EU summit: Angela Merkel warns ‘peace is at risk’ if Euro debt crisis isn’t solved

• ‘If the euro fails, Europe fails’ warns Merkel in stark speech
• EU leaders seal three-part deal including writing off half of Greek debt
  
• Leaders decide to QUADRUPLE emergency bailout fund to €1trillion
• David Cameron endures Commons grilling over Europe
• Ed Miliband accuses Cameron of not representing Britain in eurozone crisis because of divisions that dogged Tories during EU referendum vote
• Trading flat in London, Paris and Frankfurt as investors tread carefully

By Tim Shipman and James Chapman

Last updated at 3:25 AM on 27th October 2011

Eurozone leaders have sealed a three-part deal, which they hope will convince markets they have a effective response to the growing economic crisis.

In the early hours of this morning, officials in Brussels said an accord had been reached with banks on a 50 per cent write-off of Greek debt, and they had also approved a complex mechanism for ‘leveraging’ an existing bailout fund to boost its firepower.

It means that, coupled with an earlier decision to recapitalise vulnerable banks, the summit has delivered on the package it promised.

However, no figures are included about the size of the bailout, and experts are already warning that the recapitalisation, obliging some banks to boost liquidity by 100 billion euro (£87bn), will not be enough.

Sidelined: David Cameron had a difficult day debating market turmoil with EU leaders including Polish prime minister Donald Tusk (left) and German Chancellor Angela Merkel

Disrespectful: France’s president Nicolas Sarkozy shakes hands with David Cameron at the summit but tellingly does not look at him and does not stand to greet him. Sarkozy has criticised the PM for interfering in the euro crisis

Earlier in the talks, the German Chancellor warned that the peace and prosperity Europe has enjoyed for generations could be put at risk if the euro collapses.

Angela Merkel raised the spectre of future conflict as it emerged that a comprehensive deal to save the single currency from economic catastrophe could be weeks away.

EU leaders met in Brussels yesterday to cobble together enough of an agreement to fend off market turmoil.

The emergency summit discussed boosting the euro bailout fund, recapitalising teetering European banks and writing off huge slices of Greece’s towering debts.

Speaking at the summit, David Cameron admitted the crisis is acting as a ‘drag anchor’ on growth, even in countries such as the UK which do not use the single currency.

Economists predict that Britain will be dragged into a second recession unless squabbling EU leaders can reach an agreement. 

They warned that even the proposed €1trillion (£870billion) rescue package would not be enough to solve the debt crisis that is threatening to bankrupt several European countries. In particular, there are growing fears about Italy’s ability to pay its way.

Together: Mrs Merkel, who says that peace in Europe is at risk, arrives with Mr Cameron last night

One in the eye: Italian Prime Minister Silvio Berlusconi, who may be stepping down by Christmas, wipes his eye as he arrives for a round table at an EU summit in Brussels

That figure has already been bumped up from the €440billion bailout fund set up last year.

With only around €250-275billion available after cash is set aside for Greece, Ireland and Portugal and recapitalising the eurozone’s banks, the leaders decided to quadruple the emergency fund to €1trillion.

But with talks in chaos, the only solution seemed to be further involvement from the International Monetary Fund – which would land British taxpayers with a new bill and put the euro’s fate in the hands of China.

In an apocalyptic vision of what might follow, Mrs Merkel told the German parliament yesterday: ‘Another half century of peace and prosperity in Europe is not to be taken for granted. If the euro fails, Europe fails.’

Le crunch: Prime Minister David Cameron arrives in Brussels to join European leaders for talks

iPhone: Prime Minister David Cameron is shown on his mobile as he prepares, at the British Residence in Brussels, for the meeting where he is due to meet with other European leaders about the current crisis

Run-through: Mr Cameron reads over his notes before he prepares to leave this afternoon

She added: ‘We have a historical obligation: To protect by all means Europe’s unification process begun by our forefathers after centuries of hatred and blood spill. None of us can foresee what the consequences would be if we were to fail.’

That Germany, the country responsible for two world wars, is raising the prospect of future conflict is a measure of the panic sweeping Europe about the unrest that could follow a collapse of the single currency.

At the talks last night, EU leaders hailed plans to require European banks to raise €100billion (£87billion) to protect themselves against disaster. If they fail to do so by next summer, public sector bailouts will be required.

Relaxed: The PM then meets with the new Danish prime minister Helle Thorning-Schmidt before the talks start in the Belgian capital

Chat: The pair share a few laughs ahead of last night’s tense and fragile talks

A separate meeting designed to end the Greek debt crisis, which was expected to see banks agree to take eyewatering losses of 50 per cent on all their investments, collapsed in chaos when the banks refused to sign up.

Mrs Merkel and French president Nicolas Sarkozy were last night said to be prepared to ‘lock themselves in a room’ with European bankers to force them to agree to accept huge losses on their investments in Greece.

Mr Cameron, meanwhile, warned his fellow leaders that the trillion euro target proposed for an expanded bailout fund is not enough to solve the European debt crisis for good.

Britain was locked in a heated disagreement with Germany over how to fund the bigger bailout facility.

Mr Cameron said the International Monetary Fund – to which the UK is a major contributor – should not put money directly into the euro bailout fund.

A Downing Street spokesman said: ‘We will put our foot down on the IMF putting in money. That’s not what the IMF is for.’

But No 10 officials admitted they may not be able to prevent British taxpayers’ money being used at some point to provide direct loans to countries in the single currency as they have already with Greece, Ireland and Portugal.

Britain argues that the IMF might play a role in administering a fund to which countries such as China, Qatar and Saudi Arabia had contributed, without putting in its own money.

The prospect of China and Arab countries being forced to bail out Europe, the continent which once led the world, is seen by some as a historic moment which marks a fundamental shift in international power.

EU officials hope China can be persuaded to invest in a ‘special purpose vehicle’, a new legal entity to be set up to buy up the distressed debt of eurozone governments.

The fund – not far off a ‘begging bowl’ – would be open to private capital, sovereign wealth funds and the IMF.

Britain is also pushing Germany to let the European Central Bank underwrite the euro, a move the Germans oppose.

Economists believe that even if a deal is finally struck it will just delay a catastrophic meltdown for two years – and insist the only way to keep the euro project on the road is for the countries in the single currency to move towards fiscal union.

Important? Members of the European Parliament attend a debate on the state of play of the negotiations of the European Council concerning the economic crisis

Credit ratings issued by Moodys a week ago

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