ward off the pressures on uk manufacturing, which had their origins abroad. that's fairly obvious where we are talking about the global slowdown - with negative overall growth last year of about 2 % in japan ( fourth quarter on a year earlier ) and close to zero growth in the us and germany. this compared with growth of just over 1½ % in this country - by some margin the highest in g7. we can go to international meetings and encourage the respective authorities there to stimulate their economies, but there is nothing that we can do about it directly ourselves. what we were able to do - given that inflation was marginally below target - was to try to compensate for that external weakness by stimulating domestic demand here in the uk. the bank sought to do this by cutting interest rates to buoy up consumer spending. and the government stepped up its own spending, which was helpful given the international environment. although we couldn't avoid an overall slowdown altogether - the economy on the latest data ground to a halt in the fourth quarter of last year - we have managed for most of the time to keep the uk economy as a whole moving forward despite the recession in the internationally - exposed sectors of manufacturing. of course we'd all have been much happier with better balanced growth. stimulating domestic demand to offset the external weakness - the only option available to us - was very much a second best option. it was not without its own risks including the build - up of household debt and the current exuberance in the housing market. but it was better than doing nothing at all. that would have meant a much sharper slowdown, and probably recession, in the economy as a whole. and, given that inflation was well under control, it would have meant a quite unnecessary loss of overall output - and income and employment. in effect we took the view that unbalanced growth was better than no growth. it is perhaps less obvious that we could not have done more to weaken the exchange rate. at around $ 1. 40 - 1. 50, sterling's value against the dollar through this period was not seen by most people even in the internationally - exposed sectors as a particular problem. the problem - for businesses trading or competing with firms in the eurozone, our largest trading partner, was the persistent and puzzling weakness of the euro. now many people think that we could have caused the pound to fall against the euro simply by cutting our interest rate somewhat further relative to the interest rate in

the eurozone. but it really isn't as simple as that. the us has reduced its interest rate far more aggressively than the ecb over the past year or so, and to well below the ecb's rate ( to 1. 75 % as against 3. 25 % ) but the dollar is actually stronger today against the euro than it was at the start of last year. and the same is true, though to a lesser degree of ourselves : uk interest rates were reduced by 2 % from the beginning of 2001 compared with a fall of 1½ % in the eurozone, yet sterling is stronger against the euro ( though weaker against the dollar ) than it was to begin with. i don't think i can offer you a wholly convincing explanation for the euro's weakness since its introduction. it seems to have been driven by capital flows reflecting expected medium - and longerterm future corporate earnings growth rather than short - term interest rate differentials, and it is often suggested that these expectations reflect perceived supply - side rigidities within the eurozone. but whatever the explanation the resulting strength of sterling against the euro has contributed to the pressure on the internationally - exposed sectors of our economy, and a stronger euro would, from my perspective, help us towards better balanced growth in this country. it would also incidentally facilitate debate about sterling's possible entry into the single currency, in the sense that the undoubted attraction of nominal exchange rate certainty vis a vis our european trading partners, which is a major potential advantage of our adopting the euro, must depend to some degree on the likely exchange rate at which we might join. these then are the monetary challenges that we have faced over the recent period. the question now, of course, is where do we go from here? there has recently been encouraging evidence - in the us data particularly but also for example in many of the more forward - looking indicators of european economic activity - that we are now in the early stages of global recovery. we cannot be sure that the early momentum will be maintained ; nor do we know just how strong the expansion will prove to be or how long it will last ; but the signs are promising, and indeed far more positive than any of us would have dared to hope just six months or so ago in the aftermath of the terrorist attacks on new york and washington. as it becomes clearer that the international environment really is improving, and that we really are seeing a sustained pick up in external demand, then we