's heavy on the "European" and light on the "economic reform."

 

In a newspaper interview this week, Mr. Macron argued that the European Union should pursue a form of fiscal integration in which Brussels would issue bonds backed by the EU rather than individual member countries. It's a naked attempt to socialize France's fiscal dysfunction, and a nonstarter. Other governments also are exasperated with his attempts to thwart final approval of a major free-trade agreement between the EU and the South American countries in the Mercosur trade bloc.

 

Mr. Macron's opposition could scupper any meaningful economic improvement in the EU. Yet several factors are encouraging. One is the development, although tentative, of a plausible reform agenda at the EU level. Another is the hint of a political coalition that might one day be able to sell it to voters. As accustomed as we've all become to European inertia, don't miss early signs that a turn may be possible.” [1]

 

Remarkable that, pushed by Merz, Western European deregulation, slim-lined bureaucracy and freer trade with the rest of the world combined with absurdly high energy prices kills Western European industry, destroys energy hungry Western European AI startups and leave Western European market completely for American and Chinese IT giants. Mutti Merkel, where are you?

 

The situation we’re describing—the "de-industrialization" debate in Europe, spearheaded by the new German conservative government, and its impact on the energy-intensive AI sector—is indeed one of the most critical economic challenges in Western Europe in early 2026.

 

Based on reports and current political developments:

 

    The Merz Approach: German Chancellor Friedrich Merz has aggressively pushed a "regulatory clean slate" agenda, aiming to reverse what he calls overregulation. He is pushing to overhaul the EU Emissions Trading System (ETS), speed up planning, and lower taxes and fees to combat high industrial energy prices.

 

    The Industry Crisis: Energy-intensive sectors like chemicals and steel in Germany are under massive pressure. Reports indicate that investments have dropped sharply, with capacity shutdowns increasing and jobs moving to regions with cheaper energy, like the US.

 

    AI and Digital Sovereignty: High energy prices are directly impacting the operational costs of AI data centers in Europe, fueling worries that Europe is ceding the AI market to dominant American and Chinese players.

 

The European Commission is attempting to address this, but industry leaders are demanding more urgent action.

 

    The Shift from "Mutti": The reference to Angela Merkel highlights a shift away from her legacy. Merkel's era focused on cheap Russian energy, gradual change, energy transition (Energiewende), and building a European consensus. The new conservative leadership is taking a more confrontational, pro-business, deregulation-first approach, arguing that Europe's survival depends on being as fast and cheap as its global competitors.

 

How do you get to be cheap using the most expensive energy in the world is an idea that still didn’t come out of contemporary German government. You need Einstein to figure this out.

 

The debate is fierce: supporters of this change argue it is necessary to save European industry from "slow agony," while critics argue it sacrifices climate goals, social protections, and the industry itself, potentially causing long-term damage in a desperate attempt to fix short-term economic problems.

 

1. Political Economics: Hurrah! Europe Is Fighting Over Economic Policy. Sternberg, Joseph C.  Wall Street Journal, Eastern edition; New York, N.Y.. 13 Feb 2026: A15