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Game over. The game of procrastination and useless ideological prejudices is over. The time has come for our country to decide. In fact, at the Eurogroup meeting on Monday, November 30, the finance ministers of the eurozone member countries will have to comment on the long-awaited reform of the ESM treaty, the so-called “Save States” fund, which has become famous. in this crisis due to its Pandemic Credit line created and made available to the states to finance their direct and indirect health costs due to pandemic. The issue will then be discussed by the heads of state and government at the next European Council on December 10-11, and the new treaty signed by governments in January 2021. To complete the reform process, it will be necessary to wait for the National ratifications, to be completed by the end of 2021.
The reform of the ESM has been expected for years. The ESM was hastily created by Europe in 2012 with the aim of curbing the sovereign debt crisis born as a result of the Great Recession of 2008, which led states like Greece away from default.
The ESM is an intergovernmental treaty between the countries of the Eurozone that aims to stabilize the Eurozone in times of market turbulence, providing financial assistance to States with problems of access to financial markets. Assistance is provided through (i) the granting of loans at subsidized interest rates, (ii) support for the issuance of government bonds, and (iii) the direct recapitalization of systemically important credit institutions. Strict conditionality is associated with any financial assistance plan awarded by the ESM, stricter than eligibility for the euro zone.
The intervention mechanism is designed to keep financial risk within individual Member States, exactly as in the case of the ECB’s government bond purchase plan (quantitative easing), which does not provide for hypothetical loss sharing among central banks . Eurosystem.
The reform of the ESM serves to avoid the contagion effect between the different countries of the euro area, guaranteeing to minimize the aggregate risk for the euro area as a whole, risk due to the macroeconomic and financial weaknesses of the Member States that are in trouble.
The new ESM, this is the most important novelty, would not be limited to intervening only to rescue the States but also in cases of crisis in the banking system, creating, through a “backstop”, a seat belt around the banks in the Eurozone. , acting as common support for the Single Resolution Fund, financed privately by private credit institutions, which is activated after the triggering of the bail-in of the institutions in resolution, discharging the rescue costs on private savers.
Regarding the relationship between the ESM and sovereign states, however, the reform reinforces the relevance of the sustainability of the debtor’s finances. In practice, the new Month may intervene through two different lines of credit. The conditional prudential credit line, limited to countries capable of meeting a series of criteria that, unlike what is established in the current regime, are identified in detail. For “eligible” countries, conditionality would imply the need to sign a letter of intent with which they would commit to continue complying with these criteria, compliance with which should be evaluated at least every six months. The European Commission would be tasked with assessing whether the political intentions contained in the letter of intent are fully compatible with EU law.
To access the “simplified conditionality” credit line, the requesting State must, among other things, not be subject to the excessive deficit procedure and respect the following quantitative budgetary parameters in the two years prior to the request for financial assistance: a deficit less than 3% of GDP; a structural budget balance equal to or greater than the minimum country-specific reference value; a debt / GDP ratio of less than 60% of GDP or a reduction of this ratio of 1/20 per year.
The line of credit subject to improved conditions, on the other hand, would be open to members of the ESM who cannot access the simplified line due to non-compliance with the aforementioned eligibility criteria, provided that their economic and financial situation remains solid and has a debt. public considered sustainable.
For these countries, access to the ECCL and other support tools would result in the need to sign a memorandum of understanding. In the event that a member country requests the granting of support other than the PCCL, the Board of Governors must instruct the Director General of the ESM and the European Commission, in agreement with the ECB, to negotiate with the member concerned (together and when possible also with the IMF) a memorandum of understanding specifying the conditions associated with the granting of the support instrument, reflecting the severity of the gaps to be filled.
The other great novelty of the reform is the transition from two-level collective action clauses to single-level clauses, with the aim of making sovereign debt restructuring more orderly and predictable, a very delicate process so far. And this is perhaps the hottest point politically, because it could affect Italy itself. The introduction of the single-level class action clause, in fact, would open the door to a controlled restructuring of debt (i.e. defaults), at the risk of alienating investors. But the mere idea that a large country like Italy is not ruling out bad debt runs the risk of increasing financial instability rather than reducing it.
The reform of the MEDE treaty, it must be remembered, began in a historical phase in Europe before this pandemic, which, needless to say, has completely changed it. With this crisis, Europe has equipped itself, for example, with financial instruments such as the EU Next Generation Fund that it did not have before. The European Central Bank has also changed its intervention strategy. Consequently, the reform of the ESM must also be contextualized in the light of the new Europe and, if it is to be reformed, this must be included within a European “package approach” with which the new Europe 2.0 is redesigned, through a serious modification. of the decision-making processes of the European institutions and the mechanisms for the transfer of financial resources between the member countries, from a federal point of view.
During the crisis, there was also much talk about the use of the pandemic line made available by the Luxembourg institution, which for Italy would amount to 37,000 million euros. But it is not on this line of credit, which Italy has unfortunately decided not to exploit until now, that the ministers will have to express themselves next Monday. The question is much more important and concerns, as we said, the role of the ESM as a backup mechanism to resolve banking crises. Crisis that will almost certainly reappear at the end of the pandemic, when credit institutions will find on their balance sheets a huge amount of new bad loans (the famous NPL), which are then those that do not pay the millions of failed companies or that, due to the credit crunch and lack of liquidity, they cannot return them. A phenomenon that could be worth around 1.5 trillion euros, according to recent estimates by the European Central Bank.
Against this risk, it is good that the reform of the ESM is completed as soon as possible.
Let’s be clear, once and for all, to reassure even the most energetic opponents of the reform, the sovereigns of our house: reforming the ESM treaty is not synonymous with automatically accessing its reinforced lines of credit. The possibility of this happening for Italy, from this point of view, is very remote. However, it is Italy’s duty to participate in this momentous reform.
Providing Europe with a safety net for the entire Union banking system is a fundamental signal that must be transmitted to millions of savers and to financial markets.
For this reason, it will be good that the Minister of Economy Roberto Gualtieri expresses, already next Monday, a clear and unequivocal position on this reform, and that the Prime Minister Giuseppe Conte confirms his position at the next European Council on the 10th and December 11. because it represents one of the fundamental pillars for the reconstruction of post-pandemic Europe. Game over. The game of procrastination and useless ideological prejudices is over. The time has come for our country to decide.
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