Mark Carney did his best. The governor of the Bank of England insisted that his speech in Oxford announcing the findings of a 100-page Threadneedle Street report should not be seen as an assessment of the “pros and cons” of EU membership.
That, though, is not the way Carney’s intervention into the Europe debate is likely to be interpreted. Whatever the governor said on this fraught issue was bound to carry a political punch, no matter how hard he tried to be dry and technocratic.
So, while Carney said he was only really looking at how EU membership affected the Bank’s two core tasks of hitting its 2% inflation target and maintaining financial stability, it comes as David Cameron and George Osborne are starting to renegotiate the terms of the UK’s membership. And what the Bank says matters.
The governor divided his speech up into three parts. Part one extolled the benefits of Britain’s membership of the EU over the past 42 years. It had made the economy more dynamic, more open, more resilient and more productive. In short, being part of the EU had been good for growth. That’s what the prime minister and the chancellor think.
The second part of his speech set out some of the risks associated with EU membership, since it left the UK more exposed to shocks from overseas. “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.”
These challenges meant it was harder for the Bank’s monetary policy committee to set interest rates at a level consistent with hitting the inflation target. But the Bank thinks that the MPC has been able to do its job because the UK has its own central bank that can set interest rates to suit domestic conditions. That’s what Cameron and Osborne think too.
Having looked at the past and the present, Carney then did a bit of crystal ball gazing. He is worried that the new rules and regulations that are developed to make the euro work better might have an adverse impact on those countries – such as Britain – that decide that they don’t want to be part of the single currency.
As a result, what Carney wants is a set of EU rules for banks and other financial institutions that are “sufficiently flexible and effective to manage the consequences for the UK of shocks originating at home and abroad”. The message to the government is that it should negotiate a set of “clear principles” that safeguard the interests of countries not in the eurozone. That is not going to cause the prime minister and the chancellor any sleepless nights, because it is what they are setting out to do anyway.
Only in the unlikely event that Cameron and Osborne come back completely empty handed will the Bank report cause them any problems. In the meantime, they are likely to find it extremely helpful.
