The reality is that the location of financial activity does not depend upon the local currency. It will continue to be carried on wherever it can most conveniently, efficiently and profitably be carried on. And the fact that foreign-owned institutions -- from Europe itself and from around the world -- continue to build their presence here, despite the near universal assumption that the UK will not in fact participate in EMU from the beginning, suggests that they share this perception. I would hope that the rest of Europe would positively welcome the contribution that the City can, and I am confident will, make to the development of markets and other financial activity in the euro, because it is in their interest too. International or intra-regional trade and investment activity is not, at the macro-economic level, a zero-sum game. It is a positive sum game. And this is true of financial, just as much as of any other kind of economic activity. The prosperity of the City -- whether the UK is “in” or “out” -- is simply a particular case of the general point which I made at the outset. I welcome the BIS Review 106/1997  -3prospect of increasing financial activity in Frankfurt, Paris, Milan or Amsterdam or wherever because it will result in increased activity here too in London. And the converse is equally true. It is in this sense that the City is a major European, not simply a national asset.
But perhaps the most salient international economic development in 2004 was the persistent rise in oil prices. At the root of this, above all, is the force of demand from the United States and China, in a  BIS Review 45/2005  1  situation marked by production and refining capacity bottlenecks, arising from limited investment in the past. Compared with other recent periods of oil price rises, such as the peaks in 1990 and 2000 linked to geopolitical tensions, the increase in prices on this occasion fed through to a much greater extent to long-term futures contracts, suggesting the markets are expecting oil prices to hold at high levels. Despite this, and on the indicators available, dearer energy scarcely affected inflation expectations, meaning the so-called second-round effects - linked to the reaction by wages - were avoided. On past experience, it is these latter affects which are most damaging. So far, the effects of higher oil prices have been surprisingly mild. But economic policies should remain vigilant in the face of a potential pass-through to inflation expectations, all the more so when there are other risks and vulnerabilities in the world economy which, in some respects, have not only not diminished but have tended to increase. Of note, here, is the necessary re-establishment of a more normal macroeconomic stance (the main countries’ policies have been adding abnormally expansionary momentum in the world economy in recent years), and the potential impact on financial markets.