European governments were struggling last night to prevent the financial crisis from exploding into a political crisis that could shake the foundations of the European Union.
After a day of cacophony, confusion and market collapse, the French President, Nicolas Sarkozy, made a solemn appearance on the steps of the Elysée Palace to declare that EU countries were "united and determined" to rescue Europe's tottering banking system.
The declaration – two days after Europe's Big Four had given similar assurances – was intended to calm market fears that the EU was too divided, and too weak institutionally, to cope with the most serious financial crisis in its half century of existence.
M. Sarkozy, who holds the EU presidency until the end of the year, said: "Not a single saver in any bank in any of our countries has suffered any loss. We will continue to take all necessary measures to protect the [banking] system and private depositors ... in close co-ordination and co-operation between governments."
Despite M. Sarkozy's assurances, it is clear that relations between European leaders are severely strained, not least between Paris and Berlin, long the political spine of the EU. Yesterday's statement – agreed by all 27 governments – was intended to put an end to a day of muddle and recriminations, generated, in part, by a German government declaration on Sunday that the country's €1 trillion of private bank deposits would be "guaranteed". That pledge caught other EU governments unawares and appeared to trample on the pledge of European co-operation given at a Paris mini-summit of the French, British, German and Italian leaders on Saturday.
Berlin tried – rather belatedly – to clear up the confusion yesterday afternoon. The German finance minister, Peer Steinbrück, said that Sunday's statement was a "political" promise to the German people, not the announcement of a formal, legal guarantee, which might hoover savings from banks in other countries. As such, German officials said, it was little different from the British government's frequent promise that it would take "all possible measures" to protect savers or M. Sarkozy's pledge last week that French private savers would not lose "a single euro".
Berlin said that this "political" guarantee to savers should not be compared to Ireland's much-criticised decision to guarantee all the liabilities of its six main banks for two years. The European Commission, which is challenging the Irish move, said later that it saw nothing wrong in Berlin's "promise".
Nonetheless, similar guarantees were issued by a succession of other EU governments yesterday – including Sweden, Austria, Denmark and Portugal – to prevent savers from flocking to German, or Irish, banks.
The muddle illustrates the mutual suspicions of EU governments as they struggle to deal with the panic spreading across the Atlantic through European financial institutions. Washington, with one government and one political system, found it difficult enough to cope with the global credit crisis. The EU has a single currency and single market but 27 governments and no overall system of banking supervision or economic governance.
Some financial experts suggested yesterday that the very existence of the euro might come under severe strain in coming days and weeks. Although this is probably exaggerated, European governments are paying the price for creating a single currency without the institutions or regulatory system to manage a single economy .
Sylvester Eijffinger, of Tilburg University, a monetary adviser to the European Parliament, said: "This is a wake-up call. First we had economic integration, then we had monetary integration. But we never developed the parallel political and regulatory integration that would allow us to face a crisis like the one we are facing today."
Talk of European "unity" has been undermined by the unwillingness of Britain and Germany to take part in some form of overall, EU-wide banking rescue programme. At the same time, there are constant fears that "beggar-my-neighbour" actions taken by individual governments might pull a shrinking financial blanket – in the form of billions of euros in private savings – away from other countries.
M. Sarkozy was incandescent last week when Berlin torpedoed Dutch and French ideas for an EU-wide rescue package, even before they had been formally tabled. Berlin said at the time that it did not approve of grand, taxpayer-funded rescue plans, only action to cope with problems at individual banks.
Across the continent: How goverments are reacting
The Icelandic stock market regulator suspended trading in shares in the country's largest banks yesterday as the government continued to work on a rescue plan for the financial services sector. Iceland has already been forced to nationalise one bank, Glitnir, and a second bank, Kaupthing, is now the focus of several nervous investors. The country's banking crisis has hit the Icelandic economy hard, with its currency suffering further losses yesterday.
Chancellor Angela Merkel, right, came under pressure to explain the guarantee sheoffered over the weekend to depositors in German banks. German officials now say Ms Merkel's commitment was a political one and that no new legislation will be enacted to provide savers with the country's banks with an absolute guarantee. The government also announced yesterday that it has salvaged a €50bn (£38.8bn) rescue plan for Hypo Real Estate, which is the second largest mortgage bankin the country.
The Danish government confirmed it was following the example set by Ireland, offering a blanket guarantee of security for savings held in Danish banks for at least two years. The scheme will be funded by the banking industry and taxpayers.
The government stopped short of a full savings guarantee. However, ministers announced the doubling of the compensation cap to SEK500,000 (£40,000).
The Spanish Prime Minister, José Luis Rodríguez Zapatero, held emergency talks with leading banks over concerns about bad debts relating to the ailing property market. Spain's banks have avoided the worst effects of the credit crisis so far, in part thanks to laws limiting their exposure to the kind of complicated financial instruments that have already caught out other institutions.
The Chancellor of the Exchequer, Alistair Darling, made an emergency statement to the House of Commons as the UK stock market fell by almost6 per cent on fears about banking security and the economic slowdown. Mr Darling is under pressure to guarantee all deposits held in UK savings accounts. He is also considering taking equity stakes in British banks on behalf of the taxpayer.
Trading on the stock market was automatically suspended after share prices fell 14 per cent. The economy is heavily exposed to natural resources. The price of oil and gas has fallen sharply in recent months because, with the world economy slowing significantly, demand is expected to reduce rapidly.
The Benelux bank Fortis was caught out by the credit crunch after joining a consortium to buy Dutch banking group ABN Amro just before the crisis began last autumn. Parts of the bank have already been nationalised in the Netherlands, while yesterday the Belgian and Luxembourg operations of Fortis were sold to the French giant BNP Paribas. The governments of the two countries are also taking on a minority share in Fortis.
Greek ministers continued to defend their decision to guarantee their savers' deposits in full, which was taken at the end of last week after runs on several Greek banks. Officials said they had had no choice but to offer such a guarantee, even though they believed there was no question of the country's banking system being at risk.
UniCredit Bank, one of Italy's largest financial institutions, said yesterday that it was raising €3bn of additional capital, despite having said on Friday that it did not need further funding. The bank's shares have come under heavy pressure during the past 10 days.