##quification will of course take time – but there are signs that it is under way, especially in the relatively strong growth in the market for continental high technology stocks. what about the traditional banking market? i leave this to last because some of the likely changes are just the counterpart of factors i have already mentioned. but for instance, greater reliance by capital users on equity as opposed to debt capital, and bond as against bank finance, would, other things being equal, be expected to lead to some shrinkage in banks ’ balance sheets in relative terms. the extent to which this may happen is of course uncertain. it will depend on many factors, including the impact of any changes to the basle accord. but even if there is substantial disintermediation, it does not mean that banks will cease to be dominant players. my point is just that as euro securities markets develop and deepen, more of the finance banks arrange will be off balance sheet. i ’ m inclined to think also that we will see further consolidation within the european ( and indeed global ) banking sectors, though i think that will not primarily be a function of the euro, and is something i will touch on in a minute. now, all these developments offer opportunities for financial services firms globally. this is not a zero sum game. i expect to see financial centres within the euro zone growing in size over the next few years. but london will grow too, and i think it is significant that many of these potential developments depend on market practices and techniques pioneered in london. i see london as the engine for growth and innovation in the european capital markets. this is not a narrow parochial point. as i have already emphasised, uk financial services are highly internationalised and many of the uk – based beneficiaries of this process are owned elsewhere – in the us, europe, asia and elsewhere. nor does it reflect complacency. although london has tremendous critical mass – especially in the crucial area of human capital – one major implication of what i will say in a minute about technological innovation is that certain aspects of financial services – especially trading and settlement – are potentially more geographically mobile now than in the past. we are already in a market where it is possible for a trader in london to deal on a german exchange, call for delivery in luxembourg and make payment in paris. so, the advent of the euro is just one factor transforming the environment in which uk based financial services firms must operate. i would now like to

supposed to be that both the creditor and debtor countries were obliged to adjust their imbalances. in practice, the obligations on creditor and debtor countries were asymmetric, and in part that explains why the system proved unsustainable. one drawback of the system was that it did not allow countries to smooth their expenditure in the face of fluctuations in their income. the role of the imf was to facilitate some smoothing, by lending pooled reserves. alternatively, changes in exchange rates would be sanctioned by the imf for those countries judged to be in " fundamental disequilibrium ". in doing this, the imf fulfilled its purpose to help achieve orderly world growth. the history of the united kingdom illustrates these features of the bretton woods system. britain faced repeated challenges in achieving external balance during the bretton woods era. sterling was devalued twice and four imf lending programmes were necessary. yet in 11 of the 17 years between 1955 and 1971, the uk ran a current account surplus, and its current account deficit peaked at around a mere 1 % of gdp in 1964. over time countries realised that restricting their ability to save and invest overseas was a significant limitation on their wellbeing. opening up capital accounts broke the link between current income and current expenditure, and enabled countries both to smooth consumption and to diversify risk. the openness of capital accounts means that the world today is very different from that of the bretton woods era. capital flows - both public and private – are very large. and, for many countries, private capital flows now dwarf official flows. because domestic demand is no longer constrained by current national output, a current account deficit does not necessarily indicate any " fundamental disequilibrium " nor require any official help to finance. for example, new zealand received the largest annual disbursement of any industrialised country as a share of gdp during the bretton woods era : 1. 9 % in 1967. that was associated with a current account deficit of 3. 7 % of gdp. since 1990, new zealand's current account deficit has averaged more than that, but it has had no need of an imf programme to finance these deficits. indeed, the need for official financing for industrialised countries has become redundant. 3 many of the " imbalances " that reflect private decisions to save and invest are desirable because they improve the efficiency with which capital is allocated throughout the world. since it is difficult