The flexibility game is not worth the new ESM

The reform of the Treaty Establishing the European Stability Mechanism (ESM) broadens the functions of this mechanism so as to transform its current role of financial manager of sovereign debt crises into an institution for the prevention, control and management of such crises. There is thus the risk that the ESM will also have the power to decide whether a euro area Member State that is forced to apply for a European aid program should restructure its government debt in advance. In this eventuality, euro area countries with a high public debt - such as Italy - would be exposed to heavy and distortionary instability. It is therefore appropriate to prevent the ESM from assuming this restructuring power or, at least, to minimize the risk of Italy having to resort to a European aid program. The repeated use of flexibility in the management of public balance sheets is not going in that desired direction and must therefore be replaced by other strategies.