Bank of England’s Carney says EU has boosted dynamism of UK

Bank of England Governor Mark Carney delivered an upbeat assessment of Britain's membership of the European Union on Wednesday, which is likely to be welcomed by supporters of the country staying in the union.

British prime minister David Cameron has promised to hold a referendum before the end of 2017 on whether the country should remain in the EU, and recent opinion polls have shown public opinion is split on the issue.

Mr Carney, aware of the risks of dealing with one of the most divisive issues in British politics, stressed in a speech that he was not making an overall assessment of the pros and cons of Britain’s EU membership, but rather its implications for the Bank of England.

However, he said Britain was possibly “the leading beneficiary” of the EU’s single market of 28 countries, and that being in the bloc had been one of the drivers of its strong economic performance in the four decades since it first joined.

"Overall EU membership has increased the openness of the UK economy, facilitating dynamism but also creating some monetary and financial stability challenges for the Bank of England to manage," Mr Carney said in the speech at Oxford University.

“Thus far we have been able to meet these challenges.”

On immigration, one of the most controversial aspects of Britain’s relationship with Europe, he said that the free movement of labour could help tackle skills shortages and allow faster economic growth.

The BoE did not consider how Britain would fare outside the EU, or what would have happened if it had never joined, as there were too many potential scenarios to consider.

Mr Carney said Britain was not immune to risks from Europe, such as the economic hit it suffered when big trading partners in the euro zone slid into a debt crisis in recent years.

“As a result of closer integration within the EU and, more recently with the euro area crisis, this may have increased the challenges to UK economic and financial stability,” he said.

Mr Carney also stressed that the EU needed to safeguard the interests of non-euro zone countries, such as Britain, when drawing up rules for the financial sector as the single currency area gets increasingly integrated.

Britain, which is home to a financial sector unmatched in size in the rest of Europe, has clashed with the bloc over limits to bankers’ bonuses and the details of plans to make banks issue debt that can be converted into equity.

That concern about protecting the voice of non-euro zone members echoed a priority reform of the EU sought by Mr Cameron and finance minister George Osborne before the referendum is held.

Campaign

Mr Carney’s speech, which he delivered as the bank published a 100-page report on the same issue, comes as campaigning is intensifying ahead of the vote which could take place as early as next year.

Most opinion polls have shown more Britons favour staying in the EU rather than leaving, but the lead has narrowed and two recent polls have shown a narrow majority supporting an exit.

Mr Cameron is trying to renegotiate the terms of Britain’s EU membership and has not yet set a firm date for the referendum.

Until now, Mr Carney has largely steered clear of making comments on the vote on Britain’s EU membership.

His speech on Wednesday, and the Bank’s report, will provide a boost for groups seeking to keep Britain in the EU who argue that benefits outweigh the gains of leaving.

Opponents of Britain’s EU membership might take some comfort from Mr Carney’s mention of the risk that non euro-zone countries could be dominated by those in the single currency area.

A speech by Mr Carney on currency unions before Scotland’s independence referendum in 2014 was cited by opponents of a breakaway as a reason why Scotland would be unable to keep on using the pound if it split from Britain, an issue that fed into concerns among many Scots about the risks of independence.

Last month, BoE deputy governor Ben Broadbent said that the bank would monitor the risk that uncertainty around the referendum could make it harder for the country to finance its large current account deficit.

- Reuters