Europe may be facing worst hour since war says Merkel

Mrs Merkel told a party conference in Leipzig yesterday that the failure of the euro would mean the failure of Europe – and that she would do whatever it took to prevent such an outcome from the spiralling sovereign debt crisis.

Problems continued yesterday when a brief market rally following the resignation of Italian Prime Minister Silvio Berlusconi quickly stalled, as the enormity of the task facing his successor set in. The FTSE 100 closed 26.34 points down after investors demanded the highest interest rates for five-year Italian bonds since 1997.

The record rate – suggesting investors still lack confidence in the country’s finances – came as premier-designate Mario Monti began talks on forming a new government to guide the country through the financial crisis.

Last night the new Greek Prime Minister, Lucas Papademos, warned his country’s budget deficit would reach nine per cent of gross domestic product this year – higher than earlier targets.

Mr Papademos promised faster structural reforms and declared Greece had already met requirements to receive the next eight billion euro rescue loan instalment, vital to avoid bankruptcy.

Nonetheless, fears remain widespread about the long-term future of the eurozone.

In an address to her own Christian Democrat party, Mrs Merkel called for closer European political union but offered no new ideas for resolving the crisis.

“Europe is in one of its toughest, perhaps the toughest hour, since World War Two,” she said.

Here in the UK, Chancellor George Osborne predicted eurozone countries would have to swallow “a big loss of national sovereignty” by pooling resources and control over fiscal policy to restore long-term stability to the single currency.

Mr Osborne added that the global economy was at its “most dangerous moment” since the crash of 2008.

He insisted the UK would not be part of any EU fiscal integration, and would not bear the financial cost of bailing out the euro.