December 4, 2020

State of the Union - Week 49 - One small step for the European bailout, one giant step for Eurozone leaders?

One of the most significant - and equally overshadowed - agreements from this week was the political outcome of the Eurogroup meeting on Monday. As stories emerged about the so-called iliberal vetoing of the MFF and the chaos and uncertainty that followed, a highly technical agreement broke years of stalemate in negotiations over the European Stability Mechanism and the Banking Union.

The agreement includes a reform of the European Stability Mechanism (ESM) and sets a framework for the completion of the Banking Union and its bailout scheme. The ESM Treaty has been an especially disputed issue in debates between Eurozone finance ministers - in particular for the now former Italian populist led government which opposed the stricter conditionality in the draft proposal during its administration. 

The political agreement reached on 30th November includes an earlier measure of a Common Backstop - in practice an extra guarantee that if banks should run out of cash, the backstops will ensure sufficient liquidity to the Single Resolution Fund via the ESM. This acts as extra insurance for private banking customers across the EU, comprising a last resort for banks in financial trouble. 

The reform of the ESM fund and its conditionality, used to fund sovereign debt EU economies during the debt crisis, has been underway for a long time. The dearth of progress has been primarily caused by strict conditionality clauses which have been pushed forward by Northern countries - especially Germany and the Netherlands. Italy's major concern has been the harsh austerity conditions which were imposed on Greece during the crisis. With Italy's large and growing national debt these concerns could become a domestic reality. For now, Italy doesn't seem to need to borrow from the ESM, as the NextGenEU recovery package will meet some of its need for credit. Italy formally agreed to the conditionalities as it no longer believed that the conditionality clauses conflict with access to the ESM fund. 

Hopefully, the ESM Treaty will enter into force in a year pending ratification in national parliaments.

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