The euro's wild week: a peek behind the scenes

Berlusconi ordered to shape up, Merkel and Sarkozy at odds, banks arm-twisted -- the race to save the euro before this week's summit saw moments of high drama in the corridors of European power. On October 19, Jean-Claude Trichet, the outgoing head of the European Central Bank, invited the cream of Europe's financial world to a Frankfurt concert hall for a last drink to celebrate his departure from the ECB. But the fancy get-together quickly turned sour. An EU summit had been scheduled the following Sunday to contain Europe's debt crisis but there was no deal on the table. So at the last minute French President Nicolas Sarkozy decided to join the other VIPs, flying out of Paris just as his wife prepared to give birth. Putting champagne glasses to one side, those now known as "the Frankfurt group" gathered to set things right -- Sarkozy, German Chancellor Angela Merkel, the ECB chief, the head of the euro-group, Luxembourg premier Jean-Claude Juncker, and EU leaders Herman Van Rompuy and Jose Manuel Barroso. "Everybody was extremely surprised in Frankfurt by the deep difference of opinion between the French and German suggestions on the EFSF," the eurozone rescue fund, said an official briefed on the talks. Paris dug in its heels over its suggestion the EFSF be given a licence to operate as a bank that could borrow without limit from the ECB. An angry Merkel, backed by Trichet, put her foot down, saying "Nein!" Finally giving in, the French leader turned to the ECB, asking it to give a signal it was ready to come to the rescue of Italy and Spain by buying back their debt on the market. This time Trichet turned a darker shade of red. "He did not appreciate this idea at all" and reacted "sharply," said one negotiator. The ECB's mandate to remain completely independent is dear to Germany so Merkel demanded that a reference to the ECB that had slipped into a draft summit statement be struck out to avoid all future misinterpretation. Sarkozy nonetheless phoned Trichet's successor, Italy's Mario Draghi and on the day the summit finally took place the Italian proclaimed he would continue to take "non conventional" measures. For Paris, that amounts to a clear message the ECB would never let Italy down. The "Frankfurt group" then hit another snag. Because all decisions on the EFSF now must be approved by Germany's Bundestag, Merkel said she can take no decisions at the October 23 summit and wants a second summit to give time to talk to the parliament. A date is set, October 26. "The Bundestag has grabbed a seat at European summits, this is regrettable," said a European diplomat. It strikes home that Berlin from now on is in charge, with France, fearful of losing its "Triple A" credit rating, playing second fiddle. But Europe then shot itself in the foot by postponing any decisions, said Juncker. "The impact elsewhere is disastrous," he complained of the move. Meanwhile, tension mounted between the 17 EU nations "in" the euro and the 10 "outs," fearful of being shut out of key decisions taken to stem the debt crisis. At the October 23 summit, British Premier David Cameron objects angrily, only to be sharply rebuffed by Sarkozy. In a heated exchange, the French leader tells Cameron he is "sick of him telling us what to do." Though united on Libya, the pair are at war over Europe. Top of the agenda for the eurozone was to prevent debt contagion spilling over into Italy, which meant beefing up the EFSF rescue fund but Prime Minister Silvio Berlusconi first must pledge to cut his deficit. A sharply-worded draft statement is readied but as soon as "Il Cavaliere" is informed he picks up the phone to Brussels complaining it is "a scandal," one participant said. "You always said you dreamt of implementing reforms but that you couldn't -- well this time you can make your dream come true," he is told. So a bitter Berlusoni comes up with a plan to placate his partners. But still left to be sorted is Greece's mammoth debt. With banks unwilling to do a deal to share the pain, negotiations have stalled. So at the "last-chance" summit on October 26, Merkel and Sarkozy decide to take things in hand and save the day. At around midnight, the summit is halted for a huddle in Van Rompuy's office between "the Frankfurt group" and two eminent members of the world banking lobby -- Charles Dallara, of the Institute of International Finance (IIF) and Jean Lemierre, of BNP Paribas. The atmosphere is tense, said a participant. The eurozone agrees to add 30 billion euros as a sweetener if banks agree to a 50 percent write-down of Greek government debt the banks hold. "We said it was our last word, our last offer," said Merkel of threats to allow Greece to default failing an agreement with the banks -- which then duly came through.