Silvio Berlusconi, the Italian prime minister, was said to have offered to resign in January in exchange for the support of his coalition partners in raising the Italian retirement age.
A subsequent debate over the issue in the Italian Parliament descended into a fist fight.
On what was billed as a “make or break” summit for the eurozone, leaders from across the continent descended on Brussels for all-night talks. It was the second summit in the past week, and the 14th in the past 21 months.
Before the day had even begun, finance ministers cancelled a planned meeting which was due to discuss the technical detail of a bail-out for the single currency.
International investors are expecting a bail-out worth more than one trillion euros although the EC said that the final “figure” would not be drawn up for several weeks.
By mid-afternoon, talks between the EU and major banks had been suspended after those who had lent money to Greece were asked to write off about half of the loans they had made to the beleaguered country.
Last night Alistair Darling, the former Labour chancellor, said it was essential that banks accepted substantial losses on their Greek debts to avoid triggering another global credit crisis.
“It’s quite clear the banks are certainly going to take a write-down or a 'haircut’ as they say in the jargon, which is why they will need to be recapitalised, but it could be that some governments are going to be in it as well,” he said.
“Whatever the whys and wherefores of that, though, if they don’t sort it, if they just Lehmans-like let it collapse into a heap of rubble then stand back and watch what happens, well, look what did happen three years ago. They can’t afford to do that this time.”
Mrs Merkel said European leaders could not allow the single currency to fail as “the world is watching”.
“Nobody should believe that another half century of peace in Europe is a given — it’s not,” Mrs Merkel said. “So I say again: if the euro collapses, Europe collapses. That can’t happen.”
Although German politicians formally backed Mrs Merkel’s call for an increased European bail-out fund, the German government is refusing to allow the European Central Bank (ECB) to lend money directly to countries in the single currency.
This threatened to undermine a deal which involved enough “firepower” to tackle the crisis.
The British Government, although not directly involved in the euro deal, is thought to favour a greater role for the ECB.
Arriving at the European summit, David Cameron called for “the greatest possible support for the most comprehensive solution possible” to the crisis.
Italy was also emerging as a key issue.
Mr Berlusconi arrived with a plan to cut Italian debt, but there are concerns that it is not radical enough to satisfy the demands of international financial markets.
The final deal is also likely to lead to the establishment of a eurozone-wide monitoring organisation, which will ensure that countries do not run up unsustainable debts in future.
The value of the euro fell yesterday before last night’s meeting as fears mounted over the scale of the rescue deal.
The markets are expected to remain volatile over the next few days, while the detail of the bail-out continues to be hammered out.
“There is a fatigue on financial markets listening to politicians always coming up with the ultimate, final plan,” Carsten Brzeski, an economist at ING Group in Brussels, said.
Yves Mersch, a member of the ECB’s governing council, said that European leaders needed time to develop the deal.
“Unfortunately, the markets don’t have to do with the functioning of democracies,” he said. “It’s not just a question of money, it’s a question of change that has to be explained.”
