But when the appropriate time comes, there should be no concern about the ECB’s determination and ability to exit. As I said on behalf of the Governing Council, looking ahead, not all our liquidity measures will be needed to the same extent as in the past. Accordingly, we will make sure that the extraordinary liquidity measures taken are phased out in a timely and gradual fashion and that the liquidity provided is absorbed in order to counter effectively any threat to price stability over the medium to longer term. By so doing, we will continue to ensure a firm anchoring of medium-term inflation expectations. Such anchoring is indispensable to supporting sustainable growth and employment and contributing to financial stability. On the institutional side, the Governing Council has the unfettered capability to decide and institute appropriate policies whenever circumstances warrant. Fiscal authorities, too, need an exit strategy. Their response was instrumental in avoiding a collapse of the financial system. It helped to halt the sharp decline in economic activity and build general confidence. But that response also entailed significant fiscal costs. Only the additional fiscal burden that is associated with the workings of automatic stabilisers will reverse by design once economic conditions improve. Discretionary interventions will need discretionary action to unwind. In any case, the additional fiscal costs that governments have shouldered will be carried forward in terms of higher debt for years to come. This is why there is an increasingly pressing need for ambitious and realistic fiscal exit strategies and for fiscal consolidation.

First, it will be centred around the European System of Financial Supervisors. The establishment of this System will permit better coordination among national authorities responsible for financial regulation. If one lesson can be learnt from the crisis, it is that the reach of financial supervision and regulation needs to be extended to better monitor those financial institutions, including highly leveraged, which can arbitrage across national borders and across oversight jurisdictions. The European Systemic Risk Board (ESRB) will be the other dimension of the European approach to financial reform. This new body will provide early-warnings and issue recommendations that will help to prevent a renewed build-up of excessive risk in the financial system as a whole. The crisis has displayed the phase transition that risk can undergo almost overnight: a mutation from localised liquidity risk to a generalised solvency threat attacking the whole system of financial interconnections. The ESRB will have to oversee the likelihood and measure the severity of these reactions and instant transmissions. The ECB and the National Central Banks in the EU will fully contribute to this new institutional framework. Global governance The underlying approach to reforms should be holistic. The global proportions of the crisis call for a rethinking of the links between financial behaviour and macroeconomic policies, as they interact in a global scene. 4  BIS Review 150/2009  The G 20 has made a quantum leap in creating the new premier global economic group.