subject to a deleveraging process whose scope is still not readily discernible. on the prices front, the risks of deflation have diminished substantially. although the strong easing in commodities prices until mid - year meant that inflation turned negative, there is a broad consensus, of which the ecb is part, that anticipates inflation will resume positive levels towards the end of the year. such levels would, however, be moderate for a relatively lengthy period, against a background marked by considerable slackness in productive capacity which will help contain potential inflationary pressures. the benchmark interest rate in the euro area, at 1 % since last may, has proven appropriate in a setting in which inflation expectations have remained anchored and in which the effects on the economy have been complemented, moreover, by those of the various exceptional measures adopted by the ecb governing council since october 2008. such measures included most notably the unlimited provision of liquidity to the banking system at terms extending up to one year and a programme for the outright purchase of mortgage bonds and other similar securities issued in the euro area. moving now to the spanish economy, it is clear that the acute international financial crisis and recession in the main areas of the world fed through with great intensity to spain, exacerbating the correction of the real estate market that had begun previously and prompting rapid job destruction. the fact that the powerful external contractionary trends coincided with the internal adjustment needed after a long expansionary phase has led to a decline in economic activity that is unprecedented in recent decades. on the data available, output fell by 4. 2 % year - on - year in the second quarter of 2009 as a result of the marked sluggishness of national demand, particularly private spending. only the public - sector components of demand have held at positive growth rates, and in the case of public investment this was due above all to the roll - out of the local investment plan last april. the strong contractionary impact of the decline in domestic spending on economic activity has been cushioned, however, by external demand. that said, the positive effect of foreign trade has been the consequence, above all, of the substantial cut in imports, since exports – despite improving their market share – have also been affected by the sharp decline in world trade. fortunately, the latest figures for the spanish economy indicate that, as in the euro area and in the rest of the world, the sharpest phase of the contraction is now behind us. the decline in activity

directing of support policies to the unemployed, so greater importance is given to active policies such as training, improvements to the intermediation capacity of public employment services, etc. in addition to the reform of labour institutions, there are other areas where action should not be delayed, even though the effects will be over a longer term. this is the case primarily of education, which is pivotal for ensuring a continuous increase in human capital and for reinforcing one of the main sources of improving productivity. and, of course, there is a long list of reforms outstanding to increase competition in many industries, such as services, energy, rail freight transport, etc., to which i have repeatedly referred. lastly, the soundness of the financial system is essential for ensuring the financial flows needed to restore economic dynamism. the spanish financial system has weathered very well the direct and indirect effects of the international financial crisis thanks to a series of widely known factors that i shall not repeat here. however, the intensity of the adjustment the spanish economy is undergoing in a setting of prolonged financial tension further compounds the pressure on the financial system in terms of asset impairment, increased bad debts, narrower banking margins and the gradual reduction in the buffers built up by the system. not all institutions are equally prepared to face these factors. accordingly, appropriate mechanisms – such as, in the current circumstances, the fund for the orderly restructuring of banks – are crucial for tackling the necessary restructuring processes, without that entailing a distortion in credit flows that may hamper the economy's path of recovery. to conclude, the spanish economy is at a decisive crossroads where many challenges must be addressed to prevent the situation leading to a long period of economic weakness and to be able to embark on a new growth path based on a more productive and sustainable pattern. this is not the first time in our recent history that we find ourselves in such a position. we emerged from similar situations in the past with major advances and with vigorous growth once the necessary decision - making machinery had been geared up to undertake far - reaching reforms. this time need be no different. only through medium - term stability strategies and ambitious and well - structured reforms can we overcome these difficult circumstances, paving the way for a new phase of dynamism and job creation that will further the outstanding trajectory of the spanish economy in recent decades.