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[...] There are three ways 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; and,
- 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 for the United Kingdom of shocks originating in both the domestic and global economy and financial system. [...]
Overall, the openness of the UK economy has almost certainly increased as a result of EU membership. This is likely to have increased dynamism and the ability of the economy to grow without generating risks to the Bank of England’s primary objectives of monetary or financial stability. Dynamism will also have contributed to the achievement of the Bank of England’s secondary objectives of strong sustainable and balanced growth and facilitating effective competition. Greater openness to the EU, however, like openness more generally, has probably increased the external challenges to UK monetary and financial stability, as seen in the recent euro-area crisis.
The UK’s institutional arrangements and policy framework for price stability have been able to manage these challenges and maintain price stability. A reformed domestic institutional framework for financial stability is in place to address the shortcomings exposed by the financial crisis and protect financial stability. This framework depends in part on the quality of financial regulation set at the EU level and the flexibility to apply that regulation to meet the specific financial stability challenges in the world’s largest international financial centre. In the main this combination has been achieved thus far. It may, however, become more challenging as the euro area integrates further.
Looking forward, the future development of the EU regulatory framework must be able to facilitate the necessary further integration of the euro area. The single currency however, requires a higher degree of integration and risk sharing than the single market. It is therefore desirable, particularly given the weight of the ECB and of the members of the single currency within the EU, that there are clear principles to safeguard the interests of non euro-area member states. This will ensure the ability of the Bank of England to continue to meet its financial stability objectives is not impaired and the integrity of the single market is not weakened. The future direction of EU financial reform should recognise that the EU comprises multiple currencies with multiple risks. Such principles would enable the Bank of England to continue to ensure that EU membership contributes fully to the attainment of the Bank’s statutory objectives.