French President Nicolas Sarkozy has agreed with German Chancellor Angela Merkel to drop a proposal to tax European banks by €50bn (£44bn) over five years in order to fund a second bail-out of the Greek economy, ahead of a critical eurozone summit in Brussels.
Sarkozy's plan, which would have raised €10bn (£8.9bn) per year through a 0.0025 per cent tax on all assets held by eurozone banks, was intended to provide almost half of the money needed for a €115bn (£101bn) Greek rescue package.
The concession is seen as a victory for Merkel, who wants private investors and not banks or taxpayers to take the brunt of the impact from the collapsing Greek economy. Merkel felt Sarkozy's plan would take too long to raise money to repurchase Greek bonds.
It is now likely, said officials in Europe, that an alternative plan will be put in place in which private holders of Greek bonds that mature within the next 8 years will be asked to swap their holdings for new bonds that do not mature for another 30 years, in return for beneficial deals on credit.
If the plan goes through it would put the Greek economy in a state of "selective default". That would make it necessary for eurozone officials to find additional money to recapitalise Greek banks.
Other plans are still being considered, however, and the exact form of the deal will not be known until the conclusion of Thursday's emergency summit.
President of the European Central Bank Jean-Claude Trichet, who opposes Merkel's plan, has rushed to Brussels to take part in the meeting, which is the tenth such summit in 18 months.
Many analysts fear that the European economy could be grinding to a halt.
Howard Archer, of IHS Global Insight, has said: "The eurozone is clearly struggling in the face of tighter fiscal policy increasingly kicking in across the region, the ECB raising interest rates twice and the heightened sovereign debt tensions. In addition, slower global growth has hit foreign demand for eurozone goods and services pretty hard."
The International Monetary Fund and the American government also feel that only more radical moves toward fiscal union in Europe can create a long-lasting and comprehensive solution to the debt problem. American president Barack Obama called Merkel on Tuesday to urge her towards a far-reaching solution to the debt crisis.
European Commission president Jose Barroso is also urging the 17 leaders at the summit to find a deal: "Nobody should be under any illusion: the situation is very serious.
"It requires a response - otherwise the negative consequences will be felt in all corners of Europe and beyond. They have said they will do what it takes to ensure the stability of the euro area. Well, now is the time to make good on that promise."
Merkel, however, has rejected those calls for a wider restructuring of the eurozone.
"I know there's a great longing for a big decision, proposals for eurobonds, a big restructuring [of Greek debt], for a transfer union, and much besides," said Merkel on Tuesday, reported The Guardian. "I will not give in to this. The government will not give in to this."
This has worried analysts, who say that without a larger restructuring of the eurozone no comprehensive solution will be found.
"There needs to be a programme with a certain amount of shock and awe to impress the market that the leaders are on top of the crisis," said Robin Marshall at Smith & Williamson Investment Management, according to Bloomberg.
It has also worried Chancellor of the Exchequer George Osborne, who in an interview with the Financial Times urged European leaders to "get a grip" on the crisis.
"I think we have to accept that greater eurozone integration is necessary to make the single currency work and that is very much in our national interest," he told the FT. "We should be prepared to let that happen."
Shadow Chancellor Ed Balls told BBC 5 Live that if the eurozone crisis continued the UK economy would be in "deep, deep trouble". He also said that Osborne should have attended Thursday's emergency summit.
"Half of all our trade, all our companies exporting and importing, happens with other European countries, so if that goes into crisis and they stop growing and contract, that means lots of jobs and investment lost in Britain directly," he said. "If there's a financial crisis which essentially bankrupts lots of eurozone banks that directly has a huge hit to our British banking system."
In France, newspaper Le Monde wrote that the crisis was "feeding the anxiety of eurozone savers". Le Monde said, through a translation by The Guardian: "It's useless rushing to the bank counter to empty current and savings accounts as only their life insurance would be affected. And yet, the extent of possible damage is difficult to determine."
The Telegraph, however, quoted one diplomat who said the eurozone faced its "splat moment". "There is a sense of crisis but the panic is leading to paralysis. Eurozone leaders are like a rabbit caught in the headlights and the truck is rocketing towards them," he said.
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