Matteo Renzi, the new broom of Italian politics, is in danger of being swept away.

The youthful Italian prime minister who ascended to power in 2014 as the leader of a new generation seemingly destined to clean up the country’s stale politics is now facing a combustive cocktail of financial crisis, political miscalculations, and anti-European populism.

At stake is not only the future of the 41-year-old former mayor of Florence — but also Italy’s relationship with the European Union and the health of the Continent’s fragile banking system.

Time is not Renzi’s friend. By July 29, EU banking regulators are widely expected to say that Monte dei Paschi di Siena (MPS), the world’s oldest bank, will need an emergency infusion of capital. That decision will sound the starting gun on a rescue package not just for MPS but for the entire Italian banking sector.

Renzi’s immediate dilemma is clear: He must convince Brussels and skeptical member countries, led by Germany, to let Italy inject money into a banking sector in dire need of repair.

But he needs to do so without triggering EU rules that would penalize retail investors, many of them individual savers who may not have realized that the bonds they were buying were at risk of suddenly becoming worthless.

Wiping out the thousands of households that bought bonds in Italy’s banks would be tantamount to political suicide in the country’s charged social climate.

It’s a very tight needle to thread for a man who styles himself as il rottamatore — the demolition man — of Italian politics. And righting a banking sector saddled by more than €360 billion in bad loans and decades of mismanagement is not even the biggest of Renzi’s challenges. In the fall, Italians will go to the polls in a referendum on constitutional reform that could provide Italy with its own “Brexit moment.”

If the new regime is voted down, Renzi has pledged to go — as David Cameron did after he lost the Brexit vote. As with the former British prime minister, Renzi’s problem is in large part one of his own making. Last year, when he was riding high in the polls, Renzi promised he would step down if his reforms weren’t made into law. In doing so, he ensured that the vote would become a referendum not only on his reforms, but on his government.

Should Renzi step down, the transfer of power is unlikely to go as smoothly as it has in the U.K. His departure would almost certainly trigger political instability and early elections.

A strong showing by the populist 5Star Movement would throw Italian politics into chaos and upend its relationship with the EU. 5Star won the local elections in Rome and Turin in June and is currently ahead in national polls. “It’s one thing to have a British problem,” says a senior banker. “It’s another thing to have a British and an Italian problem.”

European Commission President Jean-Claude Juncker is among those personally worried for the Italian prime minister’s future, according to a senior Commission official. Renzi, a man who saw himself as a revolutionary force in Italy’s atrophic political system, risks going down in history as the leader who handed one of the EU’s founding members to a party of Euroskeptics fronted by the comedian Beppe Grillo.

Politically toxic

Renzi has his work cut out to save MPS — a bank founded before Columbus discovered America that survived the plague and two world wars — and the rest of the Italian banking system. The bank is Italy’s third largest, and its collapse could trigger a domino effect, sparking runs on surviving banks and wreaking havoc through the economies of Italy and the wider eurozone.

Paradoxically, the all-or-nothing nature of the situation is Renzi’s best hope of convincing his European interlocutors to bend the rules and allow a bailout that doesn’t affect small savers. Enrico Letta, who preceded Renzi as prime minister and now heads the Delors Institute, a Paris-based think tank, describes this act of political jiu-jitsu thus: In this troubled period for the EU, “Europe can afford everything apart from worst case scenarios becoming real.”

State funds to help banks can only be deployed after shareholders and bondholders bear the pain.

So far, the noises coming from the European Commission’s Directorate-General on Competition, where Italian and Commission officials are arguing over the application of the EU’s state aid rules, have been positive if inconclusive. In theory, the EU regulation — in this case, the Bank Recovery and Resolution Directive (BRRD) — is fairly rigid: State funds to help banks can only be deployed after shareholders and bondholders bear the pain. To be precise, up to 8 percent of a bank’s liabilities has to be wiped out before any taxpayers’ funds reach its coffers, a procedure known to financial nerds as a “bail-in.”

What makes that process so politically toxic is that an ill-fated sales campaign by banks means that the affected bonds, and similar financial products, now account for about 10 percent of all the financial holdings of retail investors, according to the Bank of Italy’s latest estimate. Indeed, some 46 percent of the debt that would be written off in a bail-in is held by Italian families, according to Giuseppe Lusignani, deputy chairman of Prometeia, a consultancy specializing in the banking sector.

These mom-and-pop bondholders include small-scale savers like Roberta Gaini, a mother of two from the town of Vitolini, not far from Florence, who lost €60,000 when Banca Etruria, a much smaller bank, was rescued under a similar scheme. Gaini’s mother and sister lost another €40,000. “The day after the bail-in, I went to the branch and asked for updates,” she says. “The director printed off my bank statement, and that’s when I learned all my assets had been written off.”

Gaini says that neither she nor anybody else in her family were informed that their savings could be suddenly wiped out. Vitolini is a town of about 800 people, with just one bank branch. She knew the bank director well. “We trusted those people, they were born and raised in our town.” she says. “But they told us not to worry. They never told us there was a risk.”

Bailing-in MPS would mean replicating Gaini’s pain on a vastly larger scale and almost certainly consigning Renzi to the political dustbin. The sheer size of Italy’s retail army makes them untouchable in any bail-in. In the words of a high-ranking Italian official, if Renzi penalizes them, “he is politically dead an hour later.”

Frenemies

So far, Renzi has played offense, at least publicly. Italian officials argue that other countries — including Germany — have used billions of EU funds to recapitalize their banks in recent years and that Italy is having a tough time only because the latest provisions of BRRD came into force this year. European officials counter that banks like MPS have been zombies for years and that Renzi should have grasped the nettle and faced the consequences much earlier on.

The European Court of Justice bolstered the Commission’s stance on bail-ins with its ruling on Tuesday on a government-led bank rescue in Slovenia in 2013. In that case, the EU’s top court said the Commission was right to require “burden-sharing by shareholders and subordinated creditors as a prerequisite for the authorization … of state aid to a bank with a shortfall.”

In public, the Italian PM has been characteristically unrepentant. In an interview with Il Corriere della Sera, Renzi tried to change the subject, saying he was more worried about the derivatives exposure of European financial groups. That was a thinly veiled allusion to the financial fragility of Deutsche Bank, the huge German lender. Others, like the German Green MEP Sven Giegold, have hinted that Germany may be willing to compromise because large German institutions hold MPS bonds.

Fortunately for the demolition man, no EU rule is really as strict as it seems. Upon close scrutiny, Italy has a few cards to play, ranging from the creation of a “bad bank” — restoring confidence by isolating MPS’ worse liabilities — to a bail-in, but with some compensation for retail investors.

The banking regulation provides for some flexibility when the aid is needed “to remedy a serious disturbance in the economy of a member state and preserve financial stability.” Indeed, it was the financial market turmoil that followed the Brexit vote on June 23 that first prompted Renzi to bring up the issue of a state rescue of Italian banks, a move seen by supporters as a masterstroke and by detractors as cynical opportunism.

“I see the risk that Europe will not manage to save Renzi from the political costs” of a banking rescue, says David Allegranti, a Renzi biographer.

To get any sort of deal, Renzi will have to get the approval, or the benign neglect, of its frenemy Germany. The two countries have been working together on thorny issues such as the migration crisis and the future of the EU after Brexit. But they have also locked horns repeatedly in the past few months, including a bitter fight over a pan-European banking deposit scheme.

Wolfgang Schäuble, the tough-minded German finance minister, has advocated taking a similarly intransigent stance on the Italian rescue, as has Jeroen Dijsselbloem, his Dutch counterpart who heads the Eurogroup of eurozone finance ministers. Renzi has made matters worse by often pointing out to the domestic gallery his unusually tough stance against the EU’s most powerful country.

For Germany, the main lesson of the eurozone debt crisis — which began in Greece in late 2009 and nearly led the common currency area to unravel — is that members of the bloc must be forced to respect its rules. When Greece was up against the ropes, German Chancellor Angela Merkel could have lifted some of the European pressure to help the country’s center-right remain in power and keep the leftists at bay. But she didn’t. And after years of uncertainty, that tough strategy broke the will of the leftist government and delivered most of what Germany wanted.

The bail-in requirements were central to Merkel’s efforts to sell the eurozone bailouts to skeptical German taxpayers. Which is why she can’t simply look the other way as Italy provides the system’s first test case.

And yet, even the Germans recognize that the aim of the reforms was not to punish small-scale savers, but to prevent well-heeled investors from avoiding the risk associated with bank bonds. And, Italy is also unique in the eurozone for the proportion of bank debt held by retail investors, so fudging the rules would not necessarily set a dangerous precedent.

Which is why, while Merkel will insist that the bail-in rules be observed — at least in spirit — she will likely remain open to some kind of sleight-of-hand to protect the small shareholders, especially if she can exact something out of Renzi in return — be it on the deposit insurance scheme or on the myriad of other measures currently on the table of member countries and the Commission.

“What we’re likely to see is some form of bail-in light to compensate the small investors,” says Carsten Brzeski, chief Germany economist at ING. “For Merkel, the key will be to convince the German public that no taxpayer money is at risk.”

Trouble ahead

Even if Renzi successfully navigates the corridors of European power, his problems will be far from over. Brussels and Berlin may be able to cook up an acceptable fudge to allow a state bailout of Italian lenders, but there’s little they can do to organize a political bailout of Renzi from the clutches of the 5Star Movement. Any use of public money, in whatever form, to save MPS — a bank that has historically been considered very close to his party — will expose Renzi to political attacks.

“I see the risk that Europe will not manage to save Renzi from the political costs” of a banking rescue, says David Allegranti, who wrote “Il Rottamatore,” a biography of Renzi, and who has been following him since his beginnings in the hotbed of local Tuscan politics.

As Renzi sweats, his rivals are, literally, partying. On July 6, Luigi Di Maio, the 5Star Movement’s most likely prime ministerial candidate, celebrated his birthday at a lavish bash on a river barge on the Tiber River, complete with vegan cake and — as the Italian press put it — his “sexy girlfriend.”

He was turning 30, and he looked every bit like a shiny new broom.

Matthew Karnitschnig in Berlin and Florian Eder in Brussels contributed reporting to this article.