– Market volatility set to rise, ruling parties at odds
– EZ banking union progress could come to a halt
By Silvia Marchetti
ROME (MaceNews) – The rising prospect that Italy will reject proposed reform of the European Stability Mechanism could raise new doubts about European integration and the stability of the ruling center-right coalition.
Sources from the co-ruling populist League party said they would vote against the ratification of the new ESM treaty, expected to land in Italy’s parliament by the end of February.
If Italy fails to ratify the ESM reforms, which are aimed at strengthening the Eurozone’s banking union, Italian spreads could blow out and it could renew market volatility across the Eurozone. The reforms must be approved by all EU member states to come into force.
Also, the risk of a ‘no’ vote by Italy’s parliament would be the first major crack in the center-right ruling, triggering instability and lowering market confidence in the government.
“The ESM as it stands must not be cleared, little improvements have been made compared to the original treaty and the only certain thing is that if Italy would ever access the ESM loans for economic reasons, our public debt would undergo a forced restructuring and we could end up like Greece a few years ago,” said a League official.
Upcoming regional elections in Lombardy, a League stronghold, are focusing on the battle against ESM, which the party is exploiting to recover lost support.
Premier Georgia Meloni, a strong opponent of the ESM before rising to office, has recently sent out mixed messages on the ratification, with several deputies of her party Brothers of Italy ready to vote against it.
Meloni, a former fascist with an anti-EU background, has stressed that the ESM reform must be updated and improved to take into account the economic impact of the pandemic and of the Russian-Ukrainian conflict by boosting investments across the Eurozone and to tackle soaring energy prices.
An official from the Democrat party, now in the opposition, warned that Italy was the only European Union member that had not yet approved the ESM treaty reform, and that a negative vote would “finally unmask the government’s fake pro-European stance but also put an end to Italy’s financial credibility, triggering a spike in the spread.”
As all EU members must approve the treaty for it to come into force, Italy’s potential delay or a no vote would halt a key reform set to boost the EU’s financial stability, a setback in the European integration project, said the Democrat deputy.
In November a ruling majority proposal was approved by the lower house committing the government not to clear the text of the new ESM.
The ESM, with a EUR 500 billion fund, was created in 2012 during the Eurozone’s sovereign debt crisis to lend to ailing Eurozone peers in need of support. During the pandemic, tapping into the fund for health spending was seen as a stigma so no country did it.
The reform, recently approved by the EU institutions, now envisages easier access to credit and also provides resources to banks in need of recapitalization, provided a country follows a tight fiscal adjustment path. This caveat is considered by the League and a part of Meloni’s group as a “weapon to supervise and forcefully restructure Italy’s huge debt,” the second-largest in the Eurozone after the Greece.
“The new ESM must be approved as it further completes the Eurozone’s banking union by providing a backstop to the Single Resolution Fund (SRF), which is responsible for dealing with failing banks,” warned the Democrat official.
Italian banks, sitting on roughly EUR 60 billion of bad loans, are among the most exposed to financial shocks and would largely benefit from the new ESM in case of insolvency, but several government sources believe the cons of the new treaty greatly outweigh the benefits.
“Even if we ever did tap into the ESM, which I hope will never happen, our public finances would be constantly monitored by the European bodies, we’d have a watchdog breathing down our necks for years to come,” noted a League official.
Meloni’s pro-ESM members of parliament believe the new ESM could be further improved even once it has been ratified. The treaty, after it’s been cleared by all member states, will in fact still be a subject of further debate on how it can be best applied to tackle future economic and financial challenges, said a Brothers of Italy sources.
However, the ESM’s green-light is part of a bigger game.
The Democrats, and Meloni’s pro-EU party members, hope that if Italy does ratify the treaty by spring-end, such an accomplishment would be rewarded’ by Brussels.
The approval could be used as a bargaining chip to secure changes to direct pandemic aid investments and greater fiscal leeway in the reform of the Stability and Growth pact, which is also under discussion at EU level.