the form of write - downs on loans, are still to be expected. those losses are mainly straining the financial institutions themselves, necessitating huge consolidation efforts. however, where banks have taken advantage of the banking stabilisation measures provided by the government and coordinated by the financial market stabilisation fund ( soffin ), these losses either have already burdened the fiscal budget or might do so in future. this leads me to the next footprint of the financial crisis. public debt has risen sharply. as in almost all industrialised countries, this was a consequence of the sharp economic downturn as well as the extensive fiscal support measures necessary in order to stabilise the economies. starting from an almost balanced budget in the years 2007 and 2008, public finances in germany worsened significantly in 2009. at 3. 3 % of gdp the public deficit went back above the eu reference value of 3 %. as the majority of the revenue losses caused by the economic downturn will accrue with a time lag to the business cycle, the prospects for public finances in this year are even more dire, with the public deficit expected to hit 5 % of gdp. finally, we have to bear in mind that the financial crisis brought to an end a period of very prosperous but ultimately unsustainable global economic growth. and it may well take some time before global output and world trade return to a solid growth path. this development will also affect the german economy, most obviously through lower foreign demand. but potential output is also likely to be significantly lower for some time than in the years preceding the financial crisis. whether this reflects a temporary adjustment process towards a new equilibrium potential output level or whether potential output growth will stay impaired for a protracted period of time will largely depend on the capacity of the german economy to adjust to the new global economic environment. to sum up, some of the gains from the last upswing have clearly been lost due to the financial crisis. compared with other countries – especially some euro - area member states – germany is in a relatively good position, as its economy and public finances were in comparatively good shape when the financial crisis broke out. in a sense, germany reaped the fruits of previous reforms also during the crisis. in addition, the german economy was spared additional burdens encountered due to lack of structural imbalances in the domestic economy, such as a pre - crisis boom in the construction sector or a housing price bubble bursting during the financial crisis. still, the deterioration in

greater employment intensity pointed to improved longer - term growth fundamentals. in addition, a nearly balanced budget was to be expected for 2007. what had happened? first of all, important structural reforms had been successfully implemented. these were bold labour market reforms, which modernised the labour market structure and lowered the employment threshold of economic growth, as well as adjustments in the social security systems, in particular the pension system. the structural reforms paved the way for further necessary market - based corrections, for example in wage setting and intra - plant working - time flexibility. secondly, the improved economic situation was used for serious fiscal consolidation. to sum up : the german economy was quite strong, when the first harbingers of turmoil were witnessed on the us housing market. in the meantime, we have experienced a very severe global financial crisis which caused the deepest global recession since world war ii. therefore, i would like to talk about the following two questions : 1. where does the german economy currently stand, now that tensions on the global financial markets have eased and the global economy is gradually recovering? 2. what are the economic and fiscal policy challenges to which germany has to respond in order to enhance the framework for economic growth? 2. where do we stand? the german economy is clearly in the process of recovering from the deep downturn it experienced in the winter 2008 / 09. as in most other industrialised economies the recovery process started in spring 2009, driven mainly by a massive fiscal and monetary stimulus. still, gdp contracted by 5 % compared to 2008 and hence by much more than in the united states. around the turn of the year, economic activity was dampened as the fiscal stimulus wore off and also owing to the inventory cycle. the relatively cold and snowy winter weather was an additional burden for the recovery process. however, trend recovery remained basically intact and the recovery process is expected to regain momentum in the second quarter of 2010. as a typical mainstay of the german economy, exports will once again play an important role in the recovery. however, unlike earlier economic downturns, the labour market stayed surprisingly robust throughout the crisis. as a consequence, consumption activity is this time comparatively stable, therefore supporting the economic growth process. nonetheless, there are obvious footprints of the financial turmoil and economic downturn in germany. these are most obvious in the banking sector. total write - downs of german banks have so far accumulated to roughly us $ 98. 9 billion during the financial crisis. and further losses, especially in