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

they see stricter trade and immigration controls as the answer to people ’ s concerns. however, they fail to recognise that it is precisely the opening - up of trade that improves a country ’ s competitiveness by facilitating the division of labour, which enables countries to exploit their own individual competitive advantages. this allows goods to be produced at low cost, which increases consumers ’ purchasing power. ideally, this stimulates demand ; prosperity, investment, and, ultimately, employment increase as a result. one thing is clear : isolationism brings no benefits, offers no stability and does not lead to prosperity. the belief that protectionism is the better alternative is merely an illusion. 1 / 4 bis central bankers'speeches nonetheless, scepticism regarding the european project has grown. of course, some of the criticism aimed at the euro area is justified. unfortunately, closer european cooperation also produces undesirable side - effects. without a doubt, there are major benefits to the single european market. but, at the same time, it obviously creates redistribution effects which can cause the regional loss of jobs or wage stagnation. and these effects tend to undermine many people ’ s trust in the european union. the european project must therefore be judged on the extent to which it benefits all its citizens. on the one hand, economic and socio - political action needs to be taken in this regard – but i won ’ t go into further detail about that today. on the other, however, there is also a fundamental need to overhaul the regulatory framework in europe. parts of this framework need to be adjusted and parts need to be completed in order to provide a stable footing for the european project in the long term. only stable institutions and a reliable regulatory framework can create confidence. we saw the opposite of this during the european sovereign debt crisis, when a lack of confidence in the euro area led to a crisis which was by no means confined to individual countries. even though many necessary reforms have been initiated and the euro area has been made significantly less vulnerable to crises, we have not yet reached our goal. we still need to press ahead with the right reforms in order to strengthen people ’ s trust in the institutions of the eu, which would also take some of the wind out of the sails of populism. so let ’ s now consider where we could start making specific institutional changes. 3. the euro area – room for improvement in the status quo the sovereign debt crisis made one of the euro area ’ s problems glaring