The Year in Review 2012: Crisis in the eurozone

Within hours of being sworn into office in mid-May, French President Francois Hollande was headed to Berlin to meet with German Chancellor Angela Merkel.

Symbolically, to the world at large, this all but immediate meeting was a gesture to show continued unity between Germany and France, which were leading the debate on how to steer the eurozone out of its deep financial crisis. This was Hollande's chance to step into the shoes of former French president Nicolas Sarkozy and fit himself into the dynamic Merkel-Sarkozy team that had defined Europe's response to the crisis since 2009 when it was revealed that Greece was nearing default.

There was just one hitch. In mid-air, Hollande's plane was struck by lightning and he had to turn back. In Paris, he found another plane and made it to his appointment with Merkel, but the implication was clear: 2012 would be a very different year for Europe regarding its response to the currency crisis, which is frequently cited as the No. 1 reason the global economic recovery has stalled.

Leadership changes were a big part of the mix as frustrated voters turned again and again to technocrats to guide them through the financial mess. In Greece, Harvard-educated economist Antonis Samaras took over from George Papandreou in June after two tense elections. In Italy, in November 2011, Mario Monti -- a Yale-educated economist, this time -- took over from Silvio Berlusconi, a billionaire. In Spain, career politician Mario Rajoy took the reins from Jose Luis Rodriquez Zapatero.

Leader of the New Democracy conservative party Antonis Samaras, right, shakes hands with head of Greece's radical left-wing Syriza party Alexis Tsipras, at a meeting in the Greek parliament, in Athens, on Monday, June 18, 2012. Samaras, who came first in Sunday's national election, said he will meet with leaders of all parties "that believe in Greece's European orientation and the euro" this afternoon in order to form a new coalition government. UPI/Petros Giannakouris/Pool

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In another critical personnel switch Mario Draghi, former governor of the Bank of Italy took over the European Central Bank from Jean-Claude Trichet, setting the stage for the region's bank to play a central role in monetary policy.

Curiously, new players in the mix could have meant a long adjustment period, but the year in Europe was defined by a sense that the inevitable was upon them: It was time for greater integration of the eurozone on major fronts including bank regulation, national budgeting and labor laws.

The power center was also shifting. The Merkel-Sarkozy alliance had been an effective, but elitist combination in 2010 and 2011, although one defined by stop and start enthusiasm that appeared to favor hesitating more often than moving forward.

In 2012, new leadership gave Spain and Italy a chance to assert themselves and Hollande through the year proved a less reliable a team player for Merkel than his predecessor. Hollande was pushing for economic growth while Merkel was clamping down on fiscal discipline.

The mid-year point provided some clues as to where the year was headed. After a mini-eurozone summit in late June attended by Merkel, Holland, Rajoy and Monti, the four leaders reiterated pledges of unity, but spelled out different approaches.

Merkel, called "La Signora No," in Italian newspapers and "Frau Nein" elsewhere repeated a rejection of a euro-bond and said in a speech before the German Parliament: "Control and liability must not be disproportionate to one another. Common sharing of debt can only take place when sufficient control has been established."

French President Francois Hollande (L) bumps into German Chancellor Angela Merkel as NATO heads of state walk off the stage following a group photo before a dinner at Soldier Field during the 2012 NATO Summit on May 20, 2012 in Chicago. UPI/Brian Kersey

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Spain and Italy saw it differently. Their borrowing costs were rising to unsustainable levels and help was needed on the economic front just as surely as it was needed to shore up Spanish banks.

Before a euro-summit scheduled to begin June 28, Monti said the region needed a master plan. Otherwise, "a large part of Europe would find itself having to continue to put up with very high interest rates that would impact on the states and also indirectly on firms."

What Spain and Italy had going for themselves was, simply put, they were not Greece. Their financial houses were not in disarray; Spain, in fact, had kept its debt load to an enviable level despite being slammed by a burst housing bubble that hit the country particularly hard, pushing unemployment to 24 percent.

That gave Rajoy some leverage and some time to think. As he waited to declare a fiscal emergency and ask for help, the rules of the game were changing. Mario Draghi at the ECB said the bank would do "whatever it takes to support the euro," and that phrase alone spurred a huge jump in equity markets and drove down benchmark yields in Rome and Madrid.

There would be a price to pay for the changes, however. The ECB eventually laid out a plan to buy short-term bonds from countries struggling to get out of debt, but attached a Germanic caveat, which was that countries must first apply for help from the European Stability Mechanism and follow the international guidelines for fiscal discipline.

For better or worse, that freed up the debate enough to move the argument to next level, which was a discussion on centralized banking regulation and greater group control over national budgets.

By December's eurozone summit, the pieces were in place for European Union Chairman Herman Van Rompuy to sketch out a plan for deeper eurozone integration, which won approval from the attending leaders.

"We agreed to a road map for the future development of the currency union," Merkel said.

Among the critical developments, the ECB was given the task of regulating the largest 100 to 200 banks in Europe while national governments will handle oversight of smaller firms -- those with assets of less than $39 billion. But the writing is on the wall. The ECB was given permission to regulate smaller banks that were in trouble and this will guide each country accordingly. Individual nations by necessity will play follow the leader on bank controls with the ECB at the head of the line.

What didn't get done? There's the rub.

Two painful oversights in 2012: Greece is still floundering badly and leaders in Europe, in general, have managed a steady campaign on policy, but left economic issues to fend for themselves. Tighter regulations are around the corner. Centralized control is on the way. But Europe has proven to be a major drag on economic growth, holding back economies around the world.

That isn't likely to change quickly. The Organization for Economic Cooperation and Development in Paris predicts negative growth for the eurozone in 2012 and 2013 with a recovery to about 2 percent in 2014.

That means there's more pain ahead.

"The euro area crisis remains a serious threat to the world economy, despite recent measures that have dampened near-term pressures," the OECD said in November.