economy. and this brings me to the appropriate policy responses. iii. the rationale and effectiveness of policy measures the nature and scope of the crisis has required the concerted and parallel implementation of three types of policy responses : ( 1 ) macroeconomic policies to stimulate aggregate demand ; ( 2 ) the provision of liquidity by central banks to ensure the orderly functioning of money markets, contain spillover effects on the financial system and foster the financing of the economy ; and ( 3 ) government measures to repair and strengthen bank balance sheets so as to stabilise the banking system and help restore the provision of credit to the economy. there are three general points i would like to make at the outset concerning the magnitude and effectiveness of these policy actions. first, the overall effectiveness of the measures depends not only on their design but also on their implementation which must be timely, well targeted and concerted so as to simultaneously address financial market stresses and the weakening of economic activity, thus preventing the development of adverse feedback dynamics between the financial system and the real economy. second, policy actions must be implemented in a manner that helps achieve the immediate objectives of stabilising the financial system and supporting economic activity, and at the same time, ( ensures that the recovery of the economy will be sustained ) lays the foundations for sustained growth and prosperity. the third point concerns the appropriate size of the economic stimulus and the nature of the other measures taken across countries and economic regions. the features of the policy strategies pursued, the precise design, magnitude, and implementation modalities of the relevant policies need not be identical across countries or economic areas, for instance, on both sides of the atlantic, or – for that matter – on the two sides of the english channel. some differences in size or scope are warranted by different economic and financial conditions as well as by different institutional structures. having said that, the general orientation and the overall strategy of the policies being pursued have been similar in all major economies. this commonality derives from our shared analysis of the causes of the crisis, its evolving global character and the lessons that have been drawn about the appropriate policy responses and the need for concerted actions across the globe. let me now focus on central bank policy in the euro area. since the eruption of the financial turmoil, the ecb has acted decisively providing and managing liquidity in the interbank currency market so as to foster its orderly functioning and ensure that banks have adequate access to central bank funding and can continue to finance the economy.

time, it was mainly an episode of strong financial turbulence that affected certain segments of the credit market resulting in large writedowns on a class of assets ( complex structured products ) that affected a relatively limited number of institutions in advanced economies. progressively, and especially since mid - september 2008, it has evolved into a global crisis affecting advanced, emerging and developing economies ; and it has spread across economic sectors. the, more or less, synchronised decline or deceleration of economic activity worldwide has been accompanied by a collapse of world trade that has further depressed global economic activity. a key feature of the current crisis is the mutually reinforcing interaction between, on the one hand, the weakening of economic activity and the rising unemployment and, on the other hand, the process of deleveraging and repair of banks ’ balance sheets and the persisting tensions in some financial markets. the weakening of economic activity has been impairing the quality of bank loans thus adversely affecting banks ’ capital positions and their willingness to extend credit to the private sector. this, in turn, imposes constraints on economic activity and the ability of firms and households to service their debts, increasing the likelihood that banks will suffer further credit losses and tighten their lending standards. therefore, the main immediate policy challenge is to prevent the emergence of a strong adverse feedback loop between the real economy and the financial sector. before examining the effectiveness of the policies being pursued to address this challenge, let me briefly refer to the impact of the crisis on the economy and the financial system of the euro area. since the financial turmoil deepened and broadened in the autumn of 2008, its impact on the economy has increased substantially. the significant deceleration in real gdp growth in the euro area to 0. 8 % in 2008, from strong growth rates of 2. 7 % in 2007 and 3. 0 % in 2006, reflects the sharp contraction in activity by 1. 5 % in the fourth quarter of last year. the latest available information suggests that aggregate output recorded a further sizeable decline in the first quarter of this year. the recent forecasts by the imf paint a gloomy picture for economic activity in the euro area, with real gdp projected to decline by 4. 2 % in 2009 and by 0. 4 % in 2010. 1 the european commission also predicts a significant contraction of euro area gdp this year, by 4. 0 %, and still slightly negative growth of - 0. 1 % for 2010. 2 what is behind