As far as the theory is concerned, this is pretty much guaranteed in any formal description of the economy as long as (i) people are assumed to care about real not nominal things – what their wages can actually buy, not just what they’re worth in pounds or dollars – and (ii) prices are ultimately flexible. But for a while, in the immediate aftermath of Phillips’s paper, the point was temporarily forgotten. His eponymous curve was commonly interpreted as some unchanging, structural relationship, one that seemed to offer a long-run choice between controlling  2 Phillips (1958), ‘The Relation Between Unemployment and the Rate of Change of Money Wage Rates in  the United Kingdom, 1861–1957’. Economica. Phillips actually estimated the relationship between wage growth and unemployment – what is now called the “labour market Phillips curve”. The plain description “Phillips curve” usually refers to the equivalent relationship between output and price inflation. Gali provides theoretical foundations to Phillips’ empirical relationship in his 2011 paper ‘The return of the wage Phillips curve’. Bank of England  Page 9  inflation and boosting real activity and incomes. If a country was prepared to tolerate a slightly higher rate of inflation it could (on this view) generate a permanent rise in its real income. It was Milton Friedman, in his famous 1968 presidential address to the American Economic Association3, who brought people back to earth. It was true, he said, that monetary expansions could boost activity and employment for a while.

2  Ecinci, Kalemli-Ozcan and Sorensen (2007), Financial integration within the EU countries: the role of institutions, confidence and trust, NBER working paper. BIS Review 17/2008  1  Research presented this afternoon also threw a positive light on the role of financial integration with respect to Central and Eastern European countries. In fact, this contrasts a bit with some previous literature that argued that developing and emerging market countries are less able to reap the benefits of financial integration. One paper argued that foreign banks appear to allocate credit more efficiently than domestic banks in this region. 3 And, accordingly, another finds that financial integration has helped convergence and economic growth in Central and Eastern European countries. 4 Financial integration is also of key importance for the performance of the tasks of the Eurosystem. First, a well-integrated financial system enhances the smooth and effective transmission of monetary policy throughout the euro area. Second, financial integration is relevant for our task of contributing to the safeguarding of financial stability. Integrated markets reinforce the shock-absorption capacity of the system, as they are more liquid and offer better opportunities for financing and risk distribution. Finally, without prejudice to the main objective of price stability, we support the general economic policies of the European Union. What is the current state of European financial integration? Here I will be very brief today, as I have characterised this already at various occasions in the past and as financial integration is not a fast-moving process.