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The EU has currently no safety net for a banking crisis, as the candidate bailout institution, the European Stability Mechanism (ESM), has not yet been ratified—or more precisely, its reformed version has not yet been ratified. Created as a “government bailout fund,” the reformed version allows the ESM to function as a bank bailout fund as well.

The EU policy is to bail-in/bail-out so-called systemically relevant banks, but to do so they need a legal framework which is, with the new competences, the ESM treaty.

Only one country signature is missing for the ratification: Italy. The Italians are not enthusiastic about the ESM treaty, because they would be the losers both in case of a sovereign debt crisis, and in a banking crisis. In the former case, if Italy loses access to the markets for debt refinancing, the ESM and its intrusive and punishing conditions are the only option at hand (Italy cannot issue its own currency and cannot buy its own bonds. It must borrow euros from the ECB and beg the ECB to support its debt).

In case of a banking crisis, it is worse: Italian taxpayers’ money is going to bail out northern European banks.

Recent statements by Italian Foreign Minister Antonio Tajani and Undersecretary to the Treasury Federico Freni suggest that Rome would capitulate and trade ratification of the ESM in exchange for softening the debt and deficit rules—the so-called Stability Pact. The latter was suspended over the Covid emergency, allowing EU member states to borrow more money, but it is scheduled to become operational again from Jan. 1, 2024. The Stability Pact demands that EU member countries implement a balanced budget, with forced deficit reduction down to zero.

Faced with criticism, the EU is working at a reform of the Stability Pact, introducing exceptions to the deficit rule. However, the exceptions are worse than the rule, because countries would be allowed to deflect from deficit targets in special cases and conditioned to more intrusive controls by Brussels over fiscal policy.

Italy has a debt to GDP ratio of 143% and a 8% deficit.

If the Italian government reaches a compromise with Brussels and agrees to ratify the ESM in exchange for looser debt/deficit rules, the government majority will crack when Parliament ratifies the treaty. A growing faction in the Lega, led by Sen. Claudio Borghi, has been ferociously campaigning against the ESM and will vote against.