The EU economy is in a serious downturn as the protracted sovereign debt crisis has lowered confidence, against the background of underlying economic, financial and fiscal weaknesses and imbalances. The economy will contract in the short run, but longer-term growth prospects are also dim. The origins of the crisis lie in inadequate financial oversight, insufficiently prudent and disciplined fiscal policy, and weaknesses in structural policies during the upswing of the credit cycle that gave rise to serious imbalances. Weaknesses in the design of regulatory, labour market and a range of other policies have impaired growth and labour market performance, while hindering necessary economic adjustments.