impact of newly - introduced products, since the relative price of a product tends to decline over its life span. second, since the nominal interest rate is the sum of the real rate plus inflation, the combination of low real interest rates and persistent undershooting of the inflation objective reduces the policy space for conventional interest rate policy to react to future negative shocks. the steady - state level of the real interest rate primarily reflects the non - monetary structural forces ( such as demographics, productivity and risk preferences ) driving desired savings and desired investment. let me give the intuition with a stylised example : the nominal policy interest rate is the sum of inflation and the real interest rate. for simplicity, let us assume that the real interest rate is zero. if inflation is stable at 2 percent, then the nominal policy interest rate also stands at 2 percent. this means that the policy space for the central bank to cut the nominal policy interest rate to zero is 200 basis points. by the same logic, if inflation is stable at 1 percent, then the policy space for cuts of the nominal interest rate to zero is halved to only 100 basis points. in practice, the ecb has demonstrated that the effective lower bound for the policy interest rate is in fact not zero : it is in negative territory. even so, the central bank cannot lower policy rates without limit : at some point, firms and households may start switching to paper currency, which provides zero return. a related but distinct argument is that there may also be a reversal rate of interest, below which decreases in the policy rate fail to be expansionary. accordingly, the principle that an effective lower bound on interest rates exists is valid, even if its exact value is subject to considerable uncertainty and likely varies over time. this lower bound, in turn, makes the conduct of monetary policy more challenging when inflation is below target. furthermore, the decline in the steady - state real interest rate presents a significant challenge for monetary policy. lower real rates reduce the available policy space to counter low inflation. this increases the time it takes for inflation to return to our aim. this is compounded if a prolonged period of low inflation also erodes inflation expectations, since a persistent fall in inflation expectations itself further reduces the available policy space through the associated downward pressure on the yield curve. in this scenario, the macroeconomic impact of negative shocks is more severe and long - lasting. it follows there is a clear risk of a self - reinforcing dynamic in the inflation process. prolonged

normally, to allow our monetary policy to be effective throughout the euro area. otherwise, there would be instability, and that would have a negative effect on all member countries. all governments have committed themselves to being ready to accelerate fiscal consolidation. we are following this very closely in liaison with the commission. faz : what happens if, for example, the greek people refuse and the government breaks its austerity promise? do you not need a plan b? trichet : let us look back. since the euro was launched, the ecb has been preaching that the stability and growth pact is a cornerstone of emu. i repeat this at least once a month. the governments of germany and france in particular wanted to get rid of its rigour in 2004 and 2005. we rigorously defended the pact and avoided its de jure dismantling, against the wishes of the heads of state and government of large euro area countries. now, the ecb has demanded a very serious adjustment programme from greece, an adjustment programme that is very much in the country ’ s own interests. faz : however, there is a risk that one of the countries whose bonds you are buying will not be able to service its debts. what then? trichet : we are in the field of governments. there are three levels of government responsibility. first, accelerate the necessary and indispensable fiscal consolidation. second, exert strict surveillance of peers within the eurogroup – i. e. euro area governments. third, if tensions emerge despite the first two levels of responsibility, stand ready to intervene through the financial stability mechanism. faz : if that is the case, why is the ecb propping up the bond markets? would it not be better for an institution to be created which the governments finance and are responsible for? trichet : we are not propping up the bond markets. that is not our objective. we are ensuring the effectiveness of monetary policy. on 6 and 7 may, the days immediately prior to the decision to purchase bonds, the markets were massively disrupted, and market participants all over the euro area and the rest of the world observed this situation, which was deteriorating extremely rapidly. this was a very serious situation, in which we had to intervene in order to preserve, as i said, the integrity of the monetary policy transmission mechanism. faz : so why has the president of the bundesbank, axel weber, distanced himself from the purchase programme and voted with other members