mario draghi : the global recession address by mr mario draghi, governor of the bank of italy, at the 15th congress of the aiaf – assiom – atic forex, milan, 21 february 2009. * * * the risks to the world economy, which until last summer were only feared, have now materialized. economic activity is falling sharply in all the main countries. the crisis of confidence is the worst since the second world war. the forecasts for 2009 have been revised repeatedly downwards. the international monetary fund now predicts a contraction of 1. 6 per cent in output in the united states, 2 per cent in the euro area and 2. 6 per cent in japan. recently released gdp data for the last quarter of 2008 and the latest economic indicators presage further downward revisions. the crisis has spread to the emerging economies, which have been affected by the fall - off in global demand and the drying up of net capital inflows. in europe and in italy the contraction began in the second quarter. for 2008 as a whole output rose by 0. 7 per cent in the euro area ; in italy it fell by almost 1 per cent. the deterioration in exports and investment, and to a lesser extent weak household spending, were contributory factors. for italy the data on orders, stocks, capacity utilization and the labour market all point to the protraction of the economic downswing in the coming quarters. the repercussions on employment have yet to emerge fully. the indicators available for recent months prefigure a marked deterioration. the fall in output has been accompanied by a sharp increase in recourse to the wage supplementation fund. businesses expect job losses in the months to come. the contraction in demand can hit society ’ s poorest and most vulnerable – precarious workers, the young, and low - income households – particularly badly. for more than ten years italian employment increased at a sustained pace. between 1995 and 2008 three and a half million jobs were created, thanks above all to wage moderation and greater labour flexibility. temporary positions have more than doubled. in the third quarter of 2008 fixedterm, temporary and project workers numbered almost three million. almost four - fifths of these workers ’ contracts expire within one year ; they are subject to especially severe risk. economic policy initiatives to break the grip of recession is the task of economic policies. there is general awareness of the need for sweeping interventions at global level, the more closely coordinated

rebalancing of the budget in the medium term. it is essential to look further ahead : the long - term sustainability of the public finances is fundamental to ensure the effectiveness of policies in the short term as well. monetary policies the central banks have made a prompt and coordinated response to the crisis. official interest rates have been lowered rapidly ; in many countries they are near zero. worrying about getting too close to the lower limit for nominal interest rates cannot be a reason for inaction. the experience of the united states in the 1930s and of japan in the 1990s suggests that in the initial stages of the crisis it is necessary to counter the tendency of real interest rates to increase. rapid disinflation must not be allowed to turn into deflation. the ecb has reduced its reference rate by 225 basis points since last october. in the euro area the real short - term rate is now below 1 per cent ; if official rates had not been cut, it would have risen considerably because of the fall in inflation. the governing council is keeping a close watch on the real cost of money. the main central banks have injected liquidity in unprecedented quantities. they have extended the range of their own instruments for action. in some cases, they have intervened directly by buying corporate debt, reactivating the circulation of credit where it had been blocked, helping to finance the private sector. they can act to influence long - term interest rates. to date, the judgement on the effectiveness of these measures is favourable. 1 when macroeconomic conditions return to normal, the liquidity pumped into the economy should be rapidly drained. the adoption of a strategy to return to normality is premature until see ben s. bernanke ’ s testimony to the committee on financial services, us house of representatives, washington, d. c., 10 february 2009. output and employment have stopped falling : but, as with fiscal policy, it is important to provide for it from today to ensure the effectiveness of the monetary expansion, firmly anchoring long - term inflation expectations and countering any speculative bubbles in the prices of financial and real assets. policies for financial system stability and the revival of credit reactivating financial intermediation remains essential to get over the recession and return to lasting growth. the surrogate role played by central banks can only be temporary. interventions in the united states and europe last autumn ( guarantees on deposits and bank securities ) affected the liability side of bank balance sheets. they prevented the collapse of the system, reviving some