The whole 'we can't drop VAT' thing is a cop out. Take it to the other EU leaders next time you have a jolly/summit or whatever you call it, tell them that its a great new environmental initiative, and you'll be away. It'll work. They'll accept it.
They're not dropping VAT in bikes for the same reason as they're spending trivial amounts of public money on bikes (relative to expenditure on infrastructure designed and maintained for cars). They don't take cycling serilously. And they don't take cycling seriously because they're cretins.