Carney Wades Into EU Debate With Speech That Tries to Stay Outby and
BOE governor weighs benefits of EU against stability risks
Cameron has promised U.K. referendum on EU by the end of 2017
Mark Carney skirted the tense political battle over Britain’s membership of the European Union with a speech that addressed the U.K.’s relationship with the bloc, but offered no final conclusion on its merits.
While the Bank of England governor was at pains to stress he didn’t want to enter the debate, his speech in Oxford on Wednesday was hailed by Chancellor of the Exchequer George Osborne as being in line with the government’s approach. The central bank published a report alongside Carney’s remarks which didn’t consider the impact of a British exit from the union.
Membership of the 28-nation bloc has bestowed benefits on the U.K. economy, Carney said, and so far the debate about Britain’s future hasn’t weighed on growth. He also pointed out some hazards to stability. He stressed that as the euro area integrates and beefs up regulation, officials need to protect the interests of London as the region’s largest financial center.
Evidence suggests that the U.K. has successfully “harnessed the benefits” from membership, while “avoiding some of the drawbacks of reduced flexibility from which some continental European economies suffer,” Carney said.
While the EU has posed challenges at times, it “does not prevent the MPC from achieving its price-stability target,” he said. Carney also said the bloc has “very likely increased the U.K.’s dynamism,” by which he said he means “the ability of an economy to grow and progress.”
Prime Minister David Cameron has pledged to hold a referendum on whether to exit the EU by the end of 2017 -- though he hasn’t yet set a date. His government wants Britain to remain part of a reformed EU and is in negotiations with the bloc’s leaders to secure modifications before the vote. Even so, battle lines are already being drawn, with most economists arguing withdrawal would risk the U.K.’s free access to 500 million customers and jeopardize foreign investment.
Carney’s “clearly taken a very political angle,” said Kallum Pickering, an economist at Berenberg Bank in London. “He’s been very clear on identifying the benefits the U.K. has from economic openness and operating in the single market. He’s been quite clear that the U.K. benefits from trade, and benefits from access to Europe’s labor market.”
Carney also pointed out some of the hazards stemming from the lack of flexibility the U.K. has to set its own financial regulations. These included caps on bankers’ bonuses and trigger thresholds for convertible-capital instruments, he said.
The U.K. has the biggest financial-services sector in the region, which means it needs the scope to set its own rules while Europe develops its own regulatory system in the aftermath of the financial crisis, he said.
Osborne said he agreed with Carney’s analysis and that it showed why the government needed to “safeguard the interests of non-euro members like Britain.”
Still, even those who are campaigning for Britain to leave the bloc found something in Carney’s remarks.
Steve Baker, a conservative member of Parliament, said the governor has given a “clear warning” on the risks of power transfer to Brussels.
Work to improve financial stability “should be further buttressed by an evolution of the EU regulatory framework that continues to work for all members of the EU,” Carney said. Any future rules should “support the U.K.’s ability to address risks to financial stability,” he said.
While the euro area needs to integrate more to achieve stability, it’s important that nations outside the currency bloc retain their discretion in applying the rules, he said.
“Actions to complete European Monetary Union should be taken with regard to their impact on all members of the EU,” Carney said. “From the Bank of England’s perspective, steps to ensure financial stability for those within the euro area should not impede the achievement of financial stability for those without, including the U.K.”
This isn’t the first time the central bank has had to grapple with commenting on a highly charged political vote. It also did contingency work last year in the buildup to the Scottish independence referendum, though it only revealed details after the vote. On that occasion, it prepared emergency measures to pump money into the financial system to meet possible demand from banks in the event that Scotland voted to leave the U.K.
The Confederation of British Industry has thrown its weight behind the campaign to keep the U.K. in the European Union, warning withdrawal would pose more downsides than upsides. At the same time, it backed calls for reform by saying the EU should do more to protect countries that don’t use the euro from further integration and reduce red tape on companies.
Carney’s “assertion that EU membership is a net positive for the U.K., with caveats that the terms of membership need to reflect U.K. domestic interests and flexibility, will go down well with the Prime Minister,” Allan Monks, an economist at JPMorgan Chase & Co. wrote in a note. His “tone comes across as friendly to the campaign for keeping the U.K. within the EU.”