Sensible people usually manage to cut a workable deal, and Merkel would not have lasted as long as she has done without having a bit of nous about her.
She will have worked out that the long term damage to the European project by having a workable relationship with the UK that sees the UK leave the EU may be a lot less than the short term damage than a no deal Brexit could cause.
Italy is in no shape to lose such a huge export market as the UK, the European banks have not managed to repair their balance sheets sufficiently after the last finacial crisis, the ECB is running out of viable options to kick start European economies and anti EU sentiment is on the rise across Europe. An economic crisis in Europe could bring the whole EU crumbling down (and Merkel must realise that and the implications that has for the single currency)
The direction the EU is taking is not the direction that the peoples of Europe want- they want less federalisation not more. If the EU does not react to that and tries to hold the project together with draconian measures, threats and a willingness to allow economic damage to Europe so they can carry on that path then it is ultimately doomed, and a no deal Brexit will hasten that demise