Just listened to the Bank of England governor’s long awaited speech on the benefits of the UK’s EU membership and the dangers of leaving it after Cameron’s ill fated EU referendum.
As you would expect from a public servant, you would be hard pressed to find Canadian Mark Carney take sides in a way that would have either the ‘remain’ or ‘leave’ camp jumping up and down in supposed victory. Nevertheless, in the time honoured way of selective perception, I tried to make notes of where I read coded messages of #brexit warnings between Mark’s diplomatic lines, words carefully chosen not to give offense to either the ‘In-camp’ or the ‘Out-camp’ or his political masters in Westminster.
Three main themes were highlighted by the ‘Guv’:
- Being part of the EU has been beneficial to the ‘openness’ of the UK economy. It created ‘dynamism’. An economy open to international trade and capital flows also needs to be open to give jobs to the most talented people from all over the EU (and the wider world over I guess). This is necessary to make the most of these great opportunities an open economy offers the UK.
- Being ‘open’ also brings with it the risk of being ‘exposed’ to economic shocks which happen in other economies. This means that if the Eurozone finds itself in crisis, also the UK suffers the consequences. Having the Pound does not make the UK immune to the wo’s of its biggest trading partner. One of the Bank’s tasks is to minimise those Eurozone shocks or at least the susceptibility/vulnerability to them.
- Finally the UK is impacted by the EU’s regulations and rules. Euro sceptics looking for a condemnation of EU overegulation and red tape must have been disappointed on the night. If anything, Mark said that the UK has a higher requirement for good regulation than yout EU average. This is especially true for the UK’s financial sector, which dwarfs those of other EU countries.
As is to be expected Mark’s talk and examples favorited the UK’s ‘Services sector’. He didn’t really talk much about UK manufacturing, although he said that Britain’s structural trade deficit in goods is worrying (like I have said in this blog many times). Hemoraging trade deficits exporting goods are only sustainable by the grace of a healthy surplus in the UK Services sector. Still there remains a 4-6% of GDP current account deficit for the UK to deal with, which is today mainly financed by Foreign Direct Investment (FDI). Mark said FDI that takes the form of real investment in our economy is good, it brings jobs and prosperity and can’t by its nature be withdrawn overnight. When FDI takes the form of foreign powers buying UK debt bonds, the story is different and more risky. People forget that 30% of the UK’s national debt is today foreign held. Carney alluded to the risk that these type of investments in an ‘open’ economy can be withdrawn overnight. The word he used was ‘Capital Flight’. Could that risk scenario allude to what might happen if Britain were to lose its AAA credit rating after a Brexit? After all with interest rates on the 1.5 trillion UK national debt rising to Greek levels, servicing that debt could become catastrophic?
Having established that the UK has this super-sized financial services market, Carney explained, that in view of the global role and responsibility the City of London has, the UK’s need for regulating that market is rather higher than lower than anything we might see being pushed from ‘Bwussels’. He also debunked the kipper and Eurosceptic spread myth that there is no EU single market for financial services: “there has been progress” he said. However when it comes to creating ‘an architecture to further improve the flow of financial services’ in the EU, then he admitted “there remains work to be done”. The natural Eurosceptic question should be: “Is that work so crucial to the UK better done ‘in’ or ‘out’ ?
Here again I can quote Mark Carney noting that for instance “creating a regulatory framework for capital markets is best done by 28 nations working together”. Mark acknowledged that the Eurozone has a need for ‘closer financial and fiscal integration’ to succeed in th elong run and that it would be a tough task for Britain to negotiate certain safeguards for itself and other countries in the EU, that retain their own currencies and their own associated risks.
My take on this: Indeed the threat of #brexit may be the only bargaining chip Cameron has to negotiate ‘bankable guarantees’ in this respect, because having opted out of the single currency and constantly fighting ‘closer union’, Britain is already seen as ‘half-way out’ of the tent by many of the other Eurozone members. If they were to call Cameron’s bluff and tell him diplomatically to ‘Piss off’ Mark Carneys job to protect the UK economy will have suddenly become a whole lot more difficult. To me that was his most important message of the night.