EU has increased 'openness and dynamism' of British economy, says Mark Carney
Being in the European Union has increased the "openness and dynamism" of the UK economy but has also left it more vulnerable to external financial "shocks", the Governor of the Bank of England has said.
Mark Carney said "in some respects" Britain has been the "leading beneficiary" of the freedom of goods, services, capital and labour that underpinned the economics of the transnational political organisation
But, in a speech in Oxford, he also warned that its openness "provides potential for both greater growth and shocks" and could act as "a dragging anchor when things go awry across borders".
His speech came as both the In and Out campaigns begin ahead of the upcoming referendum on Britain's membership of the EU.
The Confederation of British Industry (CBI) has said leaving the European Union in favour of a looser arrangement with Brussels would have "serious downsides", warning the majority of firms want to remain inside the 28-member bloc.
The CBI acknowledged there are downsides to membership and the EU needs reform, but it said the problems are "significantly outweighed" by the benefits of staying in.
Mr Carney called on the European Central Bank and eurozone members to make sure future steps to increase internal financial stability do not impede non-eurozone members of the EU, including Britain.
Delivering the Cairncross Lecture at St Peter's College Oxford, Mr Carney told the audience at the Sheldonian Theatre: "Overall, EU membership has increased the openness of the UK economy, facilitating dynamism but creating some monetary and financial stability challenges for the Bank of England to manage. Thus far, we have been able to manage those challenges.
"Our efforts have been helped by the strong domestic framework for financial stability that has been put in place post (global financial) crisis. Going forward, these should be further buttressed by an evolution of the EU regulatory framework that continues to work for all members of the EU.
"The increased resilience that brings is a necessary condition for dynamism. And a dynamic, resilient domestic economy will enhance the prosperity of the people of the UK and beyond."
Mr Carney added that the report was designed to show how EU membership affects the bank's role in achieving financial stability, adding: "It is not a comprehensive assessment of the pros and cons of the United Kingdom 'being in Europe'."
Mr Carney has downplayed the significance of his speech but his words will be carefully scrutinised for hints of any opinion on the issue of Britain remaining in the EU or leaving after more than 40 years.
He told the lecture audience: "In some respects the UK is the leading beneficiary of the famous 'Four Freedoms' first set out in the 1957 Treaty of Rome.
"These are the free movement of goods and services, capital and labour, enhanced over time through a range of measures to reduce impediments across the EU.
"So although the UK's dynamism is the product of many factors including deep human capital, well-developed physical infrastructure, a competitive fiscal regime and the rule of law; the EU has arguably bolstered it by establishing the world's largest single market with free movement of goods, services, capital and labour."
However, he also said that openness "has the potential to exacerbate existing distortions or inefficiencies".
He went on: "In times of euphoria, foreign capital can flood in and amplify domestic trends. The speed of its flight when passion turns to panic can then deepen the bust that follows the boom.
"Most obviously, openness ties the fate of trading nations together. That can mean a 'second engine' for growth from abroad. But it can also mean a dragging anchor when things go awry across borders."
The existence of the Bank's report on the EU - codenamed Project Bookend - was supposed to remain confidential, but was accidentally revealed when details were sent to a journalist in an email blunder.
The work, led by deputy director for financial stability Sir Jon Cunliffe, has looked at "a range of economic and financial issues that arise in the context of the renegotiation and national referendum" and runs to 100 pages.
The report says that "overall, the openness of the UK economy has almost certainly increased as a result of EU membership".
It added: "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."
It continued: "The future direction of EU financial reform should recognise that the EU comprises multiple currencies with multiple risks."
Mr Carney added to this in his lecture, saying that "how financial regulation in the EU evolves in future will be critical to the resilience of both the euro area and the UK economy".
He added: ""It is 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 member states."
The CBI report said the Prime Minister's promise of an in/out referendum by the end of 2017 meant it was essential for the business community to get involved in the debate.
The document said "whilst membership of the European Union has its downsides, the disadvantages are significantly outweighed by the benefits we get in return".
CBI director general John Cridland said: "The CBI speaks for 190,000 firms of all sizes, in every sector and in every corner of the UK, and most of our companies want the UK to be in a reformed EU. For business the benefits of full membership outweigh the disadvantages, but the EU must work better.
"The single market has been the solid foundation of our economic success in recent decades, giving us direct access to eight times more consumers than in the UK alone and ensuring we can go toe-to-toe with larger economies on major trade deals, creating jobs and economic growth here in the UK.
"While there are many benefits to EU membership, we should not be blind to the downsides and recognise the EU, like any big institution, has its faults and needs to do better."
Prime Minister David Cameron said: "An important speech from Mark Carney - making clear where reform is needed in Europe, as well as the benefits of the single market."
Chancellor George Osborne said: "Mark Carney's very impressive speech sets out how EU membership has made the British economy more open and dynamic, but as the eurozone integrates why we need to safeguard the interests of non-euro members like Britain.
"I completely agree. That's why these safeguards are at the heart of our renegotiation."
Steve Baker, co-chairman of Conservatives for Britain, said: " Mark Carney has sent a clear warning about the dangers of eurozone countries giving more power to Brussels. He says that the EU's next treaty will give itself even more power and warns that this creates risks for the UK and how the Bank of England safeguards our economy.
"British jobs will be much safer if we have control of how our economy is regulated. The only way to get control is to Vote Leave and negotiate a new UK-EU deal based on free trade and friendly cooperation."