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As HiFX’s Chris Towner says: “Germany is being forced into a corner where it is they who will need to start to give up if they would like Europe to become more unified. The Spanish finance minister is right to say that the battle for the euro will be waged in Spain, but it will be decided in Germany.”

Eurosceptics suspect Germany will use the crisis to usher in a United States of Europe.

“Is there a hidden German agenda? Probably not,” answers Charles Purdy of Smart Currency Exchange. “They have always thought and made clear that greater fiscal unity is a must for the euro – ensuring that each country adopts their fiscal discipline. Up to now the political will has been lacking but if the euro is to survive and the 'weaker’ countries are to benefit from Germany’s strong credit rating then fiscal union will be what Germany expects.”

World First’s chief economist Jeremy Cook believes greater unification will take decades, saying: “Fiscal union is the endgame for the eurozone – a United States of Europe that has centralised fiscal and monetary policy and leadership based from one location. This will take years to set up and will only follow a huge upheaval of the European political landscape.”

However, while the consensus view is that the eurozone will bind closer together, this doesn’t mean that all 17 members will remain in the club.

“It is becoming increasingly clear that some nations can’t remain in the eurozone,” says Richard Driver of Caxton FX. “A stronger eurozone with a fiscal union is the only way the eurozone can survive but this won’t come soon enough for Greece.”

Stephen Hughes of Currencies.co.uk is sceptical, saying, “As a growing number of voices call for greater fiscal union across the eurozone, it’s still by no means a given that this is an achievable path – don’t forget that even the German people have yet to ratify the fiscal compact.

“But, given the depth of the current euro crisis, we are likely to see a more accommodating stance from policymakers in the coming months. What is clear is that any move to greater unity will take time to implement, something Greece certainly doesn’t have. As for Spain, Portugal and Ireland, the jury’s out for them...”

He added: “We are rolling up our sleeves and doing everything possible to protect British families and firms.”

The bank funding scheme will allow high-street banks to temporarily “swap” their assets, such as their mortgage books, with the Bank of England in return for money they can loan to customers.

It is the latest attempt – following the cut in interest rates to record lows and the £325 billion quantitative easing scheme – to kick-start the British economy following the start of the financial crisis four years ago.

The scheme should also help British banks shield themselves from the impact of the eurozone crisis – as they will not have to rely on international finance markets to raise money, which is currently difficult.

Sir Mervyn said that the “euro area crisis” has created a “large black cloud of uncertainty hanging over our economy”.

He added that the “ugly picture” had created “formidable challenges” and that despite trillions of pounds being pumped globally into the economy over the past two years “we are back to where we were”.

Speculation mounted that the Spanish government will require a full-blown government bailout after the country’s borrowing rates rose above the psychologically-important rate of seven percent.

The country has already been offered a 100 billion euro “line of credit” to help Spanish banks by their European counterparts – but international investors do not believe this is sufficient.

This weekend, Greece will again hold elections and there are fears that parties refusing to support austerity plans will win the balance of power – which could lead to the country being forced out of the euro.

World leaders will meet for the G20 summit in Mexico next week when Angela Merkel, the German Chancellor, and other European leaders will be under intense pressure to solve the ongoing crisis in the single currency.

Mr Osborne reiterated warnings that Greece may have to leave the euro before the economic chaos can end.

“The political paradox Europe faces right now is this: some or all of these things are needed for the existing countries in the eurozone to make their currency work, but it may take Greek exit to make it happen,” the Chancellor said. “That is a decision for the eurozone and the Greek people. One thing is for sure: if exit is the chosen route then the eurozone must have a very good plan in place to prevent contagion.

“The worst case for everyone would be exit without a sufficiently ambitious response. But carrying on with the current uncertainty and instability is not much better. A time for decisions has come.”

Also appearing at the Lord Mayor’s banquet for bankers, Sir Mervyn also set out the damaging impact of the ongoing crisis.

“The euro-area crisis has had more dramatic moments, in which the ultimate resolution seems to be at hand only to be confounded by subsequent events, than there are episodes in The Killing,” the Bank Governor said, referring to the Danish crime drama.

“The effect of the euro-area crisis has been to create a large black cloud of uncertainty hanging over not only the euro area but our economy too, and indeed the world economy as a whole…The black cloud has dampened animal spirits so that businesses and households are battening down the hatches to prepare for the storms ahead. The result is that lower spending leads to lower incomes and a self-reinforcing weaker picture for growth.”

However, Sir Mervyn echoed assurances from the Chancellor that the situation would improve with Government action.

He added: “Leaders of the G20 will next week confront formidable challenges. In the United Kingdom, we can and will get through this. But it would be naïve to pretend that any of us can know when the storms from overseas will have passed over our shores and the economic skies begin to brighten.”

The Treasury and Bank of England unveiled plans for two different schemes to help provide funding for banks.

The “funding for lending scheme” will “provide funding for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending”. Although backed by the Treasury, the scheme will be run by the Bank of England and will not therefore add to Government borrowing.

Ministers hope that the scheme will lead to a cut in the cost of mortgage borrowing. Over the past six months, two-year fixed mortgage rates have risen from 3.22 percent to 3.66 percent. Many banks have also increased their standard mortgage rates.

It is understood that the bank funding scheme will be introduced rather than increasing again the size of the quantitative easing programme, as some economists have recommended.

The scheme was first discussed at the quad of senior ministers – David Cameron, Nick Clegg, Danny Alexander and Mr Osborne – about a month ago. The decision to only announce the programme may spark allegations that the Government was seeking to overshadow the Prime Minister’s appearance at the Leveson Inquiry.