Beyond the deadlock: two pathways to revive the ESM and EU financial integration

Judith Arnal

Capital Markets Law Journal, 2026, vol. 21, issue 1, kmaf024.

Abstract: The ratification of the revised European Stability Mechanism (ESM) Treaty remains blocked by Italy—a traditionally pro-risk-sharing Member State—preventing the entry into force of the common public backstop to the Single Resolution Fund (SRF). This undermines the EU’s crisis management capacity and nullifies the risk reduction efforts made by Member States and the banking sector over the past decade. As a result, the SRF operates without a mutualized fiscal safety net. While the fund is currently well capitalized through industry contributions and EU banks have shown resilience in recent stress tests, the lack of a public backstop limits its credibility and usability, especially in the event of a systemic crisis. No sound legal, economic, or operational rationale supports Italy’s refusal to ratify the Treaty. The alternative instrument (DBRI) is functionally unusable; the reform package strikes a reasonable balance between risk-sharing and risk-reduction; and the political stigma attached to the ESM cannot be resolved without modernizing its role. This article proposes two strategic pathways to overcome the deadlock: (i) recognising that the recently agreed Crisis Management and Deposit Insurance (CMDI) reform has materially improved the usability of the SRF and, by extension, the operational relevance of the common backstop—thereby strengthening the case for ratifying the ESM Treaty; and (ii) repositioning the ESM as a more strategic instrument within the EU’s policy toolkit, including through a potential role in supporting EU-wide defence investment and in providing guarantees for collective financial assistance to Ukraine. Unlocking the ESM Treaty ratification is not only critical to completing the Banking Union—it also opens the door to positioning the ESM as a more strategic instrument in Europe’s evolving policy mix. Recent progress on CMDI Insurance reforms makes ESM ratification more urgent, as continued inaction risks weakening the EU’s financial integration and its capacity to mobilize annual investments highlighted in the Draghi Report.

Keywords: Banking Union; European Stability Mechanism; Single Resolution Fund; Defence; Finance; Capital Markets Union (search for similar items in EconPapers)
Date: 2026
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