What is ESM and why Italy won’t (probably) sign it

The most vehement political discussions in Italy concern the approval of ESM reform, an intergovernmental treaty hastily approved in 2012, when the prime minister was the unloved technician Mario Monti.
The treaty was created to try to heal the debt crisis of peripheral eurozone countries-Spain, Greece, Italy, Portugal-but seems to have run out of steam with the declared end of the Greek crisis. But what is ESM?

The ESM, or European Stability Mechanism, is a financial institution created in 2012 to help euro area member states in economic difficulty. It  was created as an evolution of the European Financial Stability Facility (EFSF) and the European Financial Stabilization Mechanism (EFSM), two temporary funds established in 2010 in response to the sovereign debt crisis. The ESM has a lending capacity of €500 billion, financed by contributions from participating countries and the ability to issue bonds in the market.

The ESM can lend to countries in crisis, buy their debt securities or provide preventive credit lines. In return, recipient countries must agree to a program of economic and fiscal reforms, monitored by the European Commission, the European Central Bank and the International Monetary Fund.

It was precisely the harshness of these rehabilitation programs that was challenged by those who obtained the ESM loans. During the Greek crisis the government was forced to implement very harsh austerity measures, with cuts in the number of civil servants, pensions, minimum wages and the health service. It is even said that the first president, Klaus Regling, a German, when confronted with the harsh conditions of Greek pensioners, said, “I don’t care if they starve, the important thing is that they pay the debt.”

The latest proposed reform of the ESM is in 2019 and includes some significant changes. These include the possibility of using the ESM as a screen for the Single Resolution Fund (SRF), a mechanism to manage banking crises without resorting to a public bailout. In addition, the reform introduces more flexibility in loan terms, greater transparency in decision-making procedures, and a revision of collective action clauses (CACs), which govern the possibility of debt renegotiation with private creditors. The ESM reform was approved by euro area finance ministers in December 2020, but still needs to be ratified by national parliaments to come into force.

In Italy there is a very broad political front against the approval of the ESM reform, which has been postponed, for the umpteenth time, until October. One of the most determined opponents, Claudio Borghi, has listed the 10 reasons why the reform should not be approved, either by Italy or by other countries

1) Ratifying the reform means SPECIFICALLY APPROVING THE ENTIRE TREATY, including its most absurd parts, which former prime minister Mario Monti made a distracted Parliament vote for in the summer of 2012

2) ESM reform worsens an instrument already infamous because it was the child of austerity interventions against Greece. EU countries are divided into “good” and “bad.” Italy just happens to be among the bad guys.

3) The ESM will be able to intervene in bank bailouts (note, not of savers because FIRST the bail-in must be done, with the complete erasing of stock holder and  subordinate bond holder values) and one cannot DECIDE not to do so. If a large German or French bank goes bust the ESM will intervene and the Italians’ money will be used to pay its creditors.

4) The new ESM treaty clearly writes that in case of intervention there will be a cut in the value of government bonds in the hands of savers. It risks of damaging, if not destroying the whole international financial system.

5) The new ESM treaty obliges the inclusion of clauses (so-called CACS) in government bonds that make it easier to cut their value.

6) If the ESM were operational, in the event of a crisis in the markets, see, for example, during a pandemic, the ECB would no longer intervene, instead letting the ESM operate with all the consequences.

7) The ESM would become a kind of “rating agency” with the power to decide on the sustainability or otherwise of debt. In practice it could CAUSE a crisis by declaring at will that a debt is unsustainable.

8) The directors of the ESM, in the face of these enormous powers (the director could demand payment of the committed capital, over HUNDRED THOUSAND BILLION WITHIN A WEEK), are EXEMPT FROM ANY JURISDICTION (really, it says just that). They cannot be sued, they are accountable to no one for their actions, no authority can violate the ESM offices, their salaries are tax-free.

9) The qualified majority threshold, 80%, used for numerous situations, is calibrated to leave out Italy (which “weighs” 17% while Germany (27%) and France (21% 🙄) just so happen to have sufficient quotas for absolute veto rights.

10) It is not true that you can ratify but not use the ESM. Once the changes are activated they become directly binding, see bank bailouts, and if Italy lost access to markets there would be no choice but to make use of it.

In essence the ESM is an instrument of domination and submission, it brings NO BENEFIT for Italy, least of all in the new version.
It should not be ratified because it is not in Italy’s interest, and ratification is absolutely not a due act but a fundamental step in accepting a treaty.

For these reasons, the Italian parliament is unlikely to approve the ESM