Europe was caught unawares when the collapse of a little-known segment of the US mortgage market started to dry up credit at home. The ensuing crisis – dubbed the credit-crunch – eventually spread from the financial sector to businesses and households, with devastating effects on the lives of citizens across the continent.

In the European Union, the first real signs of a crisis came in August 2007, when French investment bank BNP Paribas halted withdrawals from its funds on grounds that it was unable to fairly value its holdings. The European Central Bank responded promptly, pumping €95 billion into the banking market to improve liquidity. It was the first of a series of large-scale cash injections aimed at preventing banks from seizing up.

By the end of 2008, the economic outlook for the EU as a whole had darkened considerably. In November 2008, Eurostat figures revealed that the eurozone and the EU had entered recession - defined as two consecutive quarters of economic contraction - in the third quarter of 2008.

At the end of October 2008, the European Commission drafted a detailed framework entitled 'From financial crisis to recovery: A European framework for action' that would form the backbone of the EU's response to the crisis. The framework set the scene for an overhaul of the bloc's financial infrastructure, the co-ordination of stimulus efforts and the orchestration of international action.

In May 2009, EU lawmakers approved a regulation aimed at reducing blatant conflicts of interest in the rating process and increasing transparency on the market. Firms will now be forced to register with the Committee of European Securities and Regulators. The regulation enters into force in 2010.

The Euro
In 2009, the euro celebrated its tenth birthday in impressive shape. Having succeeded in holding its own during a period of severe market turmoil, it seemed that it had finally proven itself as a solid reserve currency, second only to the US dollar.

By mid-2010, however, the situation had changed. Exposure of eurozone debt problems provoked a sudden loss of confidence among international investors, sending the single currency plunging. The euro was suddenly faced with its biggest test yet.

German chancellor Angela Merkel summed up the situation in May 2010. “The euro is in danger … If the euro fails, then Europe fails,” she said, facing German lawmakers voting on the country’s €150 billion contribution to an unprecedented eurozone rescue package for struggling member states.

The debt crisis began in Greece, which had been spending profligately ahead of its elections in 2009. Eurozone countries and the International Monetary Fund responded by setting up an emergency loan package of €110bn to prevent the crisis from spilling over into other debt-stricken states, namely Portugal, Spain and Italy.

The challenge now for heavily indebted eurozone countries is to reduce their budget deficits, while adopting painful structural reforms. Greece has pledged to slash its budget deficit by more than 10 percentage points of GDP by 2014. Spain has pledged to cut last year’s deficit of 11.2% by slashing civil servants pay and reducing public investments. Portugal, which ran a deficit of 9.4% last year, has promised to delay plans to build a new airport.