done since the beginning of the financial turmoil the mandate of the ecb is to maintain price stability over the medium term. this mandate must be adhered to both in normal times and in times of crisis. the monetary policy stance appropriate to fulfil the ecb ’ s mandate depends exclusively on its assessment of the balance of risks to price stability, and nothing else. the ecb has shown remarkable flexibility in terms of liquidity provision. this flexibility was necessary in order to avoid the breakdown of the interbank market, which is a very important transmission channel for monetary policy. given the extraordinary situation, we took extraordinary decisions. however, measures are all of a temporary nature only, i. e. market participants should not get accustomed to the enhanced role of central banks in intermediation. since 8 october we have cut the policy rate three times with an overall reduction by 175 basis points. these moves in a very short period of time are unprecedented. as monetary policy decisions are forward looking and medium term oriented, the recent rate cut by 75 basis points takes into account that the inflation rate will decline further in the quarters to come and that the risks to inflation are on the downside over the medium term. by adopting this forward looking attitude any “ double counting ” of news, which may first influence our decisions via their anticipation and then again when they materialise, is avoided. after this substantial rate cut the remaining room for manoeuvre is very limited, potentially allowing for small steps only. having only one instrument at hand the limits of what can be achieved and what cannot be achieved with a single instrument should be recognised. the key ecb interest rate is currently 2. 5 %. the president of the ecb has made it very clear that the decrease of 175 basis points within two months is exactly what is appropriate taking into account all available information. new relevant information for the euro area which allows for a serious re - assessment of the outlook for price stability will very likely not be available before february or march 2009. fiscal policies ’ reaction the write downs 1 and losses by the banking sector have reduced the capital base of banks and implicitly their capacity to lend. in a welcome coordinated effort, euro area governments have provided support for the banking system, most notably by offering funds for recapitalisation and guarantees for interbank loans. to date, the envelope of funds for possible recapitalisations and guarantees amounts to some €2, 000 billion, or roughly 20 % of euro area gdp

. these measures are crucial to protecting economies from harm, and they are key to stimulating economic activity. at the same time, they may imply a considerable fiscal burden. public debt and deficit ratios may increase substantially, and fiscal sustainability may come under pressure. on top of this, there are calls for substantial fiscal stimulus programmes in the euro area countries, and a number of countries have already announced or approved significant fiscal support. for instance, the german parliament approved a fiscal stimulus package ( 1. 3 % of gdp ) for 2009 and 2010 and the french government announced a stimulus package in total of 1. 5 % of gdp ( 2009 - 2011 ). but, many euro - area governments failed to use the past boom times to consolidate their public finances. as a consequence, they are entering the current downturn with high deficit in the euro area the total writedowns and capital raised of large and complex banking groups and other banks since the second quarter of 2007 amount to $ 129. 2 bn and $ 138. 7 bn respectively ( us : writedowns : $ 421. 4 bn, capital raised : $ 354. 7 bn ; uk and switzerland : writedowns : $ 136. 4 bn, capital raised : $ 164. 1 bn ). source : bloomberg. and debt ratios. given the weak growth ahead and the costs of the bank bailouts, these ratios are set to increase. it is very likely that, in a year ’ s time, the deficits in many euro - area countries will be between 5 % and 7 % up from 3 % now, while public debt may rise by 10 to 20 percentage points. against this backdrop, the current calls for a particularly loose application of the european union ’ s framework of fiscal rules questions the credibility of politicians ’ commitment to sound public finances. in this environment, there is a clear risk that any additional stimulus programme may erode, rather than restore, public confidence. as a result, households may prefer to raise their savings, and thus counteract any fiscal stimulus because they know that they will soon have to pay for today ’ s fiscal deficits. from the experience gained in the 1970s, it is known that promises to reverse stimulus measures once the crisis is over are frequently not kept. in many european countries, this has resulted in ever - increasing public expenditure and debt ratios, which are placing a burden on these economies even today. the introduction of the stability and growth pact in 1998 marks a break with the undisciplined policies