until productivity growth stabilizes and the higher rate becomes anticipated it will be possible to operate at resource utilization rates beyond what is sustainable over the longer run without inflationary consequences. it is perfectly reasonable to take advantage of this opportunity, as long as care is taken to return to more sustainable utilization rates as the disinflationary force of the upward shift in productivity growth dissipates. of course, policymakers must also weigh the option of “ opportunistic disinflation ” in such a circumstance – the possibility of reducing inflation toward their long - run target without depressing, even temporarily, resource utilization rates. however, if inflation is already at its target, the option of permitting temporarily higher output and employment clearly dominates. the apparent increase in the productivity trend probably has been an important disinflationary force over the last few years. some of the benefits in this case have been taken in the form of lower inflation and some in the form of temporarily higher resource utilization rates. an important issue therefore is whether current utilization rates are sustainable, once productivity growth stabilizes. this issue motivated my next question and answer. 2. is the economy overheated, or is there a threat of overheating? an overheated economy is one operating beyond the point of sustainable capacity and therefore experiencing excess demand in labor and product markets. the importance of the concept follows from the reasonable expectation that excess demand in labor and product markets is a proximate source of higher inflation. so, is the economy overheated? there are two ways to identify such a condition. the first is to find some proxy for excess demand in labor and product markets. we have to satisfy ourselves with proxies because excess demand is not directly measurable. the second is to look for the consequences of overheating, in the form of acceleration in wage gains or prices. proxies for excess demand are utilization rates in the labor and product markets – such as the unemployment rate in the labor market and capacity utilization in the product market. capacity utilization is measured only in the “ industrial ” sector, so it is a narrow measure of generalized excess demand in the product market. nevertheless, it remains an important proxy for the balance of supply and demand in the product market. at any given time, a lower unemployment rate or higher capacity utilization rate implies greater demand relative to supply in the respective market. but we are also searching for an absolute concept, the point of balance between supply and demand in the

market reform where we need significantly more flexibility in a number of economies. wsj : this is your last year as ecb president. how important is it that the choosing of your successor by governments be a smooth process? trichet : i have very hard work until the end of october and i expect to exert, with all my colleagues, my impressive, inspiring and profound responsibilities until the last day. as regards my succession i have full confidence in the heads of state and government. it is their responsibility. wsj : what has surprised you, both good and bad, over the last 12 years of the euro? what do you think the euro zone will look like in 2015? trichet : i will not say that i was myself surprised because i have been deeply involved in the negotiation of the maastricht treaty and the setting up of the euro. but i guess that a number of external observers are very positively surprised to see that price stability with the euro has been, over 12 years, better than with the previous national currencies and that as many as 17 countries and 331 million peoples are in the euro area since the beginning of 2011. but this is not time for complacency. as all of the advanced economies we have to draw – without any complacency – all the lessons from the present global crisis, in particular in terms of governance. wsj : the fed is doing more quantitative easing, while the ecb warns of inflation risks even though both regions are recovering in a broadly similar fashion. are fed and ecb policies diverging, and does it pose a risk to global financial stability? trichet : on both sides of the atlantic we have each of us our responsibilities that are very important. we are placed in different economies, particularly in terms of the financing of the economy, and of the nature of the shocks we have to cope with. but we are united in purpose : to deliver price stability in medium term and to solidly anchor inflation expectations. bis central bankers ’ speeches