Risks to global inflation seem to be broadly balanced in the short to medium term. Beyond that horizon, however, inflation risks depend on how efficiently the authorities withdraw the policy stimulus. b.  Euro area activity  In line with global developments, economic activity in the euro area has also contracted sharply since the second half of 2008.
The euro area economy has shrunk by about 4% over the past two quarters, the worst decline since the start of Economic and Monetary Union. For the current quarter, there is evidence that the economy has shrunk further, though at a slower pace. The economy is no longer in free fall; we are seeing the first signs of stabilisation.