by Luca Ruggeri

The ratification of the ESM (European Stability Mechanism) treaty amendment is one of the "hot" topics of the Meloni government. Let us therefore take stock of the situation, trying to make the picture more intelligible than the considerable degree of confusion that seems to reign on the matter.

The ESM has been operational for some time and has already been used in favor of several countries, most recently Greece (August 2015). There have been no further subsequent ESM interventions. Notably, although strongly urged by some, no country has drawn on the ESM availability offered during the pandemic period despite the advantage in terms of low interest rates and the affirmed absence of conditionality. This is a very important point as it well substantiates the mistrust surrounding this institution, created especially in view of the way the intervention in Greece was handled, the final outcome of which appears questionable to say the least.

Thus, the reform whose ratification is demanded does not concern the current operation of the ESM but rather the introduction of certain amendments to the international treaty that forms the ESM's legal basis. In fact, the ESM does not fall within the framework of the European Union's structure, and since its source is a treaty, it is necessary for all states participating in the treaty to sign its amendments.

The reform that is currently under discussion was extensively analyzed in Machiavelli's Dossier No. 23 of Feb. 12, 2020, and one can only repeat the concerns outlined then. In extreme summary:

  • new rules for access to precautionary credit lines, presented as a major facilitation, make them almost unusable by many countries, certainly including Italy;
  • the ESM is given the power to assess the sustainability of sovereign debt, an aspect that in the event of a financial crisis would assign enormous power to the ESM in determining and subsequently managing the inevitable conditionalities to be borne by the financed country;
  • regarding the Fund's governance, the treaty amendment gives objectively excessive powers to the ESM director general by placing him on an equal footing with the European Commission.

The advantages of this ratification, from a purely technical point of view, are basically two.

The reform includes giving the ESM the role of backstop to the Single Resolution Fund (SRF) intended to be used to resolve failing banks if other options, especially bail-in, have been exhausted. The SRF currently has more than €60 billion at its disposal and is one of the tools through which to build the European banking union, which to date has been held back by mutual suspicions among different states. The recent ruling of the German Constitutional Court, which removed the last obstacle to German ratification of the ESM amendments, was careful to point out that under Article 123 TFEU, the SRF cannot be financed by the ECB.

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A further aspect of interest concerns the ECB's OMT (Outright Monetary Transactions) lines, created by Governor Draghi, which provide for the implementation of secondary market purchases of short-term securities of countries in difficulty, thereby defining their start date, duration and end date. Such interventions can be implemented only with respect to countries that have agreed to a consolidation process under the ESM umbrella. This aspect, however, appears to be depowered by the ECB's recent introduction of the Transmission Protection Instrument (TPI) aimed at avoiding fragmentation of the euro area; the markets' reception to the TPI has been rather lukewarm given that they expected a more agile instrument than that presented by the central bank, but it may nonetheless be of considerable interest in the event of a sovereign financial crisis.

On the part of the writer of these brief notes, the perplexities about ESM reform thus remain totally unchanged, and the ESM itself appears to be an outdated instrument - as moreover evidenced by the numerous proposals for its revision suggested by several quarters. By way of example, we recall what was set out in the joint intervention of Presidents Draghi and Macron, which appeared in the "Financial Times" of December 23, 2021, with the proposal for a European debt agency (in fact the hypothesis of a new role to be assigned to the ESM.

Given the aforementioned, what to do now? It seems clear that after the assent to ratification by all the countries subscribing to the ESM, an Italian refusal would be seen as an expression of the will to clash head-on with Europe, an attitude that in the current situation does not seem to us to respond to our national interests. In this context, the pragmatic course of action suggested by the Prime Minister (approve the amendment but be wary of acceding to the ESM) appears, in the writer's humble opinion, to be the preferable option.

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Graduate in Economics, has worked for over twenty years in a large Italian bank and currently works as general manager for an institutional investor.