Why the Bank of England Wants Britain to Stay in the EU

The Bank of England has entered the European Union referendum debate.
Why the Bank of England Wants Britain to Stay in the EU
Bank of England Governor Mark Carney speaks at a inflation report press conference in London, England, on Aug. 6, 2015. (Anthony Devlin/Getty Images)
10/22/2015
Updated:
12/14/2015

The Bank of England has entered the EU referendum debate. Its report, along with comments from Gov. Mark Carney, emphasize the benefits that membership of the EU brings the U.K. Carney said membership makes the U.K. more dynamic, giving it greater potential for growth, and more resilient to shocks. But he also warned of the need to safeguard the U.K. against further eurozone integration.

The referendum, scheduled to take place before the end of 2017, will ask voters whether they want to stay in the EU or leave. If the U.K. chooses to leave the EU, this will have implications for how the Bank of England controls inflation and manages financial stability. If, for example, the free movement of labor were restricted, this may affect supply and drive up inflation.

Freedom and Vulnerability

The key theme underlying the bank’s analysis is “openness.” By this it means openness to trade and the free movement of goods and services, capital, and people. It argues that the EU’s single market drives down the cost of trade and increases competition, which reduces prices and helps to keep inflation low.

The free movement of capital helps to overcome supply constraints, and the bank reports that the U.K. has been particularly successful in attracting foreign direct investment as a result of EU membership. The free movement of labor helps reduce skill shortages, keeping employment high and wage costs in control. As wage inflation feeds through into price inflation, this also helps the central bank in its key objective of price stability.

On the other hand, euroskeptics on the right may also be skeptical of an establishment view that advocates remaining in a club whose ethos they do not agree with and that is perceived to have a democratic deficit. They may argue that further openness to trade at a wider, global level would be more beneficial than at the more restricted European one.

So, in short, the bank has taken a positive view of the U.K.’s membership of the European Union, but one based firmly and narrowly on the benefits of a free market, free trade, competitive environment. This leaves the referendum debate wide open to consider the broader benefits and drawbacks of EU membership, assessed from a wider perspective.

W. David McCausland is a professor of economics at the University of Aberdeen in the U.K. This article was previously published on TheConversation.com.