The Gunners faced accusations of lacking the stomach for a fight towards the end of Arsene Wenger’s reign, with those issues leading to a tumble out of the Premier League’s top four.
Unai Emery was drafted in to the turn the tide, but Merson says Arsenal remain "a lovely bunch of lads".
He fears that will continue to hold the club back, with finances apparently of more concern to those in north London than results on the field.
The former Gunners midfielder told Sky Sports: "If you want to keep on coming along making money and finishing fifth or sixth, nothing has to change. But if you want to break in, get to that level, it's going to need a better mentality of player; I don't think the players are mentally strong enough.
"I don't see it - when it went 2-0 and the picture panned away and Bernardo Silva ran to the crowd, it was like Laurel and Hardy with Mesut Ozil, 'that's the end of that game'.
"They just seem like a lovely bunch of lads, not even Granit Xhaka is getting them to come on - you never see it with Arsenal."
While Merson believes Arsenal are continuing to regress, ex-Gunners goalkeeper Jens Lehmann believes Emery has inherited a positive situation from long-serving Wenger .
He said: "I don't consider it a re-build, the new manager has taken over a club in almost a perfect environment.
"The players have a good attitude. I expected a little more on Saturday, they had a big change, and after 22 years it's different if something is new, of course. It could have been my grandmother in charge, or whoever, but it's still new.
"I don't agree that after 22 years it takes a while to improve - the 22 years were great, and Arsene has invented the best football in the country, probably across Europe. Pep Guardiola took him as a role model in his best years, maybe 10 years ago.
"In this 22 years, it was a period of success. Not the ultimate success, and in recent years not the biggest success with missing out on the Champions League, but it has been a great time altogether."