Yesterday’s News: Carney and the EU

This week the Bank of England Governor, Mark Carney, gave a speech on the EU in Oxford. It’s well worth reading the whole thing, rather than the various responses to it. It’s not particularly long, and there’s even a bit of humour injected in places.

Firstly, why does it matter that the Bank of England Governor has given a speech? It matters because he is head of the institution tasked with carrying out monetary policy – what happens to interest rates, essentially, to keep inflation at around 2%, and also financial regulation – to try and ensure another financial crisis doesn’t occur.

What is the context? As you’ll be aware, the UK is holding a referendum by the end of 2017 on its membership of the EU. The UK, as a very¬†open economy, is highly affected by international events – both good and bad. At times, high demand from Europe and elsewhere has helped drive UK growth, but at other times instability in neighbouring countries has inhibited our growth. Additionally, it means our policy decisions affect others in the same way that many decisions we make on a crowded train impact those who happen to be sat/stood near us.

What did Carney have to say? Essentially, he said that the founding principles of the EU: freedom of movement of goods and services, capital and labour, have been a good thing for the UK economy. These are arguments we’ll cover in much more detail next term, but here’s some food for thought in the meantime. However, he did add caution (something Eurosceptics have been quick to seize upon): financial regulation may threaten the UK economy in the future, as may the unwillingness of other European nations to reform and become more competitive.

All things we’ll be talking about in much more detail in the Spring: see you then!

The EU Referendum

The news this morning is that a new anti-EU group, “Vote Leave”, has been announced. This is apparently the second such group to be formed in recent weeks ahead of the EU referendum that will happen before the end of 2017.

As you’ll be no doubt aware, the UK is part of the EU, what Wikipedia describes as a “politico-economic union of 28 countries”. It’s what economists would refer to as an institution, and it’s supra-national in that it acts above national governments, overriding their ability to make their own decisions (sovereignty) at times.

That is the prime criticism of the EU, namely that it dictates things we must do here in Britain, rather than allowing us to make our own decisions. That does seem like quite an appealing argument – we should surely be able to make our own decisions as a nation?

We’ll have only about a lecture and a half to think really about international economics during EC114, but you’ll get plenty of chances in your second and third years to study this further, should it interest you; see the blog post earlier today, “You’re doing Intro Macro: what comes after it?”, for the options ahead of you.

The UK is a very open economy, which means we trade a lot, both in goods and in (financial) services. This means that what we do as a country affects countries around us for better or worse. It also means that what countries around us do affects us, particularly if those countries are economically powerful. Economists talk a lot about the Prisoner’s Dilemma, which illustrates a situation where by not co-operating, all individuals/groups in that situation can be made worse off, and points towards co-operation as allowing us all to be made better off.

These considerations have led macroeconomists to think about whether co-ordination between nations might be a good thing, and the EU is one example of such attempts at co-ordination. But in order for co-ordination to work, it must be that nation states forgo the ability to do what they want in all situations – they must accept less sovereignty.

The decision we as a country make in 2017 about our EU membership matters a lot, and it will be good to make sure you’re informed about what it means. That means looking at the objective facts as much as you possibly can; this will be difficult given that pro- and anti-campaign groups will attempt to convince you without necessarily using those facts properly. This is where learning the tools of macroeconomic analysis can help you, and we’ll start after Christmas!