‘Grand Bargain' to save the euro

In normal circumstances, European leaders are happy to wait until the day of a Brussels summit to meet one another, leaving any preparations in the hands of their officials. But there is nothing remotely normal about the meeting that is to take place today. It comes at a time of mounting catastrophe in the international markets, as the Eurozone faces potential collapse. And if European leaders make a mistake, it will not just be the Eurozone countries that face upheaval and devastation.

All of Europe, including Britain, will be plunged into a banking crisis which can only lead to financial catastrophe. This is why Britain's Prime Minister David Cameron chose not to delay meeting French President Nicolas Sarkozy until their formal encounter today. The leaders met last week, and the prime minister has been told by officials that he can leave nothing to chance. Furthermore, I can reveal that Cameron is facing overwhelming behind the scenes pressure from US President Barack Obama (who is panicking that a world economic collapse will ruin his re-election chances) and his Treasury Secretary Timothy Geithner to throw Britain's weight behind the rescue package being hammered together by France and Germany to pull Europe back from the abyss. Sir Mervyn King, the Bank of England's governor, is reinforcing this presidential edict. Sir Mervyn has warned that the euro collapse could plunge Britain (and much of the world) into a bigger depression than we suffered in the 1930s. The Bank's governor always chooses his words carefully, which is why his warning carries so much weight. More ominously still, 1930-39 was the decade when mainstream politicians lost control of events, when the Nazis rose to power and the far Right took charge in Europe. By the end of the decade the world was at war.

So last week's meeting between Cameron and Sarkozy could not have been more fraught with consequence. Many of the issues they discussed — financial regulation, obscure treaty changes, bail-out mechanisms — may have seemed almost comically small considering the magnitude of events. But underlying their discussion, one great question hung in the air. Would Britain smile on France and Germany entering into what Brussels officials are calling a "Grand Bargain" to save the euro? The details of this so-called bargain have gradually been emerging over the past few days and are as follows: has France caved into German demands for total oversight, enforced by draconian penalties, over the national budgets of Eurozone countries. European voters were given a glimpse of how such a system would work two weeks ago when Enda Kenny, the Irish Taoiseach (prime minister), visited Berlin. Only then was it discovered that members of the Bundestag were already studying details of the Irish national budget, which is not due to be announced till next month and had certainly not been shown to Irish legislators. This could scarcely have been more embarrassing for the hapless Kenny, who said that he had "no idea" of how such a breach could have occurred. Kenny was either being disingenuous or deeply naive.

For the truth is brutally clear. The Germans are insisting on this kind of detailed, advance oversight as a precondition of keeping their side of the Grand Bargain — which requires them to throw the weight of German finances behind the battle to save the euro. Thus far the Chancellor Angela Merkel, has steadfastly refused to jeopardise Germany's famously strong credit rating by authorising a massive bail-out of profligate countries such as Spain and Greece.

Her reluctance is hardly surprising because such a move would be hugely unpopular among ordinary German voters, and almost certainly deemed illegal in the German constitutional court. But without such a bail-out, the Eurozone will most certainly collapse. Hence the need for the Grand Bargain.

Today's summit could be the most momentous since the signing of the Treaty of Rome in 1957, which led to the creation of the European Economic Community. Depending on the outcome, Europe could either start to crumble back into a collection of individual nation states or advance into a supranational union with the 17 eurozone countries converted into provinces governed from Brussels (and ordered around by Berlin). Hence the scale of Cameron's dilemma.

— The Telegraph Group Limited, London 2011