’ s policy rates. money market rates in the euro area have now reached very low levels by international standards. lower money market rates have also led to lower interest rates for private households and firms, although the decline in money market rates has so far been greater than the decline in interest rates on credit for households and firms. the fiscal authorities in the euro area have also demonstrated their capacity to react rapidly to exceptional circumstances. in a coordinated effort, the national governments of the euro area have provided support to the banking system, most notably through recapitalisation and guarantees for liabilities and assets. the funds provided under the package announced to stabilise the financial sector through these types of measure amount to 23 % of the euro area ’ s gdp. the overall fiscal stimulus – through discretionary policy measures and the effect of automatic stabilisers – amounts to 3. 6 percentage points of gdp for 2009 and 2010. overall, during the ongoing financial market turbulence, the euro area and the eu as a whole have proved their capacity to act decisively and promptly under difficult circumstances. lessons from the crisis the current financial crisis has pointed to a number of weaknesses that need to be addressed if we are to avoid a similar crisis in the future. some weaknesses are rooted in the current design of the international financial system. this is particularly true with regard to the lack of transparency and accountability within the financial system. in this respect, much relies on financial players themselves taking responsibility for evaluating risk more effectively and increasing transparency as regards risk. in addition, various initiatives at national, european and international level aim, in particular, to improve the robustness of the financial system i would like to highlight three areas where i think change is necessary : there needs to be an increase in transparency, a dampening of pro - cyclicality and an improvement in institutional design in the field of financial supervision and regulation. first, we need to undergo global regulatory and supervisory repair. the basel committee has already set some milestones in this regard including the publication of the principles for sound liquidity risk management and supervision and its current work on strengthening the basel ii capital framework. work is also underway concerning the development of measures to mitigate pro - cyclicality stemming from the regulatory frameworks, namely by building buffers in good times that can be withdrawn in less benign conditions. in this context, let me recall that the g20 leaders approved the recommendations by the fsb to address procyclicality, which are to be implemented by the end of

gertrude tumpel - gugerell : monetary policy challenges in light of the current financial market developments speech by ms gertrude tumpel - gugerell, member of the executive board of the european central bank, at alpbach talks, vienna, 15 june 2009. * * * introduction ten years ago, on 1 january 1999, the euro was introduced as the common currency of 11 member states of the european union. today, the euro is used by around 330 million citizens in 16 countries and it has established itself as a stable currency, accepted in financial markets worldwide. looking at the inflation performance over the first decade of monetary union with inflation averaging slightly more than 2 % during this period, the ecb has fulfilled its mandate under the maastricht treaty, which is to maintain price stability for the euro area as a whole. nonetheless, undoubtfully, we are currently facing the biggest challenge so far : the world is hit by a severe economic and financial downturn, the deepest since the beginning of the great depression in 1929. it poses grave challenges to the financial industry and central bank community, as well as to supervisory and regulatory authorities and national governments and to the citizens at large. the key challenges arising from the current financial market turbulence since august 2007 the global financial markets have experienced extensive corrective realignments. the repercussions of the turbulence were initially visible in the financial market in the form of dramatic increases in risk premia and increased volatility in interest rate movements. the outbreak of the financial market turbulence was not entirely unexpected, however. both the ecb and other institutions had warned of macroeconomic imbalances and systematic undervaluation of risks in the years leading up to the crisis. those years were characterised by an extended period of low interest rates, low inflation and sustained economic growth, both globally and within the euro area. at the same time, liquidity was abundant and default risks were considered by many to be very low. this environment strengthened investors ’ risk appetite. in particular, with financial market participants expecting this environment to continue for quite some time, risks were systematically underestimated and the search for ever higher yields intensified. as a result, commercial banks readily granted credit for house purchases to households that otherwise could not have afforded it, and without adequately assessing their creditworthiness or credit default risk. at the same time, in an attempt to achieve higher yields, a number of innovative and increasingly complex financial products were offered, particularly in the