For years now within Germany’s policy circles, there have been many who have pushed for an ‘expulsion’ or ‘voluntary exit’ mechanism for the Eurozone. I am now hearing this position advocated by FDP head Christian Lindner, a potential finance minister in the new German governing coalition. I believe this affects Italy the most and sets up an existential crisis down the line for the EU.

Thoughts below:

During the Greek crisis, there were many moments where I felt that Grexit was not just a possibility but a likelihood. One example is from 2012, when the Austrian and German foreign ministers backed explicit euro expulsion mechanisms.If this idea had become codified in EU law, Greece would have left the Eurozone. That was five years ago though.

Greece is still in the Eurozone. And Europe is in much better shape economically. Moreover, back in 2012, it was then-FDP head Guido Westerwelle who was proffering the eurozone expulsion mechanism as a solution to the sovereign debt crisis. The FDP was sent into the wilderness in 2013, out of the Bundestag altogether, paving the way for a CDU/SPD grand coalition government.

But the Grand Coalition was just voted out of power last month. And even though Chancellor Angela Merkel will retain leadership, her party suffered its lowest vote percentage since 1949, when an independent post-war German government was founded. With the FDP about to re-enter the German ruling coalition, we should recognize that the politics will change.

While the FDP were out of power, German Finance Minister Wolfgang Schaeuble took up the baton of advocating for euro expulsion mechanisms but was overruled by his party boss Angela Merkel and fell into line. With the FDP re-entering the German Bundestag and likely to be governing coalition partners again, the expulsion mechanism is back in play, without Merkel’s ability to overrule her party ally Schaeuble.

FDP head Christian Lindner, touted as the likely finance minister, is calling for a “voluntary exit mechanism” now as opposed to expulsion. Here’s how the political inner-workings in Germany are being described.

Germany’s next finance minister should be politically independent from Chancellor Angela Merkel, the leader of the Free Democrats (FDP) said on Tuesday, rebuffing calls to keep the ministry in conservative hands.

[…]

In the interview, Lindner reiterated hardline FDP positions on Europe that appeared in the party’s election programme, including calls for an insolvency mechanism for the euro zone and treaty changes to allow countries to exit the euro.

Lindner also voiced opposition to the idea of turning the euro zone’s rescue mechanism, the ESM, into a more powerful European Monetary Fund, an idea supported by Schaeuble, Merkel and French President Emmanuel Macron.

“In a monetary union where the deficit rules of Maastricht are respected, there is no need for permanent rescue funds,” Lindner said.

He came out against a common deposit insurance scheme for European banks and warned Merkel and [interim finance minister Peter] Altmaier against doing deals in Brussels before a new coalition government is in place.

The upshot here is two-fold. First, in a crisis situation, a politically independent hardline German finance minister will not toe the line. Angela Merkel must deal with a more robust power center and cede ground. Second, if and when we do have a crisis, the lack of a common deposit insurance scheme is going to create capital flight that will quicken the pace of crisis. And because of Europe’s new bail-in rules that will force bank creditors to suffer losses before any bailout occurs, political implications could be severe.

Italy is the country that we should be thinking about here. After all, it was Italy’s potential default which ended the eurozone’s sovereign debt crisis. Only when Italy was threatened with default did the ECB’s Mario Draghi react with his now famous ‘whatever it takes’ quip and the ECB’s backstop of periphery sovereign debt. Greece never received this backing –as it was not important enough politically – and was essentially allowed to fail within the eurozone.

Italy is a founding member of the EU and a very large country economically. Mario Draghi’s intervention basically meant it is too big to fail. But what happens during the next downturn if Italian banks are weak and in jeopardy of failing? Who bails them out? How much is the Italian state on the hook for? And what will that mean for the yield of Italian government bonds?

I believe the next downturn in Europe will be difficult for Italy because of its low growth and weak banks. And the lack of a robust European Stability Mechanism – as the FDP wants – increases the contingent liabilities of the Italian government. Politically, this would be a toxic situation because it would radicalize the Italian electorate and quickly morph into non-stop talk of Italexit. This year, we have already seen Italy’s main opposition parties call for a new currency to flank the euro. In a crisis, the solutions would be more radical.

The Eurozone has avoided a breakup so far. Nevertheless, the way coalition talks in Germany are going, the seeds of it’s breakup are being sown.