even greater expansion in the us. in effect, the money market ceased to exist and the central bank took over its intermediation role. this emergency intervention contributed to a broad - based improvement in financial markets and a return to a more normal functioning of the money market. according to the most recent figures, the eurosystem ’ s balance sheet has already shrunk by 11 % from its peak in december 2008, while in the us it has remained stable. overall, central banks appear to have successfully performed their function as “ lender - of - last - resort ”. 1. 2 government policy response turning to the government policy response, this took three forms : ( i ) the fiscal stimulus, ( ii ) asset support and ( iii ) capital injections and guarantees. in october 2008 the intensification of the financial crisis began to affect the real economy and the need for a fiscal stimulus became apparent. in april 2009 the g20 summit in london signed a global plan for recovery and reform. although justified by the extent of the crisis and varied in extent across countries, this fiscal stimulus caused a substantial deterioration of public deficits and debt - to - gdp ratios. in addition to asset support, governments also intervened on the liabilities side of bank balance sheets, with direct capital injections and with state guarantees. since these measures are the subject of tonight ’ s conference, i will discuss them in more detail in the second part of my speech. for now, let me just recall that so far euro area governments have committed 26 % of gdp to supporting the financial sector ( although the sum actually drawn is only about 10 % of gdp ). this support was necessary, not for the banks ’ sake, but for the sake of the central role they play in the market economy. this is particularly true in the euro area, where banks are firms ’ main source of external funding, as opposed to other economies whose financial system is sometimes considered more “ market based ”. these differences across economies also determined different policy responses. the us and the uk initially focussed on asset support that was intended to return markets to proper functioning. eventually, they turned to their second line of defence, with direct capital injections to support the banks. in the euro area, this order was reversed, with authorities more focussed on the banking sector and turning to asset support as a second line of defence. 2. preparing for the future having described the recent policy response to the crisis, i turn now to the challenges that

remain for the future. i will divide my remarks in three parts. first, the immediate challenge is to implement exit strategies from the current extraordinary monetary and fiscal measures. second, a longer term challenge is to design and implement financial reform that effectively mitigates systemic risk. finally, i will discuss some new ideas advanced within this process of reform. 2. 1 immediate challenge : monetary and fiscal exit strategies first, let me consider the exit strategy from current extraordinary monetary measures. as i mentioned before, there are signs of substantial improvement both in financial markets and in the real economy. these suggest that the eurosystem extraordinary liquidity measures are not all needed to the same extent as in the past. however, unwinding of enhanced credit support must be both timely and gradual. it must be timely because there are risks associated with acting either too early or too late and it must be gradual because the situation is only improving progressively. the process of withdrawal is facilitated by the fact that many of the non - standard measures were designed to phase out naturally over time unless renewed by explicit policy decisions. for other measures, the situation has improved sufficiently for governing council to initiate the gradual process of withdrawal. the cornerstone of the exit strategy is the ecb primary objective of price stability in the medium term. this has guided the introduction of enhanced credit support and will govern the process of withdrawal. as with the monetary policy strategy, the exit strategy cannot precommit governing council to a given timing or sequence of actions. these must be decided with reference to changing economic and financial circumstances. now i wish to briefly address the exit strategy from the current fiscal stimulus. in addition to government measures supporting the financial sector, the extraordinary fiscal stimulus and the so - called automatic stabilisers have substantially deteriorated public finances during the current economic crisis. according to autumn 2009 forecast of the european commission, the deficit ratio in the euro area should reach 6. 9 % of gdp in 2010, while government debt is expected to reach 84 % of gdp in 2010. these significant fiscal imbalances undermine public confidence in the sustainability of public finances, which may place an additional burden on monetary policy in maintaining price stability. as stressed by the ecb governing council, national governments must abide with the ecofin council agreement to communicate timely, ambitious and credible fiscal exit strategies as soon as possible. the fiscal consolidation process should be transparent and should be guided by the rules of the stability and growth pact ( sgp ). current government commitments to start consolidation in