MNI EXCLUSIVE: Italy May Delay ESM Reform As Coalition Creaks

By Silvia Marchetti

     ROME(MNI) - Italy may try to push back a European Union overhaul of the

eurozone's bailout fund due early next month as it seeks to resolve a dangerous

split in its ruling coalition which one prominent former legislator said had an

outside chance of bringing down the government.

     The Eurogroup is set to grant final approval to a deal to transform the

European Stability Mechanism on Dec. 4, but opposition from the populist 5-Stars

Movement, which rules in partnership with the centre-left Democratic Party,

might mean Italy's parliament votes against ratification, party officials said.

Italy might try to delay the decision in Brussels order to buy time and water

down the reform, they told MNI.

     The draft ESM changes were agreed in June by the EU's finance ministers,

including Italy's, but 5-Stars officials say it could force countries into

unnecessary and painful debt restructurings in order to qualify for financial

assistance. They can only come into force if ratified by all 19 eurozone

national parliaments, and any delay in approval would be seen as a significant

setback for reform of the governance of the single currency area.

     Italy has never so far failed to ratify EU reforms, said Giampaolo Galli, a

former Democratic Party legislator who is now director of Milan's Cattolica

University Public Accounts Observatory and recently briefed parliament on the

proposed changes to the ESM.

     "I am confident that a deal among parties will be struck. However, even if

it is highly unlikely, there is a risk that if a reform or law is given the

green light at EU level but then not ratified by parliament, this would trigger

a political crisis and the government could eventually collapse," Galli told

MNI. "If parliament votes against something decided by government it would

equate to a vote of no confidence."

     --LEAGUE LEADS IN POLLS

     The government formed after a previous coalition, grouping 5-Stars with the

hard right Eurosceptic League party, collapsed in August. The League, which

would be in pole position in fresh elections with 33% support in polls, now says

the revamped ESM could potentially impoverish millions of Italians.

     The ESM draft would, as of 2022, allow individual creditors to trigger debt

restructurings, and limit risk-sharing. The 5-Stars Movement wants both of these

provisions changed.

     "It's not a matter of delaying but of changing the reform text. If a delay

is aimed at a better reform, that's fine. Otherwise we're just losing time with

the certainty that Italy would have to undergo a destructive debt restructuring

if it ever needs to access ESM funds", said a 5-Stars source, adding that the

movement would vote against ratification.

     Another smaller coalition party, LEU, backs 5-Stars' stance against the

new-style ESM, which would only make credit lines available under conditions

including two years of a fiscal deficit of no more than 3% of GDP, progress

towards a debt/GDP ratio of 60% and continued access to international capital

markets.

     Even the Democrats, who broadly back the ESM changes, would water down its

fiscal criteria.

     "There's always time to negotiate and reach a solution which more or less

satisfies everyone," a senior Democratic source told MNI, adding that Italy

could muster support for softer rules from other indebted southern countries.

     An official with ties to the Italia Viva party, set up by former Democratic

prime minister Matteo Renzi, said that it "wasn't compulsory" for the Eurogroup

to clear the reform by December as "there's no deadline written in stone" and

that June's proposed treaty revisions are only a draft.

     "We need to overcome this stalemate to reach a common stance, even if it

means temporarily blocking the reform approval process with veto power or simply

delaying it", said the Italia Viva official.

     A senior EU source told MNI that Italy has not yet requested any changes to

the plans to consider the ESM at the December meeting.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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