The European Stability Mechanism (ESM) is an intergovernmental organization founded in 2012 by the euro area member states. Its primary objective consists in ensuring long-term financial stability in the euro area. The ESM operates by granting aid to member states facing severe financial distress or at risk of it, particularly when it is not possible to refinance the public sector at sustainable conditions. In this sense, it functions as a «lender of last resort» (see the ESM website: https://www.esm.europa.eu/about-us).
Funds provided by the ESM come with strings attached. When seeking assistance, states exhibiting severe public finance imbalances are required to put their house in order. This typically involves the enactment of highly unpopular reforms consisting of tax increases and reductions in public spending.
In January 2021, the governments of all euro area member states agreed upon a revision of the ESM treaty, so as to make it more effective also in the presence of banking crises. The revised version would widen the scope of the ESM and provide a backstop to the Single Resolution Fund – a key component of the European Banking Union – and a more significant role in crisis prevention and economic adjustment programs.
Many believe that the ESM is an essential instrument for protecting the integrity of the banking system and providing a rapid response to the potential risk of public debt default. However, more than two years later, Italy is the only country whose parliament has not ratified the revision, thus keeping the reform on hold.
Critics and supporters of the ESM
Critics of the ESM highlight uncertainties about its economic benefits and the risk of financial stigma that could increase interest rates on public debt. Moreover, they argue that conditionality might harm financially strained countries. They also fear it could exacerbate institutional imbalances and unduly favor creditors. In contrast with other rescue mechanisms designed to mitigate the effects of financial crises, the ESM funds disburses are structured as loans, which must be paid back.
On the other hand, the ESM supporters believe that the Mechanism prevents sovereign debt and banking crises by offering a safety net to countries unable to access market funds. They argue that conditionality is necessary to manage the limited budget and protecting Eurozone taxpayers’ money. Klaus Regling, former ESM managing director, compares the ESM’s role to the IMF, noting its larger capacity and focusing on lending to European nations. He suggests that the ESM is a key element in stabilizing the monetary union; he also argues that austerity policies linked to the ESM, although unpopular, are voted by European governments, not by the ESM itself. One should add, however, that it is precisely the existence of the ESM that facilitates the establishment of a conditional credit line.
Italy’s troubled relationship with the ESM
What about the Italian viewpoint? It was not love at first sight between Italy and the ESM. The first version of the treaty was approved when Mario Monti served as prime minister (2011-2013). Yet, approval was secured by the Italian Parliament despite many abstentions and absentees, including Giorgia Meloni. Matteo Salvini’s League voted against it, and so did many centre-right MPs.
In February 2021, the League was part of the coalition supporting Draghi, and stopped the revised version of the ESM treaty. In summer 2023, discussions on the reform of the European Stability Mechanism started again, but nothing came out of it. In fact, in December 2023, Matteo Salvini denied that the Italian reluctance to proceed would lead to Italy’s isolation within the EU. He criticized the ESM as “useless, unused, obsolete, and harmful” and argued that ratifying it would burden Italian pensioners and workers, whose money would be used to bail out German banks.
The 2023 Refusal: Reasons Behind Italy’s Decision
To many, the Italian hesitance to endorse the ESM reform seemed perplexing, as backing the reform does not equate to seeking assistance from the ESM: these are distinctly separate actions. In fact, the reluctance to support the ESM reform can be attributed to various factors, most notably a desire among the government’s political factions to preserve economic sovereignty, and fears that the new ESM would eventually compromise Italy’s fiscal autonomy. While the Italian government is not compelled to request ESM aid, in times of financial turmoil its European counterparts might exert pressure to seek such support, making resistance a political challenge. Others would argue that the Italian government simply intends to retain a bargaining chip in negotiating the new Stability Pact, currently under discussion in Brussels.
That said, rejecting the ESM reform has consequences. In the short term, it strengthens the ideal of fiscal sovereignty, i.e., the will to maintain an autonomous management of public finance, as free as possible from external constraints. In the long run, however, it risks souring Italy’s relations with the EU. Moreover, the refusal could set an example for other member states and undermine the unity of economic policies across the Union.
Photo by Rosie Steggles
