Peace and prosperity in Europe cannot be guaranteed, the German Chancellor Angela Merkel warned last night, as it emerged that a comprehensive deal to save the eurozone economies will not be finalised for weeks.
European leaders meeting in Brussels believe that market uncertainty is likely to continue well into next month despite a "political deal" on the broad details of a three-point plan to restore economic confidence.
But the specifics of how to recapitalise Europe's banks, force Greek bondholders to take a "haircut" of up to 60 per cent on their investments and create a €1 trillion fund to prevent future sovereign debt crises are still to be resolved. Acknowledging how high the stakes were, Ms Merkel warned that a deal had to be done. "Nobody should believe that another half a century of peace and prosperity in Europe can be taken for granted. It cannot," she said.
"If the euro fails, Europe fails. The fundamental weaknesses and holes in the construction of the economic and monetary union must either be addressed now or, I say, never."
But last night there were concerns that Italy might backtrack on key pledges it made to other European leaders on economic reform – a precondition of any deal.
Silvio Berlusconi spent his last minutes in Rome modifying Italy's "letter of intent" setting out his Government's commitments to a timetable for reform.
The original 15-page document contained no dates and sparked a chorus of concerns at the EU. By the time he arrived in Brussels it included a plan to sell €5bn of state assets a year for three years and raise the pension age.
But privately some senior European officials still question whether Mr Berlusconi can deliver the reforms with a fractured coalition and a slim majority in parliament. Italy has now been given until later next month to provide exact details of how it will implement its plan.
In another setback yesterday, talks between the EU and Greek bondholders failed to reach agreement. The EU is seeking voluntary participation by banks to write-downs of up to 60 per cent on their investments.
While the EU could impose a forced write-down on the debt, it fears this could trigger a Lehman Brothers-style contagion and further market uncertainty. This would not happen if a voluntary write-down is agreed.
There is also still disagreement about what role the IMF might play in any Special Purpose Vehicle set up to administer a €440bn protection fund – which will be leveraged to provide total financial firepower of more than €1trn.
Sensitive to public opinion in Britain, David Cameron is insisting that the IMF – to which Britain contributes – should not provide any funding to the new body.
But despite political agreement between the European leaders last night on establishing the fund, it is far from clear that it will be big enough to reassure the markets that it has enough financial firepower to deal with future sovereign debt crises in much larger European economies such as Italy.
In a sign that the summit results may not be enough, the incoming head of the European Central Bank, Mario Draghi, announced that the bank would go on buying troubled states' bonds until a comprehensive settlement was reached. His statement appeared to rebuff pressure from Germany's powerful Bundesbank for the ECB to end the bond-buying programme which prompted the resignation of the two most senior German ECB policymakers earlier this year.
But it is also a sign of the growing realisation that a deal will take longer to complete despite Franco-German assurances that a "comprehensive solution" would be found. Speaking after the first part of the summit which discussed the bank recapitalisation David Cameron said: "We made some good progress tonight. It's very much in Britain's interests that we sort out these problems and solve this crisis. We have made good progress on the bank recapitalisation; that wasn't watered down, it has now been agreed. It will only go ahead when the other parts of a full package go ahead and further progress on that needs to happen."
However Mr Cameron did not take part in the crucial part of the talks – being held by Eurozone leaders – which took place afterwards.
Force Greek bondholders to take a 'haircut' of 60 per cent
Greek debt levels are unsustainable and everyone agrees they need to be reduced in an orderly way to stop the country from defaulting – and triggering mass market panic.
Problem Most of the debt is held by financial institutions and they have failed to agree with the EU on how much they are prepared to write-off.
Boosting eurozone bailout fund
The plan: create a "big bazooka" fund of up to €1 trillion to guarantee European countries against future sovereign debt crises.
Problem How you raise a fund big enough to reassure markets. Investment may be needed from China and Gulf Sovereign Wealth Funds. Uncertain they will agree to this.