Speaking at St Peter’s College yesterday, Carney said that membership has increased economic and financial openness, allowing the economy to grow more rapidly and create more effective competition, but also leaving it more exposed to economic and financial shocks from overseas
Discussing the positives for the UK 'being in Europe', the governor highlighted that greater openness boosts the size of markets that UK households and firms can access.
He said:
"In turn, trading in larger markets spurs innovation and promotes the adoption of new technologies from abroad. It also intensifies competition and drives efficiency improvements not least by allowing firms to exploit economies of scale.
"The openness associated with the free movement of labour can help better match workers with firms, alleviating skills shortages and boosting the supply side or the potential growth rate of our economy.
"And greater openness can enhance the allocation of capital by better matching lenders with borrowers, potentially financing growth-enhancing investment. Foreign Direct Investment has particular benefits. By creating stable and long-lasting links between economies, it assists economic integration and boosts dynamism by establishing channels for technology transfer and skills improvements."
However he admitted that the 'large and complex' UK financial system generated vulnerabilities in the run up to the Global Financial Crisis, adding that the UK, along with many of its main international partners, lacked the institutions and tools for managing and addressing them when they crystallised.
As a result, he said, global shocks were "transmitted virulently across borders, doing great damage to the financial systems and real economies of many countries". Carney believes that the UK was particularly affected given its high degree of financial openness.
He was also critical of the EU's bonus cap which restricts the proportion of pay that can be clawed back in the event of excessive risk taking or poor conduct, thereby weakening discipline from remuneration.
During his speech, Carney stressed that while EU regulations define many of the Bank of England’s policy instruments, the influence of EU membership does not prevent the MPC from achieving its price stability objective.
He said that under inflation targeting the MPC has "ultimate control" over the UK’s nominal destiny, allowing the flexibility of the exchange rate and free capital flows to facilitate adjustment to global shocks.
Carney described the UK economy as one of the most flexible in the advanced world, arguing that the scale, complexity and degree of global activity of the UK financial system are unmatched in the European Union.
He added:
"More foreign banks operate in the UK than any other EU country, and more than half of the world’s largest financial firms have their European headquarters in the UK. The UK has the largest global share of cross-border bank lending, foreign exchange trading, and OTC interest rate derivatives. It has the world’s third largest insurance industry and its second largest asset management industry."
He concluded that 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.
