Tight-lipped: Italian Prime Minister Matteo Renzi

The Demolition Man was the unlikely nickname earned by Italian Prime Minister Matteo Renzi when he was elected on a promise to shake-up the political establishment.

But it is one that he now threatens to live up to outside his own country, as the premier of the eurozone’s third biggest economy threatens to smash even greater cracks in the EU.

While many in Europe have been focused on the fall-out from Brexit, another battleground has been raging as Italy desperately tries to come up with a plan to rescue its struggling banks.

It has pitted 41-year-old Renz, Italy’s youngest-ever prime minister, against German Chancellor Angela Merkel, in a row over rigid EU rules. It is the ambitious outsider and one-time fencing champion – who still keeps a sword in his office – versus the steely pragmatic German.

In essence, Italy has come up with a plan to bail out its banks, and Merkel has rejected it because it is against EU legislation.

Hard-line elements in Italy suggest it should simply flout the rules to save the Italian banking system, which is crippled with £301bn of bad debts.

For many the bailout bust-up highlights how the UK is not alone in being exasperated by the red tape from Brussels which prevents individual nations from making their own decisions.

It also underlines a further stereotypical (but no less true) cultural divide within the single currency: between Italians who are used to a more laid-back approach to rules, and Germans who are sticklers for the very letter of the law.

When he was elected two years ago, Renzi staked his political future on being able to turn Italy’s finances around.

He believed Italy should have taken steps to reform its banks five years ago, but this is a country crippled by instability – it has had 63 governments since the Second World War – making it almost impossible for leaders to make any important decisions.

H IS first challenge was to cut the spending deficit, but after initially falling, in the six months to June it rose to £23bn.

As a proportion of its GDP its debt is now the euro’s second biggest behind Greece at 139 per cent.

More pressing in recent months, though, has been the challenge of supplying Italy’s banks with cash. Share prices at some lenders have collapsed in 2016, with the world’s oldest bank Banca Monte dei Paschi di Siena falling 60 per cent – a lender which has already been restructured twice and still is in poor health. Having also slumped at the start of the year, many have dropped a further 30 per cent since the Brexit vote. What’s not helped is the obscure structure of Italy’s banks which are owned by foundations – business leaders and politicians – rather than shareholders.

Had Italy begun the process of bailing-out its banks in 2010 it would have been able to benefit from weaker EU rules, and been able to pump money in to them.

But since then, the EU has ruled out this practice, as it is deemed a breach of state-aid rules – regulations that are supposed to prevent unfair competition. It is the same legislation that prevents the UK government from ploughing money into its steel industry.

This is where the battle between Brussels, and more specifically Merkel, and Italy now lies.

The debts of Italy’s banks are a third of the eurozone’s total. Recent estimates suggest the Italian economy is £35bn short of capital to pay off some of these debts. Last week, in the wake of the Brexit vote, Renzi asked Brussels to suspend its rules for six months to allow the Government to set up a £35bn rescue fund. Merkel said no.

In April, Italy created a fund to help provide assistance for struggling lenders. The Atlante fund – named after Atlas, the Titan god who held up the sky – has already helped two lenders stay afloat.

But this won’t be enough in a country with 500 banks. It has been suggested that Italy’s new plan is to increase the capital at the banks, or provide a fund that will buy bad loans off Italian banks at above market prices.

THE DEMOLITION MAN Interviewed earlier this year, Matteo Renzi held up a fencing sabre. Asked on whom he’d most like to use the blade against, he sliced the air and grinned, saying: ‘The banks!’ Since being elected PM in 2014 aged 39, Renzi has been determined to take on the culture of cronyism and bureaucracy which have for so long categorised Italian politics. His enemies call him ‘Il rottamatore’, the demolition man. Renzi agrees: ‘I’m the scrapper. I’m cleaning up the swamp.’ Such modernising idealism have earned him inevitable comparisons to Tony Blair. He was born the second of four children into a Catholic family. His wife is a Latin teacher and they have three children. At 27 he appeared on Italy’s version of Wheel of Fortune winning €30,000.

Italian banks can’t raise capital like this in the normal market because of fears about the health of the wider Italian economy.

It is in stark comparison to UK lenders, such as Lloyds, which last week issued a £700m bond on the US market and found it seven times oversubscribed.

The bailout would be in breach of the state-aid rules. So again, when the Italians went to Brussels with their plan, Merkel said no. At the weekend she said: ‘We have established specific rules as far as recapitalisation of the banks is concerned.’

She added: We can’t come up with new rules every two years. The Commission is ready to help, but so far it has not been convinced by what has been proposed by Italy.’

If Italy doesn’t receive support it could mean multiple bank failures, which could mean huge losses for ordinary savers who own £230bn of bank bonds.

With the eurozone nervous following Brexit, Renzi is publicly hoping to win favour with the EU. He knows they want a financial crisis as little as he does. The International Monetary Fund has long warned that the poor health of Europe’s banks has hampered the recovery as they can’t lend to small businesses.