Italian MPs vote against key reform of EU rescue fund

It is now likely that Meloni's hard-right government will come back with its own proposal for ratification, albeit with some conditions, analysts said.

Italy is the only country that has not yet ratified a 2021 reform of the European Stability Mechanism (ESM), which strengthened the fund's financial firepower and increased its authority to supervise countries in difficulty.

Meloni's coalition government is torn between deep suspicion of the ESM and pressure from European Union allies to greenlight an accord that cannot be implemented without approval of all national parliaments.

Thursday's vote was on a motion for ratification presented by members of the centre-left Democratic Party.

The lower house's finance commission said the motion "lacks appropriate mechanisms to ensure the involvement of parliament" in "procedures of significant importance in terms of economic and financial policy choices".

In December last year, Meloni said she would "sign in blood" that Italy would not join the ESM.

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Italian commentators have suggested in the past few months that its potential ratification was dependent on a loosening of EU budget rules.

As reforms to loosen them were agreed in Brussels on Wednesday, "the government has no more alibis," said analyst Wolfango Piccoli from political risk consultancy Teneo.

"What we expect to see now is an initiative from the ruling coalition" on the ESM, Piccoli said.

"I expect them to put forward a motion with a condition that would make a vote in parliament necessary to activate it.

"The government is looking for a way for Meloni to save face, to spin it as some sort of victory."

Meloni's Brothers of Italy party voted against the motion on Thursday, as did the League party of Deputy Prime Minister Matteo Salvini.

The motion's rejection meant "Italian pensioners and workers will not risk paying for the rescue of foreign banks", Salvini said.

The third party in the ruling coalition, the late Silvio Berlusconi's right-wing Forza Italia party, abstained.

The motion was rejected by 184 votes, with 72 in favour and 44 abstentions.

Created in 2012 in the heat of the eurozone debt crisis, the ESM borrows on the financial markets to provide loans at below-market rates to eurozone states in difficulty, who must in return implement reforms to their public finances.

Spain, Portugal, Greece, Ireland and Cyprus have all used it but Italy remains deeply suspicious, with many considering it a tool for northern European countries to impose austerity on the south.

There are also fears in Italy that if it used the ESM, it would be forced to restructure its enormous debt, valued at 144 percent of GDP – the highest ratio in the eurozone after Greece.