The ESM Treaty and the Single Resolution Fund: The Unfinished Reform

The establishment of banking union with a centralised structure of supervision and enforcement has recently raised criticisms on the long-waited reform of third pillar, namely the Single Resolution Fund. Notwithstanding the successful progress of supervisory mechanism for dealing with failing banks, the deposit insurance scheme remains controversial. In this context, the revision of the European Stability Mechanism (ESM) Treaty has been questioned with respect to negotiation and monitoring of conditionality in financial assistance programmes. This article argues that the policymakers should move towards completing the banking union by introducing a deposit insurance system and a form of risk sharing on the government debt issued by countries in the Eurozone. The pandemic crisis has inflamed the debate on the ability of the ESM to deal with euro area countries with non-sustainable government debt. The task of the ESM to provide financial assistance, subject to strict conditionality to Eurozone countries, has irritated some Member States, i.e. Italy which claimed that the debt restructuring should not be imposed from political desire but designed and implemented based on Italian initiatives. This article also suggests that the approach taken on the revision of the ESM should be reconsidered. With its focus on possible debt restructuring for countries receiving stability support it has led to further political tensions between Italy and the European institutions, thereby making a deal between them less likely.