would normally be associated with a further contraction in loans to firms until at least early 2010. having said this, we will of course continue to monitor the developments in credit very closely in the period ahead, especially with a view to assessing to what extent supply - side constraints have the potential to limit the availability of credit. fiscal policy response to the crisis let me now move on to the fiscal policy response to the crisis. fiscal policies have played an important role in containing the adverse impact of the financial and economic crisis. euro area governments have demonstrated their ability to take rapid and coordinated steps both to support the financial system and to stimulate economic activity. government support for the banking sector represents a key element in the stabilisation of the whole financial system and the prevention of a further detrimental impact on the real economy. the measures adopted in response to the financial crisis consist of various types of financial assistance, including government guarantees for interbank lending, recapitalisation of financial institutions, increased coverage of retail deposit insurance and asset relief schemes. as well as addressing the sources of the crisis by supporting systemically important financial institutions, fiscal policies have provided extensive stimulus to aggregate demand. as a first line of defence, a significant fiscal impulse has been, and continues to be, delivered via automatic stabilisers, which are relatively strong in the euro area. at the same time, european governments have agreed to adopt expansionary fiscal measures in order to mitigate the effects of the economic downturn. the past few decades have been characterised by a considerable degree of scepticism towards the effectiveness of fiscal policies that go beyond the operation of automatic stabilisers. in some respects, recent calls from academics and policy - makers alike for fiscal activism represent a shift in this paradigm. this has also led to a re - emergence of old disputes between academic macroeconomists. it must be stressed, however, that the government measures adopted in response to the economic crisis carry considerable fiscal costs. the effectiveness of fiscal stimuli crucially depends on the expectations and reactions of economic agents. in this context, the perception of the measures as being temporary and trust in the sustainability of fiscal policies are crucial. so far, fiscal activism seems to have been reasonably well coordinated, timely and targeted. but the challenge of ensuring that the measures are temporary remains. the determination of euro area governments to avoid further fiscal stimuli is welcome. however, the current support measures cannot be sustained forever. timely and credible exit strategies for withdrawing the existing fiscal stimuli must be

##able stimulus measures. exit strategies may reduce market concerns about fiscal sustainability, and they may help to limit ricardian behaviour on the part of consumers, which could otherwise offset the impact of the fiscal stimulus. third, recent calls for a persistently greater role for government owing to failures in market systems must be rejected. historical experience shows that the market principle remains by far the best basis for an economic system, although we know that markets need rules and that the existing regulatory and supervisory framework has to be enhanced. the role of government should be scaled down after the crisis. no matter how serious the current crisis is, governments should ultimately cease to perform non - government tasks and the private sector should step in again. fourth, fiscal positions in most euro area countries represents a challenge for the stability and growth pact. any weakening of the peer pressure mechanism on which the fiscal framework rests must be avoided. full compliance with the treaty and the stability and growth pact is necessary in order to preserve confidence in the whole framework and contribute to the credibility of fiscal exit strategies in individual countries. fifth, the fiscal costs of crisis measures are expected to be considerable. government support for the financial sector gives rise to government debt and extensive contingent liabilities owing to government guarantees. the effects of automatic stabilisers and discretionary fiscal stimuli lead to a sharp deterioration in fiscal balances. all these factors, together with the expected adverse fiscal impact of population ageing, pose considerable risks to fiscal sustainability. it appears unlikely that countries will be able to rely on strong gdp growth to reduce their debt burdens. in this respect, unwinding fiscal stimuli, while necessary, is clearly insufficient to restore sustainable public finances. the structural adjustment of fiscal policies to the new economic environment will be needed. moreover, potential costs stemming from guarantees provided to the banking sector should be taken into account. finally, the phasing - out of most non - standard monetary policy measures is highly predictable and withdrawal will be communicated in due time. the same level of transparency should apply to fiscal policies. governments should provide a clear and credible medium - term timetable for fiscal exit strategies in order to help maintain a predictable environment, both for economic agents and for the conduct of monetary policy. general principles for fiscal exit strategies based on these considerations, governments should develop and communicate ambitious and realistic fiscal exit and consolidation strategies as soon as possible. structural adjustment will have to be implemented in order to reduce high debt ratios and return public finances to a sustainable path. the timing, pace and