2011's Major Events for the Euro Zone

At the start of 2011, the euro zone was already in the throes of a debt crisis after Greece and Ireland sought bailouts from the European Union and the International Monetary Fund in 2010, and credit rating agencies downgraded several peripheral European countries, including Spain and Portugal.

Worse was yet to come, as the eurozone crisis essentially determined the direction of global stock markets. Italy and Spain came to the fore as the newest and so far, largest EU economies to suffer from soaring borrowing costs.

Numerous summits, fresh bailouts and a plethora of austerity measures brought little relief to the euro zone or global markets. In September, President Barack Obama made the stark assertion that the debt crisis in Europe was “scaring the world.”

Portugal, Ireland, Italy, Greece and Spain are ending 2011 with entirely new political administrations that must implement austerity measures in order to balance their books.

What were the big decisions made in relation to the crisis in 2011? Which of the many summits should we remember? Who will be the major players in 2012? Click ahead to find out.

By Antonya Allen and Bianca Schlotterbeck
Posted 28 December 2011

The year began on a positive note when Estonia became the first former Soviet state to join the single currency despite the deepening crisis in the periphery.

Many questioned why Estonia would choose to join at time when the debt crisis affecting Greece appeared to be spreading to Spain, Ireland and Portugal and the euro had fallen 6.5 percent against the dollar during 2010. An anti-euro campaign inside Estonia described it in a statement as “getting the last ticket for the Titanic."

However, joining the euro was viewed as a positive development for Estonia, a small economy that had seen the crisis of 2009 cut 14 percent off its gross domestic product. The leadership viewed monetary union as way to entice investors, through removing fears of devaluation and driving further integration with the West.

German Chancellor Angela Merkel and French President Nicolas Sarkozy had both reiterated their support for the single currency in their New Year’s addresses, with Sarkozy stating: “the end of the euro would be the end of Europe.”

Violence broke out during a protest called by Greece’s two largest labor unions against government austerity measures. Up to 30,000 Greeks went on strike, paralyzing public transportation, canceling flights, closing business and many government institutions, including schools and hospitals.

In the center of Athens, a protest by leftists and civil servants outside parliament in Syntagma Square turned violent as several hundred youths hurled projectiles, firecrackers and firebombs at police, who responded with volleys of tear gas and stun grenades.

An Agence France-Presse image aired by CNBC of a policeman in flames after being hit by a petrol bomb graphically captured the depth of the violence.

In an election dominated by fear and anger over the financial implosion that led to an 85 billion euro bailout by the European Union and the International Monetary Fund, Ireland’s once most successful political party, Fianna Fail — led by Brian Cowen (pictured here), suffered a historic and devastating defeat; with its support plummeting to only 15 percent, Cowen's party came in fourth.

Fine Gael leader Enda Kenny replaced Cowen as prime minister, with a mandate to return to Europe and re-negotiate the interest rates charged on loans to Ireland.

On April 6, Portugal became the third country to request financial aid from the IMF and EU following a rise in the bond yields to unsustainable levels. On May 16, the EU and IMF agreed a 78 billion euro ($91 billion) bailout for the country.

In return, Portugal promised to slash its budget deficit from 9.1 percent of GDP to 5 percent and then to 3 percent by 2013. Private bondholders were asked to maintain their exposure to Portuguese debt rather than sell.

Markets reacted favorably, with the euro rallying and Portuguese bond prices recovering some ground in early trading; shares on the country’s stock market moved higher. The yield on its 10-year debt declined to 10.06 percent. The euro rose to $1.4854 against the dollar and traded above 90p against the pound.

This was followed by elections on June 5 with the victory of Pedro Passos Coelho's center-right Social Democratic Party ending a period of political uncertainty that started with the collapse of the Socialist government in March.

On June 13, Standard & Poor’s, the largest of the three ratings agencies, downgraded Greek debt to make it the lowest-rated country in the world. Cutting Greece’s rating to CCC from B with a negative outlook left Greece with a lower rating than countries like Pakistan or Ecuador.

The downgrade came at the worst time for Greece’s socialist government led by Prime Minister George Papandreou, as it tried to push an unpopular austerity package through parliament to ensure continued funding of the Greek bailout plan.

After failing to meet fiscal targets under the first bailout deal, the government, which was trailing the conservative opposition in opinion polls, decided to raise taxes and slash spending more than planned to avoid default.

The prospect of more austerity and rising unemployment fueled 20 days of protests in central Athens, challenging the government as its new package headed for a parliamentary vote.

Greece’s parliament approved deeply unpopular austerity measuresdespite increased violence on the streets of Athens. Lawmakers approved a five-year package of spending cuts, tax increases and state asset sales by a comfortable margin, handing a significant victory to embattled Prime Minister George Papandreou.

In his speech before the vote, Papandreou had stated that there was “no plan B” to avert the country’s collapse. The EU and IMF had insisted that Greece pass both a 28 billion euro ($40.3 billion) austerity package, as well as specific legislation to begin implementing the plan or face the prospect of not receiving the next 12 billion euro ($17.3 billion) tranche of Greece's bailout program.

Outside the parliament building, fierce clashes raged between stone-throwing masked youths and riot police, who fired clouds of teargas from behind steel crash barriers to keep the rioters at bay. Syntagma Square resembled a battle zone at times.

In a strong signal that European leaders were failing to get ahead of the crisis, ratings agency Moody’s downgraded the Portuguese government's debt to junk status, just two months after the country had received a 78 billion euro bailout and elected a new prime minister, Pedro Passos Coelho (pictured here), to deal with the crisis.

Moody’s said that it was increasingly unlikely that Portugal would be able to borrow money from capital markets in 2013 as planned. As a result the country would require more financial aid on top of the bailout it had already received, with private banks being likely to have to take some losses.

It stated that Portugal faced huge challenges in reducing spending and eliminating tax evasion, achieving economic growth and supporting the banking system. Moody’s did not exclude a further rating cut.

After weeks of uncertainty and jittery markets, European leaders agreed on a second rescue plan for Greece. German Chancellor Angela Merkel confirmed the 109 billion euro aid package. The package contained provisions to reduce Greece’s borrowing costs, including getting banks to swap existing bonds for new bonds with lower coupon rates and longer maturities.

Increased powers were given to the bailout fund, the European Financial Stability Facility, by allowing it to buy government bonds on the secondary market and to help recapitalize banks where necessary, even to shore up countries that had not requested a rescue — all proposals Germany had rejected months before.

Portugal and Ireland also won reprieves on the interest rates they had to pay on their loans, a recognition that the mountain of debt hanging over them threatened to stifle any prospect of recovery.

Markets reacted positively to the news, which came after days of turbulence in which bond yields spiked for Italy and Spain, raising fears that the euro zone debt crisis would spread to these much bigger countries, potentially setting off a global financial crisis

The European Central Bank bought 22 billion euros in Spanish and Italian government bonds in a single week in August, marking a profligate end to a 19-week hiatus for the central bank, which had not intervened in bond markets since April.

After receiving assurances from Rome and Madrid that they were serious about driving down their respective national deficits, the ECB bought bonds to ease Spanish and Italian yields, which had risen above 6 percent. The ECB intervention — the largest since May 2010 when 16.5 billion euros of Greek government bonds were purchased — drove yields down to around 5 percent, but also increased divisions with the ECB's Governing Council.

Four members of the council, led by senior economist Juergen Stark and fellow German Jens Weidmann opposed the purchase of Spanish and Italian bonds, while the Financial Times Deutschland rued the end of a period of German economic influence on the Central Bank, claiming the purchase of bonds by the central bank marked "the end of the ECB as we know it."

European indices rose on the news after a rough overnight session in Asia, where shares tumbled in response to a downgrade of the United States' credit rating by Standard & Poor's.

Tens of thousands of Italians took to the streets in September to protest a 45 billion euro package of austerity measures. The general strike, organized by Italy's largest trade union federation, the Italian General Confederation of Labor, disrupted transportation services, schools, hospitals and other government services.

The strike followed a number of revisions to the original proposals announced on Aug. 12, and workers protested over plans to increase the state retirement age for women to 65, a 1 percent rise in sales tax from 20 percent and a 2 percent tax on cash transfers by immigrant workers to their home countries.

As market pressure on Italian bonds intensified, Prime Minister Silvio Berlusconi's center-right government yielded to demands to strengthen measures intended to balance the budget by 2013.

The labor confederation claimed government workers were hardest hit by the austerity plans, and an initial proposal to impose a 3 percent "supertax" on Italians earning over 90,000 euros was dropped and the threshold increased to 300,000 after wealthy Italians objected.

ECB executive board member Juergen Stark (pictured on the left with former ECB President Jean-Claude Trichet), resigned from his post on Sept. 9 "for personal reasons," which the media translated as vocal opposition to the ECB's policy of buying bonds from heavily indebted euro zone nations.

Stark became the second German member of the central bank's executive board to resign in 2011, after former Bundesbank chief Axel Weber quit in February over the bank's bond-buying program.

Weber's resignation effectively ruled him out of the race to succeed Trichet at the ECB helm. Stark's shock announcement in September exposed the extent of the German opposition to the direction the bank was taking.

Stark's departure — three years before his term was due to expire — sent European stock markets tumbling, with the DAX falling by 4.04 percent on the day he announced his departure.

On Dec. 18, German magazine Wirtschafts Woche featured an interview with Stark in which he admitted the ECB's bond buying program was the reason he quit.

Global markets were temporarily boosted in October when euro zone leaders agreed a plan to reduce the Greek deficit and struck a deal with private bondholders that they would take a 50 percent haircut on Greek government debt.

Austerity measures designed to wipe 100 billion euros off the country's debt included a range of tax hikes, public sector reforms and cuts to benefits and pensions. As well as action on Greece, leaders agreed to boost the European Financial Stability Facility (EFSF) bailout fund's lending capacity to around $1.4 trillion.

German Chancellor Angela Merkel, French President Nicolas Sarkozy and IMF chief Christine Lagarde helped broker the deal in a summit in Brussels, which investors hoped would bring the elusive "big bazooka" solution to the crisis.

After talks through the night, French President Nicolas Sarkozy told reporters: "We have reached an agreement which I believe lets us give a credible and overall response to the Greek crisis." He added, "The results will be a huge source of relief worldwide."

The relief was clear when European stock markets jumped to a 12-week high when they opened on Oct. 27 and Wall Street indices surged by around 3 percent on news of a three pronged plan to resolve the crisis.

At the end of a week of gains for global stock markets, Greek Prime Minister George Papandreou announced on Halloween that he would put the latest round of austerity measures to a public vote, stunning global markets, European leaders and his PASOK party colleagues.

Referring to the referendum as "a supreme act of democracy and of patriotism," Papandreou essentially offered the Greek people a say over the deal reached by EU leaders a week earlier, when private banks and insurers offered to take a 50 percent haircut on their Greek bonds while the Greek administration agreed to implement its toughest austerity measures yet.

Global indices plunged in response to the news; on Wall Street the Dow Jones ended the day 2.5 percent lower, the CAC in Paris fell by 5 percent and Germany's DAX was down 5.4 percent.

Bank shares took a battering, with Societe Generale recording the biggest share drop at 16.2 percent. German lenders Commerzbank and Deutsche Bank and UK-based Barclays and RBS saw their shares fall by between 8 and 10 percent.

Just four days after George Papandreou announced that Greece would hold a referendum on austerity measures agreed with the EU and IMF, the Greek prime minister reversed his decision.

Papandreou told his PASOK colleagues on Nov. 3 that there was no need to put the government's austerity measures to a public vote as Antonis Samaras' opposition New Democracy party had backed the terms of a 130 billion euro EU-ECB-IMF bailout.

"If we have consensus, then we don't need a referendum," Papandreou told his party colleagues, who had become increasingly exasperated with their leader. Papandreou had been summoned to Cannes by French President Nicolas Sarkozy and German Chancellor Angela Merkel on Nov. 2 ahead of a G20 meeting where both were said to have expressed their disappointment in Papandreou's move for a plebiscite on the debt deal.

The embattled Greek prime minister also faced significant opposition to the deal within Greece. Five PASOK colleagues had rebelled, ending his slim parliamentary majority of just three seats.

Papandreou's government narrowly won a confidence vote on Nov. 5, but failure to reach an agreement with opposition parties over the nature of an interim government and Papandreou's role within it marked the end of his reign. He formally resigned on Nov. 10.

Two weeks in November saw the departues of Italian Prime Minister Silvio Berlusconi, Greek Prime Minister George Papandreou and a heavy defeat for Jose Luis Rodriquez Zapatero's Spanish Socialist government in a general election by the conservative People's Party of Mariano Rajoy.

With the exception of Spain, democracy seemed to be on hold in the most troubled countries of the euro zone as Mario Monti succeeded Berlusconi without an election and former ECB vice president Lucas Papademos was named as prime minister of Greece. The ascent of technocrats in two of Europe's most turbulent economies came without so much as a vote cast.

Italy's borrowing costs hit a record high on Nov. 8 and Berlusconi, for so long regarded as one of the world's most resilient leaders, promised to resign once new budget agreements were passed. Five days later, the ebullient Italian resigned, with commentators anticipating a return to the political fold at some point in the future.

He was replaced on Nov. 16 by Monti, who would head up a technocratic government tasked with driving down Italy's deficit and unsustainable borrowing costs. Monti, like his recently installed Greek counterpart, is an American-educated economist, academic and a vociferous supporter of the European project.

Changes to the political administrations of Greece, Italy and Spain followed election defeats for incumbent prime ministers in Ireland and Portugal earlier in the year, ensuring that all of the so-called PIIGS will end 2011 with new leaders.

French President Nicolas Sarkozy and German Chancellor Angela Merkel met in Paris to agree on a series of reforms designed to tackle the European sovereign debt crisis ahead of a highly anticipated summit on Dec. 9.

The leaders of the euro zone's two largest economies set aside a number of differences to reach a pact laying out budgetary rules for zone members and automatic sanctions for countries that break them.

The plans, designed to bring about greater fiscal unity within the zone, included a requirement for all member states to present their budgets to the EU and consequences for countries that breach the rule that national deficits must not exceed 3 percent of GDP.

At a news conference, Sarkozy told reporters the aim was for all 27 members of the EU to back a treaty change, but if any country exercised a veto they could apply the pact to the 17 euro zone members alone.

The French and German governments remained at odds over the ECB's issuance of joint Eurobonds, and Merkel made it clear after the meeting that the German position had not changed. "We reject the idea of Eurobonds," she said.

Standard & Poor's responded to the Franco-German fiscal pact by placing 15 eurozone countries — including France and Germany — on credit watch negative, threatening an imminent downgrade. S&P said "systemic stresses" were putting downward pressure the credit worthiness of the euro zone and warned of the need for a decisive plan at the EU summit on Dec. 9.

European Union leaders met in Brussels for the final summit at the end of a tumultuous year for the euro zone. Franco-German plans for greater fiscal integration were approved by all 17 euro zone members as well as the majority of EU countries outside of the common currency area, but British Prime Minister David Cameron (pictured here) exercised his veto to block an EU-wide treaty change.

After failing to win the concessions he demanded for the City of London financial district in discussions that lasted through the night, Cameron isolated himself by forcing a voluntary agreement instead. At a news conference, he told reporters that Britain will "never join the euro." French President Nicolas Sarkozy could hardly contain his exasperation with the British position.

He said Britain had ensured "there are now clearly two Europes", while also talking up the agreement, saying: "This is a summit that will go down in history."

But critics said the summit achieved little of significance. Crucially, there was no agreement on the role the ECB might play in efforts to resolve the debt crisis and ECB President Mario Draghi seemed to kill off any hopes of a "big bazooka" solution to the crisis when he stopped short of promising more intervention in bond markets and stressed that the central bank would stick to its original mandate to control price stability.

European market reaction to the news was relatively muted when they opened in Europe on Dec. 9, with the FTSE falling slightly, while the DAX and the CAC were higher.

On Dec. 21, the European Central Bank moved to prevent a credit crunch in the European banking sector by offering cheap three-year loans to continental lenders exposed to eurozone sovereign debt and viewed as risky by international money markets.

The new ECB president Mario Draghi (pictured here) had urged banks to forget the stigma attached to taking loans from the central bank and actively encouraged lenders to take advantage of its ultra-cheap lending operation offering record interest rates of 1 percent.

Massive interest from over 500 banks meant 489 billion euros was borrowed ($643 billion), exceeding the ECB’s initial prediction of around 450 billion euros. The central bank did not release the identity of the banks that had taken out loans, but it is believed some of the biggest borrowers were banks based in peripheral European countries like Spain and Italy.

French President Nicolas Sarkozy urged banks to invest the money in euro zone bonds, but with a large proportion of bank and government debt due to be refinanced in the first quarter of 2012, the loans could well be used to boost battered balance sheets.

European stock markets and the euro rose initially, but by the end of the day shares and the common currency had fallen. Spanish and Italian bond yields rose as doubts grew over whether banks would invest money in sovereign debt, and the banking sector, which had been the best performing in Europe after the tender, pared gains by the close of trade.

Analysts welcomed the ECB operation, but market reaction suggested the so-called "big bazooka" solution to the crisis had eluded European leaders and the institutions of the EU, and an early Christmas present for Europe’s banks proved not to be a panacea to the crisis.