Former Labour chancellor says economic turmoil worse than 2008 crisis and says EU leaders are 'constantly behind events'

The economic crisis facing Europe has become far worse than the banking crisis of 2008 and will see the break-up of the euro if it is not resolved by Christmas, the former Labour chancellor Alistair Darling has said.

He told the Guardian: "I despair of the way in which EU leaders are constantly behind events. I do not think enough people realise how serious this crisis is, and how hard it is going to hit us.

"This is far worse than the banking crisis of 2008 in its seriousness and, if it is not solved by Christmas, I think the whole of the euro will break up.

"I know of no one in private who thinks the solution proposed for Greece will work. Any solution that will leave Greece with debts of 120% of GDP in 2020 is simply not credible. Everyone knows there is going to have to be a larger cut than the 50% write-off" .

Darling's warning is likely to be taken seriously because, as the Labour chancellor, he took a lead role in preventing a UK banking collapse.

He said he believed the idea of setting up a larger European financial stability facility was foolish, adding: "The fact is that the rescue fund does not exist.

"It has no money in it so it provides no reassurance to the markets, and it avoids the key issue – which is to get the ECB [European Central Bank] to say it will do whatever it takes to protect the euro and become the lender of the last resort.

"I do not want to hark back to what we did, but the G20 summit in 2009 worked less for what was decided and more because of the perception that we were determined to sort it out."

In contrast, he said last week's summit in Cannes was "a disaster", adding that leaders "appeared to gather on a wet Friday, appear mesmerised by Greece and then were away by 3.30, as soon as they possibly could get out of the place. Sometimes it is better to have no summit than a failed summit".

Discussing the future role of the ECB, he said: "I recognise that Germany has a historical problem because of its concern about hyper-inflation, but the problem now is not hyper-inflation, it is hyper-deflation.

"The ECB has been buying Italian bonds in the markets for months, and now they have to recognise they have to be the lenders of the last resort, and they must say they will do everything possible to protect the euro. Unless they do that, the markets will continue to have a go at any weak economy."

Darling described bank recapitalisation as being "like a fire that starts under the floorboards – before you know where you are, the whole building is in flames and burnt down".

He added: "That is what is happening now. I do not think people realise how serious the situation is.

"In 2008 we were facing a banking crisis. Now we are facing an economic crisis, and if it gets worse it will turn into a banking crisis that will worsen the crisis.

"We are seeing government after government introducing austerity programmes to protect themselves from the markets, but if there is no growth there is no way that the austerity can be enough.

"That is why the G20 should have been focusing on how to achieve growth – but it did not, and we may now pay a very heavy price."

He said he believed it was legitimate for the IMF to be given extra funds as long as it was not seen as a substitute for the eurozone sorting out how it protected the euro.

Darling did not vote with Labour when it opposed extra contributions to the IMF in the summer.

His remarks came as the deputy prime minister, Nick Clegg, prepared to deliver a speech in Brussels urging the EU to do more to make itself more competitive.