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The euro crisis, explained

History of European integration explains why single currency is in current troubled state.

Germany carries a bigger stick when it comes to solving this crisis, not just because its economy is booming, but for historic reasons, according to Ian Stannard, currency analyst for BNP Paribas bank.

"The strength of the euro is inherited from the deutschmark," Stannard said. "The Bundesbank gave credibility to the European Central Bank."

One solution suggested for helping raise money to bail out the weaker economies is for the central bank to sell Europe-wide bonds. But the sale of euro-bonds is a no-no for the German government. German Finance Minister Wolfgang Schauble told German television earlier this week, “As long as we don’t have a common budgetary policy — and that was a decision made when setting up the euro — then we need to have different interest rates” payable on government bonds, Schaeuble said. “Because that’s the only way to bring member states round to sound policy. That can’t be abandoned.”

In other words, Ireland, Portugal and Greece can raise money by selling their own bonds, and if the interest they have to pay on them is murderous, tough. Germany's economic strength and probity is not going to underwrite Europe-wide bond issues.

This doesn't mean Europe's leaders won't come up with some way of addressing the crisis, if not solving it, said Stannard. "The EU has always been managed by a series of deals being brokered."

The solution being discussed at this week's summit involves rewriting a clause of the recently ratified Lisbon Treaty: “The member states whose currency is the euro may establish a stability mechanism to safeguard the stability of the euro area as a whole. The granting of financial assistance under the mechanism will be made subject to strict conditionality.”

That is pure European technocrat language. I think what it means is that bailouts will be decided on a case-by-case basis. Whether that keeps the bond markets at bay is open to question.

Over in Britain, there is a self-satisfied sense of "I told you so." Yesterday at Prime Minister's Question Time, David Cameron was asked by Mark Reckless, a member of his own Conservative Party, "The BBC reports that the German Finance Minister wants to set an interest rate to punish Ireland. Will the prime minister confirm that this country wants to help Ireland?"

The prime minister replied: "My right honorable friend the Chancellor of the Exchequer will be setting out the details of the loan on Second Reading of the Bill today, but I think that it is worth standing back and asking ourselves, 'Why is it that we are able to make a loan to Ireland? Why is it that people are asking us to do that?' It is because Britain’s economy is out of the danger zone and recovering." The reason for that, he implied was because Britain was in charge of its own economic policy.

Despite the more alarmist analyses that have been published, Stannard does not think the euro is in danger of collapsing. "The euro is going to continue. The political will is very strong to keep it going," he said. "There are still countries queuing up to join the euro."

And if you wonder why the political will is still there to maintain the single currency now is the time to answer the questions at the top. No one knows precisely but a good estimate is that about 70 million people died in World Wars I and II. No one has died in a European war since the euro went into circulation.