Europe split ahead of crunch summit

European leaders prepared to meet for a crunch summit in Brussels on Wednesday with scant indication that they will overcome their differences to craft measures to stem the eurozone’s sovereign debt crisis.

With details of negotiations closely guarded and fears growing that there would be no final deal, trading in world markets was wary following heavy falls in equities and commodities on Tuesday.

The European Union’s 27 member governments were seeking common ground on the final shape of a second bail-out for Greece, the bloc’s weakest economy; how to beef up the eurozone’s €440bn financial rescue fund; and measures on how to strengthen the capital of the regions’ banks.

In Germany, Europe’s biggest economy where resistance to assisting weaker eurozone members has been mounting, Angela Merkel secured a big majority of legislators who backed her mandate in Brussels but insisted on “strict conditionality” on any German assistance to its neighbours.

Describing what she called “Europe’s deepest crisis since the end of World War II”, the chancellor told the Bundestag: “It is … clear that things cannot go well for Germany in the long term if they are not going well for Europe. That means no more and no less than the European Union becoming a real stability union.”

Ms Merkel said Germany would not exceed the financial guarantee of €211bn to the bailout fund. She also insisted that any leveraging of the fund would not include support from the European Central Bank.

German lawmakers voted by 503 in favour of giving Ms Merkel powers to negotiate in Brussels to 89 against. The number of MPs who voted against Ms Merkel from her own SPD party has not yet been announced.

A European Union official said the Commission, the bloc’s executive, had yet to receive officially the 15-page letter in which Silvio Berlusconi, Italy’s embattled prime minister, was to outline his government’s response to demands for concrete economic reforms to stabilise the country’s finances.

Whether the details of the proposals, agreed after a fraught day of talks in Rome on Tuesday that brought Mr Berlusconi’s coalition to the brink of collapse, would satisfy his fellow leaders remained unclear.

The tension boiled over in Italy’s parliament on Wednesday, when rival lawmakers traded blows.

Mr Berlusconi’s difficulties mirrored tough pre-summit negotiations in other European capitals.

In the EU’s fourth attempt to agree a comprehensive plan to ease the crisis, Wednesday evening will see back-to-back summits in Brussels: a brief gathering of the leaders of all 27 members, followed by what is expected to be a lengthy conclave of the leaders of the single currency’s 17 members.

A draft statement for the initial EU leaders’ summit, obtained by the FT, said there was “broad agreement” on requiring banks to hold “a significantly higher capital ratio of 9 per cent of the highest quality capital”.

Banks would be required to account for the market valuation of sovereign debt they hold at prices as of September 30 and would have until the end of June to meet the new capital target.

Efforts to secure national backing for boosting the EU’s response to the crisis have already toppled Slovakia’s government, forced Ms Merkel’s to make concessions to protect her majority and exposed deep rifts in Mr Berlusconi’s coalition.

Greece has seen bouts of civil unrest as the government has sought to impose swingeing austerity measures to secure bail-out funds.

Beyond the single currency zone, moves by some leading EU members to spur greater fiscal union contributed to a backbench revolt against David Cameron, UK prime minister.

In the latest sign that the crisis is sapping confidence beyond the single currency area, a survey of British manufacturers yielded its gloomiest results since July 2009, forecasting declining output over the next three months.