. global economic situation let me begin with the assessment of the global economic situation. the turmoil in financial markets, which was triggered by a systematic under - pricing of risk, particularly in the us subprime mortgage market, has now developed into a fully - fledged financial and economic crisis at global level. while the world economy continues to face a severe and synchronised downturn, recent international business confidence indicators suggest that the pace of the decline in economic activity is slowing down somewhat. most forecasters expect that the global economy is likely to recover in 2010, albeit at a gradual pace. the june 2009 eurosystem staff macroeconomic projections for the euro area, which have just been published, are in line with this overall assessment. they are based on the assumption that the global economy outside the euro area will contract by 1. 6 % this year grow and by 2. 1 % in 2010. nonetheless, the economic prospects remain fraught with uncertainty. compared with a few months ago, overall risks to global economic growth have become more balanced. a stronger positive confidence effect than expected triggered by the monetary and fiscal policy measures could lead to a more sustained recovery in global demand and in global trade, and a quicker normalisation of financial market and credit conditions. of course, if global policy actions fail to strike an appropriate balance between economic stimulus and longer - term sustainability, financial market conditions could turn unfavourable again. global inflation rates have continued to diminish rapidly. this is mainly due to lower commodity prices, weaker labour market conditions and greater global economic slack. risks to global inflation seem to be broadly balanced in the short to medium term. beyond that horizon, however, inflation risks depend on how efficiently the authorities withdraw the policy stimulus. b. euro area activity in line with global developments, economic activity in the euro area has also contracted sharply since the second half of 2008. the euro area economy has shrunk by about 4 % over the past two quarters, the worst decline since the start of economic and monetary union. for the current quarter, there is evidence that the economy has shrunk further, though at a slower pace. the economy is no longer in free fall ; we are seeing the first signs of stabilisation. indicators of consumer confidence and business sentiment have continued to improve somewhat. we are also seeing some encouraging signs of normalisation in financial markets. looking ahead, the euro area economy is likely to be very weak for the remainder of this year, before gradually recovering

risks to price stability. in particular, it helped to maintain a medium - term perspective. looking ahead, the fiscal and monetary authorities have an important role in sustaining the economic recovery. governments must devise and enact credible strategies to exit from the banking sector and to ensure that the discretionary policy measures adopted during the crisis will be reversed. their full compliance with the stability and growth pact is the best tool to solidly anchor market expectations. furthermore, the ecb ’ s commitment to maintaining price stability is the best contribution monetary policy can make to sustaining economic recovery and long - term economic growth. the ecb is well prepared to take appropriate action and also to exit from its non - standard monetary policy and liquidity management measures in a credible manner once the macroeconomic environment improves. most importantly, we will continue to deliver on what we are expected to deliver, which is to maintain price stability, and to provide an anchor of confidence in difficult times. references blanchard, o. and r. perotti ( 2002 ). " an empirical characterization of the dynamic effects of changes in government spending and taxes on output. " quarterly journal of economics 117 ( 4 ) : 1329 - 1368. international monetary fund, world economic outlook ( 2008 ). chapter 5 " fiscal policy as a countercyclical tool. " october perotti, r. ( 2002 ). " estimating the effects of fiscal policy in oecd countries. " ecb working paper no. 168.