G. Galli: The reform of the ESM and why it is so controversial in Italy
The draft reform of the European Stability Mechanism (henceforth ESM) was not approved as scheduled at the Euro Summit in December 2019, nor in subsequent meetings, because the Italian Prime Minister was obliged to ask for a delay in the face of strong domestic opposition to the reform from populist parties. With the outbreak of the Covid-19 epidemic in February the issue has fallen out of the European agenda, at least for the time being.
The arguments used by the populists against the reform were deeply flawed.
The proposed changes in the text of the EMS Treaty were relatively minor and did not contain any mechanism of automatic restructuring of the debt of countries asking for financial assistance from the ESM.
However, the small changes in the text reflected the idea that Italy would soon be obliged to restructure its debt. The only possible answer by the Italian authorities was to design a plan for the gradual reduction of the debt to GDP ratio. This will still be the case, with greater difficulties, after the end of the epidemic.
Restructuring the debt may be a painful necessity, but it is not a way to solve the problem of a heavily indebted country in which most of the debt is held by residents.