Eurozone set to abandon Greece – and austerity

Eurozone nations have been advised to draw up emergency plans to handle Greece's possible exit from the single currency, it emerged last night.

Stock markets around Europe tumbled after Germany's Bundesbank central bank said that Greece's departure would pose "considerable but manageable" challenges.

European Union and Greek leaders insisted there was no "master plan" for Greece to pull out of the euro. But officials said the Eurogroup Working Group (EWG), experts who advise the 17-nation bloc's finance ministers, "agreed that each eurozone country should prepare a contingency plan, individually, for the potential consequences of a Greek exit from the euro".

The news cast a shadow over a working dinner of the 27 EU leaders in Brussels last night, their 18th summit in two years of crisis management. In public, they insisted they wanted to see Greece remain in the euro as they marked a shift from collective austerity to pro-growth measures following the election of the Socialist François Hollande as French President.

But Mr Hollande, at his first summit, clashed with Angela Merkel, the German Chancellor, over his call for eurozone members to pool their debts by issuing eurobonds to lower borrowing costs for debt-ridden nations. The French leader said the EU had to consider "all ways to increase growth. And eurobonds are part of the discussion".

In the first split between France and Germany since the crisis began, Ms Merkel said: "The [EU] treaties forbid taking on a mutual liability, that includes in our opinion also eurobonds. They are not a contribution to foster growth in the eurozone."

David Cameron went with the EU flow as he joined other leaders at the five-hour meeting in exerting pressure on the German Chancellor to do more to solve the crisis – including eurobonds and a more interventionist approach by the European Central Bank.

At home, the Prime Minister is also changing his tone by joining forces with Nick Clegg to press the Treasury to secure growth through infrastructure and housing projects and ensuring more lending to business. Yesterday Mr Clegg promised a "massive" increase in government-backed investment in the next few months. Both he and Mr Cameron insist they are not advocating a "Plan B" and are sticking to their deficit-reduction plans. But some Liberal Democrats see the change of emphasis as a "Plan A plus". Ed Miliband, the Labour leader, mocked Mr Cameron's change of tack. He told the Prime Minister in the Commons: "For two years you have been the high priest of austerity, you have been telling the world that austerity alone is the answer. But now the recognition has dawned that it isn't working and you find yourself on the wrong side of the argument."

In Brussels last night, Mr Cameron said: "What we need is a decisive plan for Greece and we need decisive plans to help get the European economies moving. But if we're not going to keep coming back and back to meetings like this, we also need to deal with some of the longer-term issues at the heart of running a single currency: having a bank that gets behind that single currency; having coherent long-term plans to make sure that single currency is coherent. We have to address those issues, too, or these crises will keep reoccurring."

Mariano Rajoy, the Spanish Prime Minister, pleaded for help with his country's high borrowing rates. "Europe has to come up with an answer," he said. "It is a must, because we cannot go on like this for a long time, with large differences when it comes to financing ourselves."

No major EU initiative on Greece is expected until after the country holds another general election on 17 June. But there are growing fears in Brussels that the voters will again reject parties backing the tough austerity measures demanded in return for the country's second international bailout.

Jose Manuel Barroso, the European Commission President, backed a "road map" towards Eurobonds. He said Greece should remain a member of the euro area but must stick to its commitments on cuts.

Today, Mr Clegg will warn that a Greek withdrawal would cause "unpredictable, irrevocable damage" to the single currency that "no rational person" should advocate. Speaking in Berlin, the Deputy Prime Minister will criticise the notion "being whispered behind cupped hands" that Greece 's exit could be good for the rest of Europe. "We have got to hit back against this fatalism which says that Europe can't fix this," he will say.