##s in economic activity that are preceded by problems in the banking sector tend to be longer in duration and, partly because of this, more severe than those caused by other factors. this is proving to be the case both here and abroad. since last september, deteriorating financial market conditions and intense strains on the financial sector led to sharp declines in economic sentiment internationally. trade and financial channels, meanwhile, transmitted the resulting weakness in demand across the globe. as a result, we have experienced one of the steepest and most synchronised global downturns for many decades, with economic activity contracting sharply in both the final quarter of 2008 and the first quarter of 2009. following a contraction of around 1½ per cent this year, the imf now expects global growth of 2½ per cent in 2010, somewhat higher than their previous projection of just under 2 per cent. nevertheless, by historical standards this will be a modest performance and, given the nature and scale of the crisis we have experienced, the recovery is likely to be gradual, extended and uneven across regions. the imf, meanwhile, see the risks to their growth outlook as still being tilted on the downside. the fact that some recovery may be in prospect over the next year or so primarily reflects the unprecedented response of policy - makers to the crisis. there has been an improvement in investor sentiment over the last number of months, with equity markets recovering somewhat, sovereign and financial credit default swap ( cds ) spreads narrowing and the unsecured money market showing tentative signs of improvement. however, financial markets remain quite fragile reflecting caution over the prospects of an early economic recovery. turning to the euro area, the eurosystem has responded to the crisis in several very significant ways. the governing council of the ecb has cut the main refinancing rate by a cumulative 325 basis points since last october bringing it to its lowest level on record at 1 per cent. this has had a very significant effect in lowering borrowing costs for households and firms across the region, including here in ireland. a range of innovative non - conventional policy measures have also been adopted, particularly in terms of liquidity provision. under the eurosystem ’ s revised operational framework including the full allotment policy, banks can access unlimited liquidity against suitable collateral at a fixed rate for up to 12 months. in addition, this month the eurosystem has started a programme that will see it purchase up to €60 billion of covered bonds issued by banks in the euro area

overwhelmed. this is exactly what we have seen during the recent crisis. the costs of the crisis were borne in large part by the citizens in the crisis countries, but also shifted in part to the european level through mutual guarantees. basically, the countries concerned resorted to a sort of implicit insurance that was not originally foreseen. this experience gives rise to two key questions : • first, how can member states better absorb external shocks – even without an independent exchange rate and without a national monetary policy? • second, how can risks be shared at european level without a transfer of risk occurring which distorts the incentives for the individual member states? a monetary union needs strong members... as for the first question, the euro area countries need economic structures which meet the requirements of a single currency. the crisis has made this abundantly clear. many countries are now on the right track. ireland, spain and portugal, for example, have implemented a series of reforms ; they have become more competitive and their economies are recovering. and yet, in some euro area countries, unemployment remains very high, especially among young people. in addition, many countries still have large public deficits and high levels of debt. so further reforms are necessary here. the same applies to goods markets and the general business environment. in many member states bureaucratic hurdles have to be overcome in order to start a business, and not only in the crisis countries. removing such administrative barriers is much bis central bankers ’ speeches less expensive than national recovery plans, and can contribute significantly to sustained growth and increasing prosperity. 2 it is all the more worrying that the oecd in its recent “ economic policy reforms ” report notes that particularly in the euro area countries the pace of reform is slowing. it would be disastrous if necessary reforms cannot be implemented or, if implemented, reforms were even to be withdrawn. that would slow down, or even totally impede, the necessary economic upswing. central banks would then come under pressure to counteract this by pursuing an exceptionally loose monetary policy. a stable monetary union rests on the shoulders of individual member states. sound economic and responsible fiscal policies at national level are an essential basis for a stable monetary union. against this background, the founders of the monetary union put in place a rulebook that seeks to ensure sound fiscal policy : the stability and growth pact. we all know that these rules were not particularly effective. they have therefore been strengthened since the crisis and complemented by a better control of macroeconomic