Mario Draghi has warned that Britain, rather than the eurozone, will “first and foremost” feel the pain of Brexit, as he called for clarity over the negotiation process that will govern the UK’s departure from the EU.
The European Central Bank president, speaking at the European Parliament in Brussels on Monday, said that it was impossible to estimate the full economic impact of Brexit at this stage, but noted that the single market had been “a fundamental asset” for the UK, allowing its banks to make “sizeable savings in terms of capital and liquidity”.
“If, in the long run, the risk of a less open UK economy in terms of trade, migration and foreign direct investment were to materialise, there would be a negative impact on innovation and competition and, thus, productivity and potential output,” he said.
Mr Draghi’s intervention comes at a time of intense debate about the impact of Brexit on the British economy between government economists in London and Brexit advocates. An interim budget statement from the UK Treasury last week was based on independent official forecasts that were sharply criticised as overly pessimistic by Brexit advocates.
Mark Carney, Mr Draghi’s counterpart of the Bank of England, has taken particular heat from Brexiters, who believe that the BoE governor improperly inserted the central bank into a political debate over EU membership and unjustifiably warned that Brexit would lead to economic crisis.
Bernard Jenkin, a Conservative MP and vocal supporter of Brexit, dismissed Mr Draghi’s warnings as empty threats. “This is all pre-positioning and jungle drums,” said Mr Jenkin, chairman of the public administration select committee. “It possibly bears no relation to the outcome of the negotiation and people should keep calm and carry on.”
Reflecting growing impatience in the EU over London’s approach to Brexit talks, the ECB chief called for “clarity on the negotiation process as soon as possible in order to reduce uncertainty”.
He said that the British vote raised questions of eurozone “sovereignty”, a reference to efforts by the currency bloc to concentrate certain types of trading activity on its territory rather than in the City of London.
“Following the outcome of the British referendum, there will certainly be issues of sovereignty in various parts of our payments framework, infrastructure framework, clearing systems and so on,” he said.
He referred to a previous legal struggle between the UK and the ECB, when Britain thwarted a bid by the central bank to push clearing of euro-denominated securities away from London and into the euro area. The ECB lost the case, with the court deciding that such restrictions were impossible under existing EU law.
“If one wants to change that, it’s basically the legislators, you, who might do that,” Mr Draghi said.
The ECB president described a cocktail of political risks hanging over the global economy, including the Brexit vote, Donald Trump’s election as US president, and a potential No vote in a looming Italian referendum, saying that the world was facing “quite profound changes” that would take years to play out.
He sought to assure lawmakers that the ECB would continue to pursue expansionary policies to underpin growth through uncertain times.
The central bank’s governing council will, at its December meeting, assess “various options” for maintaining “the very substantial degree of monetary accommodation necessary to secure the sustained convergence of inflation towards levels below or close to 2 per cent over the medium term.
At an ECB meeting next week, policymakers are widely expected to announce an extension of their landmark bond-buying purchases.
Mr Draghi also made a plea for governments to stick to the road of financial reform they have embarked upon since the 2008 financial crisis, saying that they should not be deterred from it by populism.
He said that the international community would get a signal in the coming months of the Trump administration’s stance on regulatory co-operation, with several key gatherings of global standard setters, such as the Basel committee, due to take place.
These meetings will show “exactly what the regulatory stance of the new administration will be,” he said.