UPDATED: Italy says it can’t approve ESM treaty without deal on new EU budget rules

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ROME, June 9 (Reuters) – Italy is unwilling to ratify the reform of the euro zone bailout fund without first knowing how European budget rules will change, Prime Minister Giorgia Meloni said on Friday.

Her comment sets the stage for a confrontation between Rome’s right-wing government and its partners in the European Union, starting with budget-discipline hawk Germany.

Italy is the only country dragging its feet over the approval of the treaty that reviews and strengthens the so-called European Stability Mechanism (ESM).

In addition, Rome is pushing for more flexibility over the way investments are considered under new budget rules being drawn up for the bloc.

“There is no point in ratifying the ESM treaty when you do not know what the new Stability and Growth Pact rules foresee,” Meloni said at an event in southern Italy.

Created in 2012, the ESM can offer a lifeline to euro zone governments cut off from markets, or lend to recapitalise banks and provide precautionary credit. In return, it normally requires the country concerned to implement austerity or financial reform programmes.

The fund was reformed with a 2021 treaty which cannot come into force unless and until all euro zone members ratify it, and Italy is the last holdout.

Before coming to power last October, Meloni had often criticized the reform of the ESM due to concerns it would increase the risk of a restructuring of Rome’s huge national debt.

On Friday, the Italian prime minister said requesting help from the ESM implied a “stigma” for applicants, adding that the fund should therefore be reformed and become an instrument capable of boosting the growth of European economies.

“The ESM risks keeping resources locked up at a time when we are all looking for resources to support growth. (Even if Italy ratifies the reform) it would not be used by anyone,” she said.

Meloni also said she was not “very convinced” by the European Commission’s proposals for reforming the EU’s fiscal rules.

Brussels proposed in April that governments should ensure public debt falls by an individually negotiated amount over four years and stays on a downward path for a decade afterwards.

Governments could get more time to reduce their debt and deficit, for instance over seven years, if they implement reforms that increase fiscal sustainability, boost growth or invest in areas that are EU priorities like the transition to a green and digital economy, social rights or in security and defence.

Officials have previously said that Italy might implement an annual budget adjustment worth 0.85% of gross domestic product (GDP) over four years or, alternatively, 0.45% over seven years, to comply with the Commission’s proposals.

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