potential growth as before for a while. could europe experience what japan has experienced? i don ’ t think so. the development in wages will be always different from japan. there is more rigidity in wages in a recession ( in europe ) and that is an important factor and that is why i never really feared we would have actual deflation in europe. wages will not be as flexible down as they were in japan. most of euro area gdp comes from services and inflation in services is basically about wage developments. it is very difficult to go to a situation of deflation in europe. that ’ s a difference with japan. will divergence continue in the euro zone? no. we saw an initial phase of catching up and convergence. then came the crisis. if you look to the development of the economy in the u. s. and europe, the recoveries are very similar until 2011. then europe had a double dip because of the recessionary adjustment. after painful adjustment and many reforms, ireland, spain, portugal, slovenia and cyprus grew faster than the euro area average in the first half of this year. the only exception is italy which is growing slightly less than the average. we have growth again. we need to strengthen the confidence in peripheral countries. that has to be achieved by deepening integration. the greek turmoil raised doubts. these doubts have to be now closed by additional institutional reforms. what doubts were raised about the euro? it raised doubts for the markets that countries like greece could cope with the challenges of monetary union. there was never any doubt among the majority of member countries. we maintain that the euro is irreversible. legally, no country can be expelled. the actual prospect of that happening was never for real. do you fear that some people in europe may lose faith in its institutions? at the ecb, we are doing the utmost within our mandate. we are aware that there are excessive expectations about what central banks can do. unemployment is destabilizing the continent. european values are being eroded in several countries as a result of the fear that unemployment creates. it is for other policy makers to do their job. does a change in the stance of the federal reserve have implications and has market volatility become a permanent feature? we don ’ t know what the reaction of markets will be. monetary policy is not about fine tuning volatility in financial markets. we have medium term objectives and that helps to stabilize expectations. central banks should be independent from financial

risks on global economic activity. we believed that as we worked toward our next projection, published in today ’ s mpr, we would probably be downgrading the economic outlook. that would mean a longer period of economic slack in canada, and would translate into a downside risk to inflation later in the forecast horizon. accordingly, six weeks ago, even though measured inflation had already ticked up, and looked likely to tick up even more, we indicated that the downside risks to our inflation outlook remained as important as before. in effect, the risks associated with the starting point for inflation had diminished, but the downside risks to the underlying fundamental drivers of inflation were growing. today, our report notes that total cpi inflation has moved to 2. 3 per cent, and core inflation to 1. 7 per cent. this pickup in measured inflation is attributable to the temporary effects of higher energy prices, exchange rate pass - through and other sector - specific shocks. it is not coming from any change in domestic economic fundamentals. bis central bankers ’ speeches today ’ s mpr presents a new economic projection in which there are both upside and downside risks to the inflation outlook. we believe these risks are roughly balanced. the downside risks to inflation associated with a below - target starting point have clearly diminished. the projection now includes a lower track for global economic activity, and a slower return of our economy to its full potential. our serial disappointment with global economic performance for the past several years of course means that we remain preoccupied with downside risks to economic activity and the fundamental drivers of inflation. as the temporary effects pushing inflation up begin to dissipate during 2015, unless the economy ’ s slack is absorbed over a reasonable timeframe, inflation will drift back down well below target. this will require above - potential economic growth fuelled by rising exports, followed by investment in new capacity. we believe that the ingredients are present for an eventual return to balanced and sustainable growth, with inflation on target, in 2016. we are anticipating that global demand will strengthen and, with the lower canadian dollar, indeed, will lead to a pickup in canadian exports and business investment. we expect real gdp growth to average around 2 1 / 4 per cent during 2014 – 2016. the economy is expected to reach full capacity around mid - 2016, a little later than we said in april. meanwhile, household imbalances continue to evolve constructively and recent data are broadly consistent with a soft landing in canada ’ s