It depends on a range of factors including an economy’s factor endowments, the complementarities that exist between these and its production technologies, and the correlation of shocks between the domestic and world economies.5 Although openness supports dynamism, integration also brings greater exposure to foreign shocks. 2.2  Openness and stability  Those observations point to a second important influence of openness on the UK economy: stability. As the UK has become more open over time, its interdependence with other economies, including others in the EU, has increased. For the macroeconomy, this has two opposing effects. First, openness can enhance the investment returns and opportunities to diversify risks of households, firms and financial institutions. Well-managed openness can therefore grow wealth while enhancing risk-sharing, insuring households’ consumption, smoothing their working patterns, and augmenting their borrowing and saving opportunities. That insurance helps people plan for the future in the knowledge they’ll have to change their plans less abruptly when the unexpected happens. The flip-side is that openness can change the nature of the unexpected itself, altering the type and scale of shocks hitting the economy. For example, the complexity of financial linkages can grow and become more opaque, creating new vulnerabilities and more severe shocks. And openness has the potential to exacerbate existing distortions or inefficiencies. 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 boom. Most obviously, openness ties the fates of trading nations together.

Mark Carney: The European Union, monetary and financial stability, and the Bank of England Text of the Cairncross Lecture by Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, St Peter’s College, Oxford, 21 October 2015. *  *  *  I would like to thank Ben Nelson and Iain de Weymarn for their assistance in preparing these remarks, and Aaron Clements-Partridge, Rashmi Harimohan, David Ronicle, Thomas Smith, James Talbot, Ryland Thomas, Nicola Anderson, Phil Evans, Richard Blows, George Murphy, Mike Flood, Peter Nagle, Nicola Shadbolt, Sinead Meany, Jumana Saleheen, Dennis Reinhardt, Bob Hills and Siobhan Clark for their work preparing EU Membership and the Bank of England. 1. Introduction  It is a great honour to give this Cairncross Lecture in Wren’s exquisite Sheldonian Theatre. Sir Alec Cairncross was a celebrated economist whose career bestrode public service and academia. Born to a Lanarkshire ironmonger in 1911, he rose, via Glasgow University and Cambridge, to serve as the first head of the Government Economic Service and later, much more illustriously of course, as Master of St Peter’s College. His work serves as a reminder of how enduring are the most trying economic questions we face. His PhD thesis, eventually published after great anticipation in 1953, concerned British investment at home and abroad during the last great wave of globalisation – a Golden Era for global commerce that stretched from Canadian Confederation to the eve of the Great War.