Italy’s ESM Refusal Deprives EU of Powerful Tool, Officials Say

Alessandra Migliaccio, Kamil Kowalcze and Sonja Wind
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(Bloomberg) -- The Italian parliament’s rejection of a European Union bailout fund late last year leaves the bloc without a powerful tool to protect taxpayers from a future banking crisis, EU officials said.

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“It is a missed opportunity to make the euro area more resilient and a missed opportunity to strengthen the banking union,” Pierre Gramegna, who heads the European Stability Mechanism, told reporters at a news conference in Brussels on Monday.

Lawmakers from Italian Prime Minister Giorgia Meloni’s far-right Brothers of Italy party, as well as coalition partner the League, voted in December against ratification of the reform of the ESM, which has been a politically toxic issue in Italy for years. It’s already been approved by the other 19 euro-area countries.

Paschal Donohoe, who leads the Eurogroup, which brings together finance ministers from the currency bloc, said he would “spare no effort” to try to find a way forward with Italy’s Giancarlo Giorgetti.

“Were Europe to confront a significant financial difficulty that was located within a bank, today we are now missing a really important tool to help protect taxpayers, households and small businesses from the costs of that difficulty,” he said at the news conference.

The fund was set up in 2012 to help euro-area economies in exchange for strict reforms. Meloni has said in the past that Italy will never tap it, but European peers have asked her to approve the backstop to allow other countries to access it.

Successive governments in Rome have been unable to ratify the ESM reform. Detractors argue that using it would increase the risk of a restructuring of the nation’s mammoth public debt.

In addition to causing strain within the EU, the issue reflects a populist move, including by the anti-immigrant League. Its leader, Matteo Salvini, who is also a deputy premier, said at the time of the vote that the decision protects Italian taxpayers from financing the rescue of “foreign banks.”

Gramegna said there is still room to seek a solution.

“Fortunately, this happens at a time when we do not have a financial crisis, where banks have high capitalization, where we have financial stability,” he said.

--With assistance from Jorge Valero.

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