AMSTERDAM // European leaders toiled late into the night to come up with a rescue plan for the troubled single-currency Euro zone. The 17-nation bloc's debt crisis has been called the worst European emergency since the Second World War and is seen as destabilising the entire global financial system.
The acrimonious nature of some of the discussions, with open disagreements between the UK, France, Germany and Italy grabbing headlines, is a measure of the large amounts of money at stake and of the political sensitivity of Europe and the economy in member states.
The talks in Brussels focused on agreeing a new bail-out for the Greek economy, stopping the debt crisis from spreading to other Euro zone countries, particularly Italy and Spain, and safeguarding the European banks.
Despite the pressure to come up with a comprehensive solution, the president of the Euro group, the Luxembourg prime minister, Jean-Claude Juncker, tempered expectations. "We will probably not be able to work out every last detail but the overall plan should advance," he told reporters before entering the meeting.
European leaders, both in the 27-member European Union and in the more limited 17-nation Euro zone, were under pressure to come up with a wide-ranging plan after previous deals had quickly proven insufficient. World leaders are urging a finalised plan before the meeting of the G20 bloc of largest economies in France on November 3.
Ahead of the Brussels summit, the German chancellor, Angela Merkel, yesterday impressed on the country's parliament the need for more forceful action to stop the debt crisis from spreading. "The world is watching Europe and Germany. It is watching whether we are ready and able, in the hour of Europe's most serious crisis since the end of World War II, to take responsibility," she told the Bundestag.
The German parliament agreed yesterday to an increase, through borrowing, of the Euro zone's main rescue fund, the European Financial Stability Facility (EFSF). The EFSF's lending capacity had just been raised to €440 billion (Dh2,04 trillion) but that will now probably be extended to €1 trillion. As the biggest European economy, Germany is liable for a larger chunk of that then other EU members and many Germans are apprehensive about such a commitment.
In order to placate some of her opponents, Mrs Merkel indicated that private investors, mostly banks, would have to take a much larger loss on the Greek debt than had previously been agreed. She was likely to tell banks to accept losses of 50 per cent on the Greek government bonds that they hold, possibly cutting the privately held Greek debt in half. The Euro zone countries and the banks were said to be involved in tough negotiations on the precise formula.
Under the previous Greek bail-out deal, banks had agreed to just a 20 per cent loss. France in particular has long opposed a much stronger cut because its banks relatively hold a lot of Greek debt. Mrs Merkel also rejected France's proposal that the European Central Bank take on more of the Euro zone's debt.
European banks are reeling under the debt crisis and a large part of the meeting was focused on propping them up. The leaders discussed recapitalising the banks, an exercise for which unofficial sources said that €108bn may be needed.
The international dimensions of the crisis were underlined yesterday when both China and Russia said that they would be willing to help boost the European Financial Stability Facility through the International Monetary Fund.
Italy, too, took steps yesterday to help the summit succeed when its government agreed to new austerity measures. Main among them is a rise in the retirement age from 65 to 67 by the year 2025. Italy, under pressure from other European governments because of its high debt and low economic growth, also handed the summit a letter detailing how it will implement the agreed austerity package. Italy is the third largest economy in the Euro zone and would be much harder to bail out if it encounters problems than the much smaller Greek economy.
Even though Britain is not part of the Euro zone, the prime minister, David Cameron, emphasised the importance of a comprehensive solution as he went into the summit. "We need to have the greatest possible support for the most comprehensive solution possible and that is what we'll be discussing tonight."
Mr Cameron faced a rebellion in his Conservative party earlier this week when 81 Tory MP's voted in favour of a referendum on British membership of the EU.
The Euro debt crisis and the way it is being handled has provided Euro-sceptics across the continent with a lot of ammunition over recent months, say analysts. Even though most would expect both the EU and the Euro to survive, the crisis is seen as a potential threat to both.
"We are likely to muddle through. Even the ones who are most negative about this crisis, when you asked them do you think the Euro will still be around in ten years, they'll say of course it will be," said Janis Emmanouilidis at the European Policy Centre in Brussels as the summit got underway.
But the financial markets in particular are sceptical that an injection of capital alone into the Euro zone will halt the crisis.
"Ultimately there is a set of institutions that needs to be created in the Euro zone at the national and the Euro zone level to really deal with the capital needs." said Rachel Ziemba of Roubini Global Economics in London.
Mr Emmanouilidis also warned that Europe's drawn-out struggle with the debt crisis undermined its international position.
"From the perspective of the Middle East but also of China, India and Brazil, Europe appears weak," he said.