Mes: what it is, how it works and why only Italy’s ratification is missing

The European Stability Mechanism (ESM), also known as the ‘bailout fund’, was created in the wake of interventions in the sovereign debt crisis that occurred in 2010 with repeated interventions to avert Greece’s default. With the arrival of the pandemic, it was decided to modify it by providing it with 240 billion to be used to deal with the health emergency.
Created in 2012 with an intergovernmental treaty, the Mes serves to grant financial assistance under pre-established conditions to member countries that may find themselves in difficulty in financing themselves through the normal placement of government bonds. In return there are a number of conditions to be signed. Up to now it has intervened to help Ireland, Portugal, Cyprus, Spain for the financial exposure of the banks and Greece for a total of 295 billion, also considering the interventions guaranteed by the EU since 2010. In exchange for the loans, a program of debt repayment and control with macroeconomic adjustment plans, draconian reforms according to the most critical ranging from pensions to public spending to more direct interventions. Lighter criteria are instead required for precautionary credit lines, for states affected by adverse shocks but in financial conditions with healthy fundamentals. A few months after the outbreak of Covid, the Mes was also put in place with a 240 billion credit line to support the pandemic crisis, available to Eurozone countries to finance only the costs associated with the health emergency, even if so far the credit line has not been used by EU partners. The mechanism is guided by a Council of Governors, made up of finance ministers of the euro area, and takes the main decisions unanimously. It has a subscribed capital of 704.8 billion, 80.5 billion already paid up, with a lending capacity of 500 billion. Italy, the third shareholder after Germany and France, has subscribed the capital for 125.1 billion and paid over 14.3 billion. The reform of the 2021 Mes Treaty, voted in the Council in Brussels during the second Conte government, further intervenes on the conditions for financial assistance and on the differences between the lines with enhanced or simple conditionality, as in the case of the request for intervention for the healthcare costs related to the pandemic. The heart of the reform, however, is to attribute to the Mes the function of providing a financial safety net (backstop) to the Single Resolution Fund in the context of the banking crisis management system. In other words, as an instrument of assistance to states, the Mes also comes into play in credit crises, a central step in completing the banking union. Among other things, it provides that the Mes can act as a mediator between states and private investors in the event that the restructuring of a public debt is needed. After the changes made, the only countries left to have not ratified them were Germany and Italy. Last December, after the German Constitutional Court rejected the appeal of seven liberal deputies, the go-ahead was given to the reform of the mechanism and now Italy is being asked several times to give its assent for the definitive launch. After Croatia’s entry into the euro at the beginning of the year, Zagreb also joined the Mes and recently approved the founding treaty and the reform treaty. The expectation is that it will formally become a member on March 22 when only Italy will be missing from the appeal.