What is ESM and why is it still talked about?

This is a slogan that resurfaces from time to time to stimulate the Italian political debate and debates on the Rome-Brussels axis. One thing remains constant, at least so far: Italy, which refuses to sign up to reforms of the ESM, the European Stability Mechanism or the sovereign bailout fund. In summary, one tool that should come into play when a country’s financial situation is extremely critical is to provide credit, but also subject the creditor to a reform program and cut public spending.

The ESM brings to mind the ghosts of Greece and the Troika, and for this reason it has long been opposed from left to right in Italy. But the new text, prepared from a thousand and one compromises precisely to erase this painful memory, accepted the demands from the countries whose public finances were most at risk. Considering that the compromise was signed by all 27 member states, including the Italian government, the final outcome of the reform showed that everyone was in agreement. The problem was in ratification: 26 countries did it, but from Giuseppe Conte to Mario Draghi to Giorgia Meloni, the ESM’s final act passed from hand to hand like a hot potato. How come?

What is the ESM and what does the reform deliver?

As we remember, the ESM is a mechanism that aims to provide financial assistance in the form of loans to Eurozone countries that are facing serious financial difficulties or are at risk. The capacity of the current recovery fund for this purpose is 500 billion euros. One of the problems with this fund, at least in its previous version, relates to the fact that those accessing loans had to comply with a number of conditions; for example, spending savings and committing to reforms that are often not easy for citizens and businesses to digest. . With the reform, these conditions were relaxed and should not cause social disasters like what happened with the Troika in Greece.

Is it a brand issue?

Supporters of the ESM argue that Italy stands to gain only from this reform, relying on a last resort and reliable parachute to prevent a serious economic crisis from causing the country to collapse. With Covid, we have cornered ourselves with the help of non-refundable subsidies from the richest countries of the EU, namely the Recovery Fund. However, this does not mean that it will be like this in the future.

So it seems that the new ESM is better than the old one, a fact shared even by those who opposed it until yesterday. Northern League Economy Minister Giancarlo Giorgetti admitted that he was in favor of approval “for economic-financial reasons”. The problem, if anything, is about the brand: we are approaching an election campaign like the European elections in June, and Lega and Fratelli d’Italia have recently made the fight for the ratification of the ESM one of the most important battles. their strong points.

According to many political commentators, Giorgia Meloni fears that Matteo Salvini, who is trailing in the polls, wants to use the state savings fund issue as a weapon to attack the prime minister and restore consensus. According to other reconstructions, Meloni’s no answer would be linked to some kind of grudge against Germany and to be frugal about the agreement on Stability Pact reform, which the Italian government would accept even if it was not 100 percent happy with the outcome. Maybe there is some truth in both reconstructions. But the reasons don’t seem to end here.

ESM reform: What's changing for Italy?

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As European Affairs Minister Raffaele Fitto explained a few days ago, the ESM issue is closely linked to two hot files in Brussels: the Stability Pact and the revision of the EU budget. The Meloni government, as we said, has finally given its blessing (perhaps not entirely convinced) to the Stability Pact. But Italy’s budget revision path is still uphill: in fact, the government supports the funding increase requested by the European Commission in Brussels to deal with the Ukrainian crisis, immigrants and Pnrr’s growing interests. On immigration in particular, Meloni is pushing for more resources to make agreements with third countries, similar to the model signed with Tunisia. But the thrifty ones, led by Germany and the Netherlands, built a wall (aided by Viktor Orban’s Hungary, which is against giving more money to Kiev), and the budget review was postponed until 2024.

The halt in the approval of the ESM may also be linked to another issue that Minister Fitto himself mentioned a few months ago to explain his government’s silence on the bailout fund: the Banking Union. What’s it about?

Banking Union

The banking union is nothing more than the great European project that should prevent the crisis in one financial institution in one European country from spreading to the rest of Europe. One of the key points of the banking union is the single resolution mechanism: a kind of ‘common fund’ to help banking institutions through the crisis in the eurozone. It is financed not by taxpayers’ money, but by contributions from the banking sector. For example, if a bank goes into crisis and risks the stability of an EU country, the solution mechanism with a cash reserve of 55 billion comes into play. However, if this fund is not sufficient, the system called ESM comes into play. backstop or parachute.

In reality, the transition between the resolution mechanism and the ESM might have been less direct if there had been another buffer to cushion the banking crisis: it is called Edis, and it is the European bank deposit insurance scheme, which is the final piece that completes the banking union. : Essentially, Eurozone countries will share the risks of the sector with this plan. But there is still a lack of political consensus on Edis due to opposition from Germany, which complains about the high levels of non-performing loans, or junk loans, under Italian banks. In recent years, Italy has significantly reduced non-performing loans, but the European agreement remains distant.

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Source: Today IT

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