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Italy Should Ratify the ESM While it Still Can

With markets calm and public finances stabilising, Rome can turn the revised European Stability Mechanism into a signal of strength — and even a tool for financing defence and Ukraine

Marco Buti and Giampaolo Vitali

Mar 3

As Pierre Gramegna, managing director of the ESM, has noted, “in these times of geopolitical turbulence, which have triggered higher defence spending and costs for all countries, we must fully exploit the ESM’s potential”.

The ratification of the revised European Stability Mechanism (ESM) treaty has slipped off the radar of Italy’s economic policy debate. Pressure from European partners for Rome to approve the 2021 reform has become a weary ritual. Yet this is precisely the moment when ratification would make the most economic and political sense.

The reform completes the second pillar of banking union by providing a common backstop to the Single Resolution Fund, and it establishes precautionary credit lines designed to prevent the ESM from being used only in situations of manifest crisis.

Italy today is in a markedly different position from the one that shaped earlier domestic resistance. T

he country has a stable government, a public debt trajectory broadly under control, a resilient banking system with sharply declining non-performing loans, compressed sovereign spreads and renewed market confidence reflected in rating upgrades.

These variables strengthen the international standing of Italian public finances and place the government in a position of relative strength to take advantage of the revised ESM.

What would those advantages be?

First, ratifying now would send a message of financial solidity, not vulnerability. Joining the revised ESM framework while markets are calm would amount to purchasing insurance while healthy — and without external conditionality or a specific “Italy risk premium”.

In the current climate of geopolitical uncertainty, ratification would be interpreted as a sign of political credibility rather than financial distress.

Second, the new ESM provides access to precautionary credit lines for countries with robust fundamentals without imposing the intrusive macroeconomic conditionality that in the past raised concerns about national sovereignty.

Previously, Italy’s weak fiscal position made access politically and technically implausible. Today, with debt on a more sustainable path and an expected exit from the EU’s excessive deficit procedure, Rome could credibly argue that it qualifies. Ratification would therefore benefit Italy directly, not merely its more fiscally conservative partners.

Third, approval would strengthen Italy’s hand in ongoing European negotiations — from the next Multiannual Financial Framework to the Savings and Investment Union and measures to bolster competitiveness.

It would also rebalance recent understandings with Germany by removing Berlin’s oft-cited excuse for delaying completion of banking union, notably the creation of a common European deposit insurance scheme.

Finally, ratification would allow Italy to play a constructive role in adapting the ESM to current geopolitical realities.

As Pierre Gramegna, managing director of the ESM, has noted, “in these times of geopolitical turbulence, which have triggered higher defence spending and costs for all countries, we must fully exploit the ESM’s potential”.

Using the ESM to finance defence expenditure or support Ukraine would be less politically contentious than issuing common eurobonds.

From a legal and technical perspective, Italy’s ratification would facilitate the use of precautionary credit lines for such purposes.

Collective requests could reduce the stigma effect that discouraged take-up of the pandemic-era ESM health facility. Politically, ESM-based financing for Ukraine would circumvent obstruction by non-eurozone member states such as Hungary and the Czech Republic, which do not sit on the ESM’s governing bodies. It could also open the door to a broader debate on financing European public goods, from common defence to competitiveness.

The Italian government has often been criticised — not without reason — for privileging short-term manoeuvring over structural reform and for hesitating in the face of deeper European integration.

Ratifying the revised ESM treaty would demonstrate strategic foresight that is currently in short supply among European leaders. It would serve both Europe’s collective resilience and Italy’s national interest.

A previous version of this article was published by Il Sole 24 Ore

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Marco Buti

Since April 2023, Marco Buti has held the Tommaso Padoa-Schioppa Chair at the Robert Schuman Centre. Before joining the EUI, Buti was Chief of Staff of the Commissioner for the economy, Paolo Gentiloni. Between 2008 and 2019, he was Director-General for Economic and Financial Affairs at the European Commission. Moreover, he has been the Commission Finance Deputy at G7 and G20.

He is an IEP@BU fellow.

Giampaolo Vitali

Giampaolo Vitali is a senior researcher at CNR and secretary of GEI (Italian Association of Business Economists); he was an industrial economist at FCA Turin and an adjunct professor of European Economics at the University of Turin.

His research topics concern local development, industrial economics, public policies. He has published about one hundred of scientific and professional papers in the fields of EU and Italian industry, industrial districts, local development.

IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the author

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