- BOE governor to testify to lawmakers on EU costs and benefits
- Economic risks increasing as referendum on June 23 looms
Mark Carney’s scope to sidestep “Brexit” is dwindling.
With a referendum on Britain’s European Union membership looming, the Bank of England governor has spent months trying to skirt the highly charged debate. An appearance before lawmakers this week may throw him right in, as happened in the buildup to the Scottish independence vote when his comments were hijacked by campaigners from both sides.
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The stakes are high, with Goldman Sachs Group Inc. and BlackRock Inc. among those warning the vote puts trade and investment at risk and many economists saying the full implications of an exit are almost impossible to quantify. While Carney has said there’s little evidence of an economic impact so far, some surveys signal the uncertainty is already having a detrimental effect.
“The governor will simply have to give a view,” said Philip Shaw, an economist at Investec Securities in London. “It’ll be very difficult to avoid specific questions about trade access and the potential impact on growth, inward investment, the prospects for the financial sector. He’ll be fairly frank, I don’t think there’s any avoiding it.”
Carney and Deputy Governor Jon Cunliffe will testify at Parliament’s Treasury Committee on Tuesday on the economic and financial costs and benefits of EU membership. In a report in October, the central bank considered the impact of membership on its mandate, but didn’t give a detailed assessment of the merits or the implications of an exit.
That hasn’t stopped political point-scoring, with Chancellor of the Exchequer George Osborne hailing the document as being in line with the government’s thinking that the U.K. should remain. Euroskeptic lawmaker and Treasury Committee member Steve Baker said the same document was a “clear warning” about the risk of power transfer to Brussels.
Last month, Prime Minister David Cameron hinted he wants to see the BOE go further with its analysis, saying it should “set out the figures so people can make a judgment.”
“It’s a political forum -- the questions will be quite wide-ranging and that could be difficult for him,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “His language will be cautious and technical and maybe a bit dry, but in terms of identifying the risks, that might tend to reinforce the view of someone who is more cautious about a U.K. exit.”
The risks of getting dragged into the row were demonstrated after the resignation of the leader of a U.K. business group who broke ranks with his members to personally call for the country to leave the EU. John Longworth quit as director general of the British Chambers of Commerce on Sunday -- two days after being suspended for saying he backed quitting the political bloc.
Cameron denied putting pressure on him to step down after London Mayor Boris Johnson, the most high-profile politician supporting so-called Brexit, slammed Longworth’s suspension, saying the BCC head had been “crushed” by the “agents” of the pro-EU campaign led by the prime minister. The BCC also said it had not acted under pressure from Cameron’s office.
At Carney’s hearing, trade and foreign investment may feature strongly, with EU countries making up seven of the U.K.’s 10 largest export destinations. While U.K. goods exports to the bloc fell in 2015, they still amounted to 134 billion pounds ($190 billion), almost three times the level of sales to the U.S., and 10 times as much as goes to China.
Carney’s predecessor, Mervyn King, touched on the debate on BBC television on Sunday, with a bleak assessment of the political prospects for the euro area from his recently published book. He suggested that Britain can’t avoid the problems of the region, whether or not it remains an EU.
“It’s very clear that we are influenced and affected by what goes on in the euro area,” he said. “The euro area is our biggest trading partner. That’s going to carry on being the case, and therefore it does matter to us what goes on there.”
Contingency planning may also feature at Carney’s hearing, which is scheduled to start at 9:15 a.m. on Tuesday. While he’s said the BOE is considering what actions it would take in the event of Brexit, he’s declined to reveal any details.
That mirrors the central bank’s actions in the run up to the Scottish referendum, when officials waited until after the event to give an insight into their planning. Back then, policy makers were ready to introduce cash auctions to help liquidity and provide extra bank notes. They also discussed the implications of a breakup for the U.K.’s credit rating.
With an EU withdrawal increasing the chances of a U.K. recession, that also raises the odds the BOE would have to respond with an interest-rate cut or some form of stimulus.
“The bank would be looking at this as a macroeconomic shock,” said James McCann, European economist at Standard Life. “It’s something that creates a huge amount of uncertainty, because upon ‘Brexit,’ then you would undergo a two-year period of renegotiation before you fully understood what your new relationship was with Europe. Obviously Europe is a large trading partner, so I think the bank would see it as something that needs policy easing.”