. this spills over into consumption and investment, and finally into economic growth. this mechanism is also known as the “ financial accelerator ” a final monetary policy transmission channel involving banks i wish to allude to is the risktaking channel. low interest rates and abundant liquidity may decrease risk aversion and encourage risky investments, as well as leading to laxer credit standards. this raises the supply of bank loans and can have a significant impact on credit growth. the evolution of credit volumes so much for the theoretical background. let me now move on to how corporate credit volumes have actually evolved in luxembourg, and how those developments tie in with those at the euro area level. my intention is not to identify the workings of the different monetary policy transmission channels in luxembourg – this would be a herculean undertaking! however, it is helpful to keep the theoretical underpinnings in mind when looking at the actual credit developments and the potential underlying explanatory factors. as you can see in the chart, the underlying trend developments in luxembourg and at the euro area level coincide, despite the higher volatility in the luxembourg data. most notably, corporate credit dynamics rose continuously up until 2008, when they began to unwind rather rapidly, first in the euro area at large and shortly thereafter also in luxembourg. the pace and magnitude of the decline in the loan dynamics are particularly worrying, with below or near zero growth rates in the third quarter 2009. it is worth emphasising that roughly one year ago, in september 2008, the annual progression of corporate loan volumes in luxembourg peaked at 54 %! as for credit to households, the annual progression of mortgage lending has been on a downward trend since 2006, long before the crisis. however, this downward trend accelerated considerably and the annual growth rate recently stabilised just under 6 %. consumer credit has been progressing steadily since 2008, which represents a trend inversion compared to the preceding years. all in all, household loan dynamics have been much more benign than corporate credit developments. this raises the question as to how and why the corporate credit cycle could take such a rapid u - turn. while the obvious answer is that banks refuse to grant loans in the wake of the financial crisis, this is but one side of the coin. disentangling demand and supply indeed, the bank lending survey or bls – a euro area - wide bank survey on quarterly credit developments – strongly indicates that the sharp slowdown in corporate credit expansion is owing to both supply - and demand -

stability and growth pact are not incompatible with the free play of automatic stabilisers. as i told you earlier, automatic stabilisers are especially important, because they help counteract asymmetric shocks at the national level in a situation where monetary policy is conducted at the euro area level. provided that member states are able to reach a close to balance or in surplus position, they could indeed let automatic stabilisers operate in full, without incurring the risk of breaching the 3 % reference value. a close to balance or in surplus position indeed means that the cyclically adjusted fiscal balance should be in equilibrium. in such a situation, it would require a very negative output gap, equal to about 6 % of gdp, to reach a nominal deficit in excess of 3 % because of the free play of automatic stabilisers. this underlines the overriding importance of the attainment of a close to balance or in surplus position. let me also highlight that such a position would requires a nominal surplus under favorable economic circumstances. in other words, it is essential to apply a strict fiscal discipline also during economic upturns. - third, the attainment of a sound fiscal position compatible with the treaty and the stability and growth pact would facilitate to a considerable extent the conduct of monetary policy. the absence of clear and binding fiscal rules could have resulted in a non - cooperative equilibrium, characterised by higher long - term interest rates. this can be illustrated by the example of an individual member state willing to tolerate higher deficits and to issue more debt securities in order to finance the resulting gap. this additional debt issuance would in all likelihood give way to a crowding out effect - namely to an upward pressure on interest rates due to the drain on private savings. the key point is that in emu - where there exists a single currency and a high degree of integration between national financial markets - this additional burden would be borne by the euro area as a whole, and not just by the individual member state responsible for the additional debt issuance. this kind of spillover effects could encourage each member state to issue excessive amounts of debts. as a result, the euro area - wide interest rates would tend to be higher than required by economic fundamentals. such a situation could complicate to a considerable extent the conduct of monetary policy, which underlines the need to resort to commonly shared rules of fiscal restraints. conclusion let me conclude with the statement that the relationship between monetary and fiscal policy runs both ways.