Wars, depressions and financial crises have pock-marked history, causing growth to stall or fall. And phases of innovation have lifted economic fortunes, caused living standards to leap. But whereas the growth lapses have been temporary, the leaps have been permanent. Over the past two and a half centuries, secular innovation has dwarfed secular stagnation. In explaining rising living standards since 1750, economists have typically identified three distinct innovation phases. Each was associated with a great leap forward in society’s production possibility frontier. 9 The first is the Industrial Revolution commencing in the middle of the 18th century; the second, the era of mass industrialisation, starting in the second half of the 19th century; and the third is the IT revolution, which began life in the second half of the 20th century. What distinguished these three innovation phases is that they gave birth to a sequence of socalled General Purchase Technologies (GPTs). 10 These technologies had applicability well beyond the sector for which they were originally designed, thereby transforming the efficiency of business practices generally. During the first industrial revolution, these GPTs included the steam engine, cotton spinning and railways; during the second, electricity, the internal combustion engine and internal water supply and sanitation; and in the third, the personal computer and the internet. Interest in innovation-led growth has re-intensified over recent years as growth prospects have dimmed. One strand of the secular stagnation debate asks – wither innovation? Among some there is a concern the well of innovation may be running dry.

Stretched fiscal positions have raised questions about the ability of several euro-area governments to support their banking systems. And the weak position of those same banking systems has also heightened doubts about the sovereigns’ fiscal sustainability (Chart 3). Though UK banks’ exposure to peripheral country debt is relatively modest, interlinkages with euro-area banks that are more heavily exposed have meant that UK banks have also experienced heightened funding difficulties in recent weeks. Unless those conditions improve, our banking contacts indicate that the availability of credit to the real economy may soon begin to suffer. Moreover, the heightened tensions in financial markets are likely to have raised uncertainty more generally and further depressed household and business confidence. Our regional Agents are already starting to tell us that some businesses are putting investment projects on hold as a result. In the early hours of last Thursday morning, European leaders agreed to take further steps: to address the fiscal sustainability of Greece and other periphery countries; to expand the  BIS central bankers’ speeches  1  firepower of the European Financial Stability Facility; and to buttress the resilience of European banks through recapitalisation. While the major UK banks will not be required to raise capital, they would nevertheless be well advised to take advantage of any opportunity that does arise to further strengthen their capital and liquidity buffers, thereby putting themselves in a better position to withstand any further deterioration in conditions, without needing to constrain lending.