Activity is expected to contract throughout 2009 and pick up only gradually in 2010, as the tensions in financial markets start to fade and the full effects of policy stimulus are felt. Rapid growth in unemployment and a large negative output gap will continue to dampen inflationary pressures throughout the projection period.

Given the weak outlook for inflation, additional monetary stimulus through further reductions in the refinancing rate and measures to ease credit and liquidity conditions is warranted. Further discretionary fiscal measures are also justified in member countries that have sufficient budgetary scope and where stimulus might otherwise taper off too rapidly. Ongoing area-wide assessments of bank balance sheets will need to be transparent and rigorous. Medium-term growth prospects would be enhanced by clear and credible plans for future fiscal consolidation and further structural measures to deepen the single market and enhance competitive pressures.

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©OECD Observer No 274, July 2009