By Silvia Marchetti
ROME (MaceNews) – Italy’s parliament has yet to approve the key European Stability Mechanism reform aimed at strengthening the banking union and is buying time over fears this will trigger tensions among ruling allies, according to government sources.
The League party and the 5 Stars Movement, that have joined forces to support Mario Draghi’s pandemic emergency cabinet, could be against clearing a reform which in their view would further reduce Italy’s sovereignty on budget issues and tighten fiscal adjustment.
“There are certain technical aspects of the reform which we have never quite liked, mainly the clauses regarding a forced debt structuring plan, or strict fiscal path, as a prerequisite to accessing the ESM funds in case of need”, said a League source.
The ratification process kicked-off last year but while several countries have already approved the new ESM treaty, Italy has yet to give the green light alongside Germany, France, and Portugal.
“This is a very critical moment for Italy: parliament is involved in the upcoming election of the next head of state while government is focussing on key pro-growth pandemic funds. The last thing we need are more tensions with the League and the 5 Stars”, said a Democrat official.
Sources noted that Italy risks being the last founding member of the EU to clear the ESM reform, which needs to be approved by all parliaments across the European union in order to become effective.
While Paris and Lisbon are speeding up on the ratification process, Germany is waiting for the verdict of its constitutional court over the reform, which is expected to land soon.
The League and 5 Stars argue that the ESM reform might introduce a sort of pre-emptive debt restructuring for all countries that access funds in case of financial troubles, which would highly penalize debt-ridden Italy particularly following higher pandemic spending in the past few years.
Ruling parties have always been at odds over whether or not to tap into the ESM for health spending, with the Democrats and minor Itali Viva party suggesting it would have eased Italy’s budgetary pressure.
Even though the Eurogroup reached a deal over the reform in 2020, in order to come into force the new ESM treaty must be adopted by all eurozone members through parliamentary ratification. And at present, the 5 Stars are the largest group with the most votes, while the League could team up with the far-right opposition to block the reform.
The League and 5 Stars are also seeking for clearer insight on how the debt sustainability assessment and repayment capacity of countries tapping into the ESM will be jointly conducted by the ESM and the European Central Bank, set to have a major role in a revamped mechanism aimed at better tackling financial crises and boosting the banking union through the adoption of a common backstop to the Single Resolution Fund.
The backstop prevents one single bank failure from harming a country’s entire financial sector and triggering a potential spillover effect across the eurozone.
The League and 5 Stars worry about which ‘benchmark’ will be used to determine debt sustainability, arguing that the pandemic calls for more budget leeway in tackling the economic impact through higher public spending.
“The treaty envisages a common methodology to calculate debt sustainability and requires countries commit to tightening budgets. These new rules would require all Eurozone countries to abide to common debt assessment rules and to one single method. Which would be the one taken as reference or benchmark: the German, Dutch, Portuguese or Greek one?”, argued a 5 Stars source.
It has been more than two years since European members have attempted to sign off on the ESM reform, with the pandemic outbreak delaying the adoption timing.
Contact this reporter: silvia@macenews.com
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