With the whole world telling her to get a grip now, mild-mannered German Chancellor Angela Merkel is clearly feeling the heat. Just as the “Gang of Four” EU presidents released their ‘Eurobond + budget veto’ solution to the problems in the Eurozone, she did a Thatcher by telling her MPs that any pooling of debt would not occur “as long as I am alive”. With Hollande managing quietly to delete references to new Brussels budget supervisory powers we seem to have a plan with no bonds and no budget veto. Early concessions duly won, The Guardian claims that France and Germany are ready to do battle at Thursday’s summit, predicting the start of “a long, exhausting, and bruising battle essentially pitting German-led integrationist pressure against French-led protection of sovereign authority”. It says:

“European leaders have drafted a radical plan to turn the 17 countries of the eurozone into a full-fledged political federation within a decade in an attempt to placate the financial markets by demonstrating a political will to save the single currency in the medium-term. The incendiary proposals for banking, fiscal, and economic unions resulting in a “political union” are .. likely to see major clashes over the future of Europe as well as the immediate crisis surrounding sovereign debt, bad banks and the euro’s survival.”

The crisis has shifted from the periphery of the EU to its very heart, with Berlin and Paris seriously at odds for the first time since the Greek drama started 30 months ago. The logic of the draft proposals will also pose major dilemmas for David Cameron, perhaps putting Britain at a crossroads in its relationship with the rest of the continent.

Trench warfare with no agreement will send the euro into a tailspin and the PM into a battle with his backbenchers. Will Merkel produce a game changer? FTD says she must. In a report entitled “The end is near” it says:

“Ms Merkel could stick with her opinion against a banking or a fiscal union. This would mean the end of the euro as we know it. Or she could change her mind at the last minute and agree to a banking union and eurobonds – something she opposed to for political and moral reasons.”

Without a Merkel big bazooka, does Europe think much about the EU’s popgun plan? Already FAZ, The WSJ, El Pais and Diário de Notícias have dumped on it. Diário de Notícias says that the plan shows that Europe is not prepared to integrate further. In FAZ, Werner Mussler criticises the “compromise paper” as being nothing new and too slow. The plan removes every problem for Berlin, but ignores any short-term measures to face the eurocrisis, reports El Pais. WSJ adds that it is “vague on many issues and silent on many other controversial questions“. Then, damning with faint praise, it says that “it is still the most concrete official plan toward closer economic ties yet to emerge from the bloc”. The real truth, as Emilio Contreras says on Cadena Ser, is the failure of the EU itself to persuade Germany. “When Mr Barroso speaks, Ms Merkel also speaks, making a fool of the EU,” because the German Chancellor always opposes Mr Barroso’s plans.

So who wants what?

For business it is all about leadership. The CEOs of Siemens, Peter Lóscher, Telecom Italia, Franco Bernabé, and AXA, Henri de Castries, write a joint op-ed piece in today’s Le Monde and El País demanding “an integration that should have been implemented long time ago.“

For the Germans it is all about a different type of integration. The fiscal and banking union business wants has to wait. First, we must have political union. The BBC‘s Today Programme quotes German finance minister Wolfgang Schauble as arguing that “in the optimal case” they would expect agreement on a European Finance Minister at the end of the summit. In a guest article in today’s Süddeutsche Zeitung and Der Standard, the President of the Bundesbank, Jens Weidmann, states again that the euro demands hard rules. “European policy now has to answer clearly which way to go – back to a monetary union with responsible states or a more … political union.”

For the French, it is le crunch. Can they break down the door of German intransigence, body swerve political union and come up with a Eurobond-lite agreement? The FT claims that M. Hollande is willing to give ground and will approach the issue softly, rather than in a “Churchillian manner” but seeks some breakthrough from Merkel. So it is not a surprise that Berlin is not scared that President Hollande will lead a ClubMed crusade given the relative weakness of the French economy. What do they expect? Le Monde publishes an interview with the French Minister for European Affairs, Bernard Cazeneuve, who wants meat on the bones of “structural funds, the recapitalisation of the European Investment Bank, the projects bonds, and the ability to allocate these means to investments that will foster tomorrow’s growth throughout the member states of the Union”.

For the Italians, the FT‘s Peter Spiegel claims that Mario Monti needs a productive summit in order to have the credibility to push his agenda through his national parliament. But, in an interview in Corriere della Sera, former Italian Finance Minister Domenico Siniscalco notes that the markets are expecting the European summit to fail. But he pinpoints the elephant in the room of the crisis saying that politicians and officials “know that the cost of not reaching an accord would be much higher than the price of an accord”, even for Germany.

The sad position of the UK

For the British, a Merkel game changer is vital to the PM as it is to Mario Monti and Francois Hollande. Facing increasing calls for a vote on Europe, the FT‘s leader writer opposes ‘doing a December’ and demanding financial services opt-outs and renegotiation as a precondition of approving the summit’s conclusions. The City is waking up to the need for better diplomacy following both the Standard Chartered Chairman’s clearcut statement that leaving the EU would be bad for the City and the revelations that the City denounced the value of Cameron’s famous opt-outs which he never in fact consulted them about anyway. Little wonder that Deputy Prime Minister Nick Clegg has warned that, for the sake of the City, Britain must have a hand in shaping the “risks and rewards” of a banking union.

But sadly for Cameron all talk is now of a referendum as MPs continue to campaign for it. Radio 4′s Today programme carries an interview with veteran Eurosceptic MP Bill Cash, who is to bring forward a Bill in Parliament proposing a referendum in the event that the EU agrees to create a banking union. He claims that this would represent a fundamental change that will “destabilise Europe” and affect its relationship with the UK. The euro-phobic Daily Express goes one step further than Mr. Cash in claiming that it would “beggar belief” if Britain fails to hold a membership referendum, as the fiscal union will essentially take over the EU.

The PM is in an utter bind. Telegraph political editor Benedict Brogan claims that David Cameron needs to stop being coy on the issue, as trying to please both wings of his party is actually merely serving to divide it and the public do not respect U-turns from a position of weakness.

With a referendum looming, the question is what comes first? Collapse of the eurozone or collapse of the coalition?

Read more, exclusive to nucleus.uk.net