lucas papademos : the dual crisis – economic impact, policy response and exit strategy speech by mr lucas papademos, vice - president of the european central bank, at the highlevel panel debate on “ europe in the economic and financial crisis : how to bring back prosperity for everyone? ”, organised by the european people ’ s party, brussels, 4 may 2009. * i. * * introduction let me start by thanking the organisers for inviting me to this policy debate on how to overcome the current economic and financial crisis and bring back prosperity for everyone. this subject remains topical and challenging. lately, among the generally gloomy reporting on the state of the economy, we have observed some positive signs emanating from market developments and confidence indicators suggesting that the economy is stabilising. indeed, one indicator that has recently surged is the one measuring the use of pertinent metaphorical expressions : we hear of “ green shoots ” ; “ glimmers in the dark ” ; and, the more traditional, “ light at the end of the tunnel ”. some indices suggest that the pace of deterioration in the global and european economies is slowing, and equity markets seem to reflect expectations of improving prospects. but it will take some time before our economies fully recover and grow at a robust and sustained rate. the theme of this debate rightly emphasises two important issues that are relevant for public policy : first, the dual character of the current crisis, which is both financial and economic and, second, the need to also focus on the longer term. the actions of policy makers and market participants should not only aim at overcoming the current difficulties, but should also consider the strategy and measures that will ensure sustained prosperity and that crises such as the current one will not occur again. accordingly, in my remarks i will address three issues : • first, the evolving nature of the ongoing crisis and its potential total impact on the european economy ; • second, the rationale and the effectiveness of some of the measures being implemented to resolve the problems we are confronted with ; and • third, the need to implement reforms and adopt an appropriate exit strategy, from the extraordinary policy interventions, so as to improve the functioning and resilience of the financial system and achieve sustained economic growth in an environment of monetary and financial stability. ii. the evolving nature of the crisis and its economic impact the nature and scope of the crisis has evolved substantially since it erupted in the summer of 2007. initially and for a considerable period of

s flash estimate, real gdp in the euro area rose by 0. 3 %, quarter on quarter, in the last quarter of 2014, which was somewhat higher than previously expected. the latest economic data and, particularly, survey evidence available up to february point to some further improvements in economic activity at the beginning of this year. looking ahead, we expect the economic recovery to broaden and strengthen gradually. the low level of the price of oil should continue to support households ’ real disposable income and corporate profitability. domestic demand should also be further supported by our monetary policy measures leading to ongoing improvements in financial conditions, as well as by the progress made in fiscal consolidation and structural reforms. moreover, demand for euro area exports should benefit from improvements in price competitiveness and from the global recovery. however, the euro area recovery is likely to continue to be dampened by the necessary balance sheet adjustments in various sectors and the rather slow pace of implementation of structural reforms. this assessment is also broadly reflected in the march 2015 ecb staff macroeconomic projections for the euro area, which foresee annual real gdp increasing by 1. 5 % in 2015, 1. 9 % in 2016 and 2. 1 % in 2017. compared with the december 2014 eurosystem staff bis central bankers ’ speeches macroeconomic projections, the projections for real gdp growth in 2015 and 2016 have been revised upwards, reflecting the favourable impact of lower oil prices, the weaker effective exchange rate of the euro and the impact of the ecb ’ s recent monetary policy measures. the risks surrounding the economic outlook for the euro area remain on the downside but have diminished following recent monetary policy decisions and the fall in oil prices. according to eurostat ’ s flash estimate, euro area annual hicp inflation was – 0. 3 % in february 2015, after – 0. 6 % in january. the negative outcomes largely reflect the impact of the significant fall in oil prices since july 2014. on the basis of current information and prevailing futures prices for oil, annual hicp inflation is expected to remain very low or negative in the months ahead. supported by the favourable impact of our recent monetary policy measures on aggregate demand, the impact of the lower euro exchange rate and the assumption of somewhat higher oil prices in the years ahead, inflation rates are expected to start increasing gradually later in 2015. this assessment is also broadly reflected in the march 2015 ecb staff macroeconomic projections for the euro area, which foresee annual hicp inflation at 0. 0