##k to 15 % of gdp in may 2009 from its peak of 19 % of gdp in december 2008. this appears to be the result of increasing money market activity, at least at short maturities, and a sign of improving confidence. recovery in the euro area while surrounded by an unusual degree of uncertainty, ecb macroeconomic projections expect a moderate recovery in the euro area in 2010. the accompanying graph shows that during the first quarter of 2009, economic activity in the euro area weakened considerably. the june auction saw a record demand for €442 billion which may suggest the persistence of some funding strains. the total value of these eligible securities is currently about €12 trillion, or 130 % of euro area gdp. already the announcement of the program before any purchases were carried out was positively accepted in the market and lead to a wave of new issuances and lower spreads. however, confidence indicators hint to subtle signs of improvement at very low levels. this suggests that the decline in economic activity over the remainder of this year will decelerate, and after a stabilization phase, moderate positive quarterly growth rates are expected by mid - 2010. the recovery will be driven by the macroeconomic stimulus and other measures designed to restore the normal functioning of the financial system. for the moment, the risks to the economic outlook appear balanced. on the positive side, the macroeconomic stimulus might have stronger effect than anticipated and confidence might improve more quickly than expected. on the other hand, a range of adverse factors might flatten the recovery path, e. g. feedback effects from the turmoil in financial markets on the real economy and vice versa ; relatively more unfavorable developments in labour markets ; the intensification of protectionist pressures or adverse developments in the world economy stemming from a disorderly correction of global imbalances. past experience shows that financial crises cause deep economic crises that can lower the level and growth rate of potential output for a significant period of time. in some cases, there has been a protracted loss in output in the aftermath of the slump. for example in the case of finland and sweden, the recovery of real gdp towards the pre - crisis trend level took more than 8 years. a downward shift in the level of potential output might occur, for instance, through scrapping or stronger discounting of previous investment ( e. g. in the automobile and financial sector ), or through depreciation of human capital in case of an increase in structural unemployment. in addition, there is no guarantee

approach and methodology. macro - prudential analysis treats aggregate risk as endogenous and, unlike micro - prudential analysis, is therefore not focused on the analysis and surveillance of individual financial institutions. for this reason, it evaluates systemic risk and considers correlations and common exposures across institutions rather than within institutions. contributing to financial stability using such an approach is a natural extension of a central bank ’ s mandate under the eu treaty. macro - prudential supervision includes developing early warning systems for the analysis and detection of systemic risk as well as conducting macro stress - testing exercises on the financial sector. this suggests that central banks can readily undertake an active advisory role on financial regulation and supervision issues. despite a central bank ’ s natural involvement in macro - prudential supervision there still exists a need for close cooperation with micro - prudential supervisors since effective macrosupervision is effected through micro - supervisor ’ s actions. in addition, and reminiscent of the argument in favor of a “ twin - peaks ” supervisory framework as suggested by the de larosiere group report, central banks ’ assessments of macro - prudential risks should be reflected in the actions of micro - prudential supervisors. macro - prudential supervision will be enhanced by addressing the unintended consequences of pro - cyclicality in financial markets. pro - cyclicality recognizes several institutional and non - institutional sources. institutional sources of pro - cyclicality include leverage and the increase in market - sensitive valuation techniques such as value - at - risk, procyclical haircuts, triggers in over - the - counter derivative contracts, use of mark - to - market valuation techniques even in illiquid markets, as well as upfront recognition of profits in structured products even though some risks were retained. during the crisis, pro - cyclicality exacerbated asset price changes as financial institutions attempted to sell - off assets once they had exceeded their leverage ratios, which in turn resulted in lowered market prices. capitalization requirements and accounting regulations subsequently initiated a negative feed - back loop which was intensified by adverse developments in the credit markets as institutions were required to mark their trading books to market. as a result, it became necessary for them to either sell more assets to maintain adequate capitalization levels or to reduce their loan values. what started as a liquidity problem quickly turned into a solvency problem. in this respect, policy measures require a revision of the pro - cyclical elements of the basel ii guidelines ;