BRUSSELS ― The Italian parliament is set to vote on Wednesday to postpone a reform of the eurozone’s bailout fund, dealing a blow to EU plans to boost its safety net for failing banks.
The move, delaying approval of revisions to the European Stability Mechanism until November, would leave Rome only a few weeks to formally approve the reformed treaty before an end-of-year deadline.
There’s no majority within Giorgia Meloni’s governing coalition in favor of ratification amid the ESM’s lingering associations with the controversial bailout conditions during the sovereign debt crisis. In Italy, the “MES” (as it is known by its Italian acronym) has such a bad reputation that it’s become politically toxic to endorse it.
Timing is key: From January 2024, eurozone governments will be able to draw from the Single Resolution Fund, a bank-funded pot of money that is meant to hit €80 billion by the end of the year, to cover the costs of winding down a failing lender on a first-come-first-served basis. Under the reformed ESM, which Italy and all other eurozone countries signed up for in 2021, up to €68 billion could be loaned to the SRF, nearly doubling its firepower, and so acting as a backstop.
But if Italy, the only holdout, doesn’t ratify, it would mean that in case of a string of bank failures, no eurozone country could use the backstop, and late-comers could be forced into liquidation.
Austerity measures
Fearing those repercussions, EU finance ministers at a recent meeting put pressure on Italy to vote through the changes, according to people familiar with the discussions who were granted anonymity to discuss confidential talks.
But the matter has become difficult politically in Italy with the ESM’s connections with austerity measures imposed on Greece and other countries during the euro debt crisis.
“The ESM is a stigma, so clearly it is an instrument that at present risks holding up resources that could be used,” Meloni has said.
The Luxembourg-based fund is open to discuss other uses for its €400 billion lending capacity, provided Italy ratifies the reform first.
“There is a readiness to use the potential of the new treaty to the fullest but that can only be done once the treaty is in place,” ESM managing director Pierre Gramegna said in June.
Internal divisions
Meloni’s coalition is split, with League leader Matteo Salvini opposing ratification. “It is not a useful tool for the country,” he said.
At the same time, the chief of staff to Finance Minister Giancarlo Giorgetti, from the same party as Salvini, wrote to Italian MPs that ratification “could lead to an improved credit rating of member countries, in particular for those with a high public debt, like Italy” — an apparent endorsement.
Antonio Tajani, interim-leader of Forza Italia, a member of the coalition, expressed doubts over the reform. “The current regulation does not place any control by the European Parliament and the European Commission and this is not good,” he said.
Internal divisions meant that last month the ruling parties deserted a committee vote in the Italian parliament in favor of ratifying the ESM reform, which passed solely with opposition votes.
Meloni herself has had critical words for the fund, promising that “while I’m in government, Italy will never access the ESM.”
She needs to sell the issue domestically without it looking like an about-face, and to do so, she has sought to use the ratification as leverage in separate ongoing negotiations on reforming of EU spending rules.
“There is little point in ratifying the ESM reform when you don’t even know what the new rules on the Stability and Growth Pact foresee,” she said.
But hostage diplomacy isn’t something EU partners are prepared to accept.
“I don’t think the process of [Stability and Growth Pact] reform is going to be impacted by the situation on the ESM treaty ratification,” said a senior EU official, granted anonymity to enable a discussion of confidential matters.
