In move likely to be seen as strengthening David Cameron’s hand, Mark Carney says union membership has opened up economy but also exposed it to shocks

Mark Carney, the governor of the Bank of England, has said that EU membership opened up the UK economy and made it more dynamic, but also left it more exposed to financial shocks.

In an intervention likely to be seen as strengthening David Cameron’s hand as he prepares to enter negotiations with Britain’s EU partners, Carney challenged the prime minister to demand “clear principles” to safeguard Britain’s interests outside the euro, as he warned that botched European integration could threaten financial stability.



Carney, speaking in Oxford on Wednesday evening, said Britain was possibly “the leading beneficiary” of the EU’s single market, and that being in the bloc had been one of the drivers of its strong economic performance in the four decades since it first joined.

“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,” Carney said. “Thus far, we have been able to meet these challenges.”

On immigration, one of the most controversial aspects of Britain’s relationship with Europe, he said that the free movement of labour could help tackle skills shortages and allow faster economic growth.

However, Carney said closer ties with the EU had also left Britain, with its large, open financial sector, vulnerable to the sovereign debt crisis that swept through the eurozone. “Since the crisis began, shocks arising from our biggest and closest trading partner have challenged UK dynamism and made it more volatile,” he said.



“In the aftermath of the crisis, it is essential that EU rules, directives and regulation continue to support the UK’s ability to address risks to financial stability.”

The Bank would like Downing Street to seek assurances that, as eurozone member states press ahead with closer economic and financial integration, Threadneedle Street will not lose its discretion to set regulation to suit the UK.

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Central bank governors have traditionally avoided intervening in politics, but Carney has made a series of forays into public debate, including warning Scottish voters about the risks of leaving the UK and, more recently, highlighting the financial and economic risks of climate change.

In a 100-page report published to coincide with Carney’s speech, the Bank highlights several examples of EU post-crisis regulation it believes have not been in Britain’s interests, including the cap on bankers’ bonuses. It also expresses concerned about the way in which a single eurozone banking watchdog was being established.

“From the Bank of England’s perspective, steps to ensure financial stability for those within the euro area should not impede the achievement of financial stability for those without, including the United Kingdom,” Carney said.

This argument is one that has repeatedly been made by George Osborne. The chancellor has urged eurozone members to press ahead with integration and reduce the threat of a renewed sovereign debt crisis. But he has also said the euro should not become the main locus of decision-making about the future of the single market.

Bank insiders insisted the contents of the report had not been discussed with Treasury officials or ministers, but Carney’s argument will provide a platform for the prime minister to demand reforms. Sources in Threadneedle Street also stressed that it had no intention of “marking the government’s homework”.

Even before formal talks begin, high-profile campaigns on both sides of the referendum debate have been launched, with Britain Stronger in Europe fronted by the former Marks & Spencer boss Stuart Rose, pitted against Vote Leave.The Confederation of British Industry, the lobby group, also entered the fray on Tuesday, stressing the benefits to companies and consumers of staying inside the single market.

Carney’s intervention came as the Spectator reported that Stephen Parkinson, a senior special adviser to Theresa May, the home secretary, is to resign from the government to work for the Leave campaign. The move will fuel speculation that May, who made a hardline speech at the Tory conference questioning the merits of high levels of immigration, may join the Leave campaign when Cameron completes his EU renegotiations.

The governor insisted his speech was not an attempt to assess the overall pros and cons of continued British membership of the EU, or the possible consequences of “Brexit”. But Eurosceptics are likely to seize on his warnings about the dangers of the wrong kind of EU regulation for future stability.

The Bank’s analysis was the outcome of the secret Project Bookend, whose existence was revealed by the Guardian. The first section of the report spells out the benefits to the UK of the “four freedoms” of the EU, set out in the 1957 treaty of Rome: free movement of goods, people, capital and services.

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Speaking in Oxford’s ornate Sheldonian theatre, Carney said that, ever since the repeal of the corn laws almost two centuries ago, the UK economy had “bet on openness”, opting for free trade over protectionism, and EU membership had enhanced that.

“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 since market with free movement of goods, services, capital and labour.”

But, with its disproportionately large financial sector, boosted by US and Asian companies, which can set up in the City of London and operate throughout the EU under so-called passporting rules, the UK was also left vulnerable.

“Greatly increased financial openness, in part associated with EU membership, has made the UK financial system larger, more complex and more exposed to shocks from abroad,” the governor said. “These developments reinforced domestically generated vulnerabilities in the run-up to the global financial crisis.”