ANNUAL REPORT 2008 - Polymer Bank Notes of the World

in the course of the year, in line with thetightening of financing conditions and weakereconomic activity.Overall, despite the clear deceleration ininflation rates from mid-2008 onwards, averageannual HICP inflation in 2008 reached 3.3%,the highest level recorded since the introductionof the euro. This compared with rates of around2% in the preceding years. Notwithstandingsharp fluctuations in headline inflation rates, theECB’s monetary policy succeeded in keepingmedium and long-term inflation expectationsfirmly anchored at levels broadly consistent withprice stability throughout 2008. At the sametime, real GDP growth in the euro area slowedto 0.8% in 2008, following solid growth rates of2.7% in 2007 and 3.0% in 2006. While economicgrowth in the euro area at the beginning of 2008was relatively resilient, it deteriorated rapidlylater in the year in the face of a pronouncedslowdown in world economic activity.With regard to fiscal policy, the relativelyfavourable fiscal outcomes achieved in recentyears were reversed in 2008 as the financialcrisis unfolded and the macroeconomicenvironment deteriorated rapidly. Accordingto the European Commission’s interimforecast of January 2009, the averagegeneral government deficit in the euro areaincreased from 0.6% of GDP in 2007 to1.7% in 2008, and it is expected to increaseconsiderably further to 4.0% of GDP in 2009.In October 2008 euro area countries agreedon coordinated action to stabilise the bankingsystem, including the recapitalisation offinancial institutions and guarantees for loansand deposits. In December 2008 the EuropeanCouncil approved a European EconomicRecovery Plan which is intended to supporteconomic recovery by strengthening aggregatedemand and increasing efforts to implementthe structural reforms envisaged by the Lisbonstrategy. The rising fiscal deficit and debtratios and the highly uncertain outlook poseconsiderable challenges for fiscal policy inthe euro area. To support public confidence inthe sustainability of public finances, a crediblecommitment to a path of consolidation inorder to return to sound fiscal positions, fullyrespecting the provisions of the Stability andGrowth Pact, is of the essence.Turning to structural policies, the ongoingweakness of economic activity and high levelsof uncertainty about the economic outlookimply the need to strengthen the resilience ofthe euro area economy. At the current juncture,it is essential to pursue economic policiesin line with the principle of an open marketeconomy with free competition, resisting anyprotectionist pressure. Moreover, productand services market reforms should fostercompetition. Labour market reforms shouldhelp to facilitate appropriate wage-setting,thereby protecting employment and fosteringlabour mobility across sectors and regions. Thiswill be particularly important for those areasand sectors hit strongly by the negative demandshock. In several countries, it is also crucial totake measures to address competitiveness lossesaccumulated over recent years.***Challenges in financial markets mountedconsiderably during 2008. Euro moneymarkets continued to be characterised by highcredit spreads and very low trading volumes,notwithstanding the stabilising effect on thesevariables of the special measures which the ECBhad started to introduce in 2007 and extendedin 2008. These measures mainly consisted of“frontloading” the liquidity provision to thebanking sector within reserve maintenanceperiods, increasing the average maturity of theEurosystem’s refinancing operations and, incooperation with the Federal Reserve System,providing liquidity in US dollars.As tensions across all money market segmentsand maturities intensified very significantlyin mid-September 2008, the Eurosystemtook further liquidity management measuresto ensure the continued ability of banks torefinance themselves. In particular, a fixedrate tender procedure with full allotment wasECBAnnual Report200811