Welcome to the Brussels Edition. I’m Suzanne Lynch, Bloomberg’s Brussels bureau chief, bringing you the latest from the European Union each weekday. Make sure you’re signed up here.

Ursula von der Leyen has another problem to worry about ahead of her much-anticipated “State of the Union” speech to the European Parliament tomorrow.

German Chancellor Friedrich Merz, who hails from the same political party as the Commission chief, threw his weight behind the auto industry’s push to soften EU rules that would effectively ban combustion-engine vehicles by 2035 in a speech at the Munich auto show this morning. The new rules have proved highly controversial for the powerful German car industry.

Merz speaking at the Munich auto show today. Photographer: Tobias Schwarz/Getty Images

Though Merz stopped short of calling for the deadline to be delayed or scrapped, as some in his and von der Leyen’s conservative CDU/CSU bloc would like, he made a plea for “technology openness” — a reference to the auto sector’s desire for hybrid and other vehicles to be exempted from the rules, our German team report.

“We are, of course, fundamentally committed to the transition to e-mobility,” Merz said, highlighting the importance of Germany’s biggest industrial sector for the nation’s economy. “But we need more flexibility in regulation.”

The controversy captures the conundrum facing the Commission chief as she sets the tone for the next 12 months in her annual speech to the European parliament in Strasbourg on Wednesday morning: how to keep everyone happy in a club of 27 nations.

After prioritizing the climate crisis in her first term, the Commission has pivoted away from the issue following push-back from industry and consumers in the wake of the cost-of-living crisis, competitiveness challenges and higher energy costs.

Tomorrow’s address, due to begin at 9 a.m., could be a chance for von der Leyen to reset her presidency after a difficult few months marked by criticism of the trade deal with the US, divisions over Gaza and stalled efforts to end Russia’s war on Ukraine. Read more about what to expect in this piece by my colleague Jorge Valero.

François Bayrou, meanwhile, is meeting with French President Emmanuel Macron in the Elysee Palace this lunchtime. He is expected to resign after losing a vote of confidence in his minority government yesterday evening over opposition to his plans to trim the budget deficit.

Macron is set to name his fifth prime minister in less than two years within days, and whoever he chooses will be charged with assembling a government and getting a budget approved — no easy task in a fractured National Assembly. Check out the leading contenders here.

The Latest

• France and Germany are urging the EU to target major Russian oil companies as part of the bloc’s next package of sanctions, Bloomberg’s Alberto Nardelli reported this morning.
• Banca Monte dei Paschi di Siena has secured a majority stake in Mediobanca, cementing a once-unthinkable €16 billion ($18.8 billion) takeover that’s set to reshape Italian finance.
• The Dutch government is further reducing its stake in ABN Amro Bank to about 20% as it gradually pares its holdings in the lender it bailed out during the financial crisis. Bloomberg estimates the stake is worth about €1.55 billion ($1.8 billion).
• Norwegian Prime Minister Jonas Gahr Støre starts talks today to form a new Labor government after his election win, which he said demonstrates that center-left social democracy can carry the vote even when winds are blowing from the right.
• Deutsche Bank is moving one of its top private bankers to the Middle East, bolstering its executive ranks in the oil-rich region deemed key to the German lender’s wealth management strategy.
• The concentration of a dangerous chemical in fish far exceeds EU limits in at least seven countries, with over half of European rivers and almost all coastal waters containing more perfluorooctane sulfonic acid, or PFOS, than the recommended limit.

Seen and Heard on Bloomberg

Fabrice Le Saché, Medef vice president, during a Bloomberg TV interview in January. Photographer: Chris Ratcliffe/Bloomberg

“Catastrophe” — that’s the warning from Fabrice Le Saché, vice-president of the French employers’ group Medef, if France’s next prime minister comes from the Socialist Party. Speaking to Bloomberg Radio’s Stephen Carroll in Paris, he said higher taxes on capital gains would push entrepreneurs and wealth out of the country — just when growth is needed to help repay France’s debt. Socialist Senator Hélène Conway-Mouret pushed back, insisting her party has “a tradition of keeping the books really well.”

Chart of the Day

A measure of France’s borrowing costs exceeded Italy’s for the first time in the euro zone’s history, demonstrating how investor concerns over fiscal policy are reshaping the region’s bond markets. For market veterans, it’s a remarkable development given lower-rated Italy was for years the region’s poster-child for fiscal profligacy.

What we are watching

• Press conference by Executive Vice-President of the European Commission for Tech Sovereignty Henna Virkunen  and European Commissioner for Defense and Space Andrius Kubilius this afternoon
• Joint press conference by Lithuanian President Gitanas Nauseda and President of the European Council Antonio Costa later today
• Commission President Ursula von der Leyen gives State of the Union speech at European Parliament in Strasbourg tomorrow morning

Final Thought

Diners on a restaurant terrace in Malaga, Spain. Photographer: Angel Garcia/Bloomberg

Spain’s government will propose a sweeping ban on smoking tobacco and electronic cigarettes in public outdoor spaces, according to a bill draft seen by Daniel Bastero. One in four Spaniards smoke daily and consumption among minors has been growing. The proposed ban is in line with similar initiatives in other European countries.  Sweden has banned smoking in bar terraces while France and Belgium introduced a ban in public areas like parks or beaches.

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