08 March 2016

BoE: The economic and financial costs and benefits of UK's EU membership - letter by Mark Carney

Bank governor Mark Carney wrote to Andrew Tyrie, chair of the Treasury Select Committee, in response to a request for the Bank's view on David Cameron's renegotiation settlement. Carney said that "EU membership reinforces the dynamism of the UK economy."

During Andrew Bailey's appearance at the Treasury Select Committee (TSC) on 3r d February you requested that the Bank provide its view on those areas of the agreement reached on 19t h February by Heads of State or Government on 'A new settlement for the United Kingdom within the European Union' (the Settlement'), which are relevant to the Bank's ability to achieve its statutory responsibilities. You also requested the Bank's views on an effective subsidiarity mechanism and the overall cost of EU regulation.

This letter is the Bank's response to these requests. It summarises the Bank's assessment of how EU membership affects the Bank of England's ability to achieve its statutory objectives, which is contained in its report on 'EU membership and the Bank of England' (the Report'). It then considers how the Settlement may influence this. Annex A to the letter includes the Bank's view on an effective subsidiarity mechanism and Annex B contains material from the Bank's Report which is relevant to your request on the overall cost of EU regulation.

Impact of EU membership on the Bank of England's delivery of its objectives

The Bank's Report identified three main areas in which EU membership affects the Bank of England's objectives.

• First, to the extent it increases economic and financial openness, EU membership reinforces the dynamism of the UK economy. A more dynamic economy is more resilient to shocks, can grow more rapidly without generating inflationary pressure or creating risks to financial stability and can also be associated with more effective competition. 

• Second, increased economic and financial openness means the UK economy is more exposed to economic and financial shocks from overseas. In recent years, as a result of closer integration with the EU and, more recently, with the euro area, this may have increased the challenges to UK economic and financial stability. These challenges must be set against the benefits of the recent comprehensive reform of the UK's institutional framework for financial stability. This new framework creates a coherent architecture of national macroprudential and microprudential regulators and supervisors. It provides a solid foundation for the UK to maintain and develop its role as the world's leading international financial centre, one which can safely be home to the largest global, systemically important financial institutions and markets.

• Third, EU Regulations, Directives and rules define many of the Bank of England's policy instruments particularly in relation to financial stability. These must be sufficiently flexible and effective to manage the consequences forthe United Kingdom of shocks originating in both the domestic and global economy and financial system.

The Report recognises that, although there have been some limits on flexibility in certain areas, the need for national regulators and supervisors to have the flexibility in applying EU rules to address the particular risks they face has, in the main, been respected. Looking ahead, it is important that any future EU legislative measures, designed to meet the needs of deeper integration in the euro area, do not adversely affect the Bank of England's ability to ensure the stability of the UK financial sector or compromise the single market. The Report underscores the desirability—particularly given the weight of the ECB and of the members of the single currency within the EU—of clear principles to safeguard the interests of noneuro member states while allowing differential integration consistent with the single market. In addition, the Report stresses that the future direction of EU financial reform should recognise that the EU comprises multiple currencies with multiple risks.

The Report concludes that EU membership has likely increased the dynamism of the UK economy and correspondingly its ability to grow without generating risks to the Bank's primary objectives of monetary and financial stability. The greater dynamism resulting from UK membership also contributes to the Bank's secondary objectives of supporting strong, sustainable and balanced growth and facilitating effective competition. Greater openness to the EU, however, has probably increased the external challenges to UK monetary and financial stability, as seen in recent years with the euro crisis.  [...]

Conclusion

The Settlement addresses the issues the Bank identified as being important, given the likely need for further integration of the euro area, to maintaining its ability to achieve its objectives. In line with a main conclusion of the Bank Report, the Settlement explicitly recognises the needs of the UK to supervise its financial stability, while not impeding the implementation of necessary, further integration amongst members of the euro area. It makes clear that the UK retains responsibility for supervising its financial stability, financial institutions and markets as well as maintaining responsibility forthe resolution of failed financial institutions within its jurisdiction. At the same time, it acknowledges the existing powers of the Union to take action that is necessary to respond to threats to financial stability. The Settlement recognises that EU financial services legislation may need to be conceived in a more uniform way for Banking Union member states than for member states like the UK that are not participating. It recognises that there is more than one currency in the EU and makes a legally binding commitment to ensure nondiscrimination in the single market on the basis of currency. Finally, it makes a series of commitments to improve the competitiveness of the EU economy—commitments, to the extent they are fulfilled, that would reinforce the positive impact of EU membership on the Bank's secondary objectives. 

Full letter

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