The European Stability Mechanism (ESM) is a hot topic in Italy. It has also been so in Germany. However, since the Eurocrisis, many German politicians have accepted its utility for the overall stability of the Eurozone.
If decision-makers in Italy sometimes look at the ESM with a certain scepticism, it is worth recalling that this was also the case in Germany.
Germany and the ESM do not have an easy history. The institution, which was created in 2012 during the so-called euro or sovereign debt crisis, is emblematic of everything that was long denied from a German perspective: That, in practice, the European Economic and Monetary Union (EMU) needs more for its (robust) functioning than a common monetary policy and the adherence to common budget rules as envisaged by the original institutional architecture of the Maastricht Treaties and vehemently defended by the German side for a long time.
With the establishment of the ESM, the original form of the states' own responsibility for their budgetary policy (no bailout clause), which was central to Germany, has been permanently softened - and not only, as before, on a temporary basis for the time of the crisis.
It is one thing to accept to change the rules of the game temporarily in the midst of the most severe crisis that the Eurozone has seen since its creation; it was, at least from a German perspective, quite a different thing to acknowledge that the Eurozone would work better with a permanent fire patrol in place.
Accepting the ESM as a permanent feature de facto implied the recognition of some of the empirical realities of the EMU, such as persistent or even growing divergences among its member states, developments that were at least in part unclear when the Eurozone was first established.
Fiscal Solidarity and the ESM
Linked to the ESM, a basic understanding of the Eurozone has taken hold in Germany according to which member states support each other based on the fulfilment of a certain number of conditions (ergo conditionality) in the case of outstanding events.
The ESM has played a pioneering role in the further development of the Eurozone, paving the way towards more fiscal solidarity, for which there were also alternative proposals from Germany. It is difficult to imagine the emergence of the Next Generation EU (NGEU) reconstruction and investment programme adopted by the European heads of state and government in the Covid-19 pandemic, from which Italy is one of the biggest beneficiaries, without the broader and more differentiated debate on deeper fiscal integration that has been conducted since then.
The ESM may represent for Germany as for Italy much of what is disliked about being part of the monetary union, but these uncomfortable features are what makes the institution so valuable.
Nowadays, there is a rather broad political consensus among the moderate parties in Germany that the ESM is necessary even though preferences on its design and use may differ.
In the debates in the Bundestag – the German parliament - on its reform, the spokespersons of different parties emphasized that it was good and important to have this instrument for mutual support in the event of crises. ￼
This is quite a development from the heated debates and strong resistances that included a considerable fraction of the liberals (FDP) and Angela Merkel’s (back then) conservatives (CDU/CSU) when the ESM was established and extended in the first place.
It is only on the political fringes that the ESM (and German adherence to the Euro) is fundamentally being called into question, first and foremost by the rising right-wing AfD (Alternative für Deutschland), which itself emerged in the first place in reaction to the euro crisis.
As with almost any decision that concerns the Eurozone, the German constitutional court was asked to control for constitutionality, which it confirmed in December 2021.2 Seven MPs of the liberal party (FDP) did so primarily for procedural reasons (Does the reform require the approval by a qualified majority of two thirds?). When they announced their complaint, however, they made it explicit that they were not against the ESM as such.
The fact that Europeans, through their elected representatives, are now voting again on the ESM is mainly due to the fact that the institutional architecture of the Eurozone needs to be strengthened further.
The ESM is supposed to take over the function of a common backstop to the Single Resolution Fund (SRF), which was introduced in the framework of the Banking Union. It is used when individual banks get into severe difficulties that lead to their resolution. Fulfilling this role requires a treaty amendment.
With the backstop function, a further safety net is being put in place to protect citizens and states if individual banks get into difficulties. The usefulness of this instrument is undisputed among experts, and, fortunately, it does not set Europeans against each other, because it is supposed to protect taxpayers everywhere by making European banks step in for each other through levies in the event of distress.
Recent developments in the US and Switzerland – with the SVB and Credit Suisse collapses – have shown how abruptly banking crises can emerge in macroeconomically uncertain times such as we are currently experiencing. Italy's banks may be on a good path, but it is not very long since the country's last banking crisis around Monte dei Paschi di Siena and others hit.
That is why it is important to get the ESM reform off the ground as quickly as possible.
The existence of this safety net as such would already have a stabilising effect because it strengthens confidence. Moreover, it would help to be better prepared in the event of a new banking crisis.
Thus, despite some aspects of the ESM reform one may be right to take a more critical stance on (e.g. access to the precautionary conditioned credit lines, overall governance with respect to the role of member states, ESM staff and the Commission), it has real benefits compared to the status quo. This perspective on the reform package may have contributed to the fact that the reform was ratified relatively quickly in Germany, and one would wish for a little more of this perspective in Italy right now.
Accepting the ESM as a permanent feature de facto implied the recognition of some of the empirical realities of the European Monetary Union, such as persistent or even growing divergences among its member states, developments that were at least in part unclear when the Eurozone was first established
Nevertheless, even if the Italian government's mistrust of the ESM reform seems exaggerated, some of the Italian concerns should not be dismissed out of hand from the German side either. In Germany, for example, there is a growing awareness that the ESM has an image problem, reason why the instruments of the ESM were avoided in the Covid-19 pandemic.
Especially when different positions can be observed between important partner countries in the closest circle of the EMU, premature judgements should be avoided, and the focus should rather be on trying to understand the motives and arguments of the other side.
No country can claim never to make wrong decisions. In Germany, there is a slowly growing realisation that in the past years there have been made certain mistakes by the German side, which were causing resentment among European partners, in Italy in particular. This concerns the management of the Eurozone as much as German migration policy, the nuclear phase-out or the bold announcement of large-scale support to the domestic economy during the pandemic.
This is even more relevant because Germany, through its sheer size and political weight, generates consequences with many of its decisions in partner countries. This has consequences for the public perception of Germany abroad. A recent representative opinion poll in Germany, France and Italy shows that in Italy in particular, Germany's role in Europe is viewed critically. 58 percent of Italians consider Germany's influence in the EU to be too great, compared to 35 percent in France.
It is important to make up ground by adopting a constructive stance towards each other. Even after Italy's ratification of the ESM reform, there will be a need for further discussion between the major economies on the further development of European economic governance.
The more the actors know and understand the traditions of thought, such as German ordoliberalism, the constraints and perceptions of their partners, the easier it will be to negotiate wise compromises.
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 authors.