ROME, June 29 (Reuters) - The reluctance of Italy's right-wing coalition to ratify reform of a vital euro zone bailout fund is rooted in a deep distrust of the European Union, analysts and lawmakers said, leaving Prime Minister Giorgia Meloni no easy way out of a political mess.
Italy is the only euro zone country that has not yet given a green light to a treaty that revises the European Stability Mechanism (ESM) - a fund created in 2012 after the euro zone sovereign debt crisis to provide a financial firewall for members of the currency bloc.
The proposed reform, which was agreed by euro zone governments including Italy in 2021, allows the ESM to play a bigger role in the rescue of failing banks and also reduces the risk of investors holding out in a sovereign debt restructuring.
Parties in Meloni's nationalist coalition, which came to power in 2022, argue it would make debt restructuring more likely and consequently raise debt servicing costs, despite the fact the Treasury itself released a report this month saying Italy could benefit from the reform.
Opposition parties are clamouring for a vote in parliament, but Meloni said on Wednesday that was not about to happen and linked the debate to ongoing discussions on a broader reform of European budget rules.
"Italy's interest is addressing negotiations on European governance, which covers the entirety of our national interests," she told parliament. "This is not the time to ratify the ESM."
Meloni and her main coalition ally Matteo Salvini have adopted a tough euro-sceptic line over the past 15 years, and although they have since moderated their position they are not yet ready to lower their guard entirely and embrace Brussels.
"There are sections of the coalition, which also include some high-ranking civil servants, who hate it when they feel that Brussels is dictating conditions," said Francesco Galietti, founder of political risk consultancy Policy Sonar.
"Meloni does not want to leave the anti-ESM front to Salvini and nobody wants to lose face," he told Reuters.
"PUSSYFOOTING"
Although the ESM is already operational, it cannot support the Single Resolution Fund responsible for dealing with ailing banks without Rome signing up to the pact, and frustrations are growing over its failure to act.
"The ESM Treaty is central to our efforts and we will continue our engagement with Italy on this matter," Paschal Donohoe, chairman of the euro zone finance ministers grouping, wrote in a letter on Tuesday to the president of the European Council.
Despite irritation in Brussels over the dithering in Rome, EU officials have told Reuters that any attempt by Meloni to link ESM approval to much more significant budget reform will not pay off.
Francesco Saraceno, economics professor at Rome's Luiss University and at Sciences Po Paris, said the government was wasting valuable time over the ESM, while Brussels was redrawing budget rules and looking to complete a common banking market.
"The government is pussyfooting around the ESM, which is a very, very small piece in a much larger problem that has to do with overall European economic governance," he said.
The European Commission proposed in April that governments should ensure their public debt falls by an individually negotiated amount over four to seven years and stay on a downward path for a decade afterwards.
Italy, which has the second largest debt mountain in relation to its GDP in the euro zone after Greece, has criticised the suggestion. But once again, the Treasury has undercut Meloni's position, foreseeing no major hurdles in adapting to the new recommended framework.
In budget targets unveiled in April, the Treasury estimated that an additional adjustment of the structural primary balance -- excluding one-off items and business cycle swings -- of 0.45 percentage points each year between 2027 and 2031 would be enough to meet the new criteria.
Italian officials told Reuters such an effort would be well within Rome's reach.
"It is the typical Italian circus," a leading politician in Meloni's party told Reuters about the ESM issue, asking not to be named.
