UK likely to suffer most in the event of hard Brexit, Mario Draghi warns

Theresa May's government could be forced to choose between remaining in the EU single market and regaining control over immigration

'While the UK referendum did create uncertainty as far as the country’s participation in the single market is concerned, the single market cannot go backward,' the ECB president said (AP)

European Central Bank president Mario Draghi warned that the UK economy would be the first to suffer if its decision to leave the European Union leads to protectionist measures.

"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,” Mr Draghi said in a testimony to European Parliament lawmakers in Brussels on Monday.

"Such developments would first and foremost weigh on the UK economy."

Theresa May says that by March she’ll formally announce Britain’s intention to leave the EU, triggering at least two years of potentially contentious talks between Brussels and London. Her Government could be forced to choose between remaining in the EU single market and regaining control over immigration.

The euro area has so far weathered the fallout from the referendum with “encouraging resilience” in part due to the efforts of central banks and supervisors in the UK and Europe, Mr Draghi said.

Even so, longer-term potential spillover effects from Britain leaving the EU will “vary across countries depending on their trade links with the UK”.

He argued against any splintering of the single market, which seeks to guarantee equal standards and access for the members of the union.

No Backtracking

“While the UK referendum did create uncertainty as far as the country’s participation in the single market is concerned, the single market cannot go backward,” he said. “This also means we cannot take backward steps concerning the regulatory, supervisory and oversight framework for banks and financial market infrastructures, which has been enhanced considerably since 2008.”

The ECB president said Europe should continue to shore up the foundations of its monetary union, which as “a half-built house is not stable; it is fragile”.

He also signaled the ECB’s readiness to continue pumping cash into the euro-area economy to combat risks to the currency bloc’s recovery. Geopolitics has become “the major source of uncertainty” for the coming months, though the euro area economy continues to expand at “a moderate but steady pace”, he said, adding that unprecedented monetary stimulus should ensure that this gradual trend can be sustained.

The ECB’s Governing Council faces a decision on 8 December whether to extend a €1.7t trillion quantitative-easing program beyond the provisional end-date of March. While Draghi and other policy makers have ruled out a sudden stop to purchases, the details of any extension are still up for debate, creating uncertainty about the outcome of the gathering.

Electoral Outlook

Governing Council member Yannis Stournaras, the head of Greece’s central bank, said in an interview on Friday that the ECB might consider extending asset purchases at a slower monthly rate to stretch out the stimulus as the institution positions itself as a “pillar of stability” amid political uncertainty. A series of national votes in the next 12 months could change the euro area’s political landscape.

Mr Draghi stressed that the bond-buying program is “sufficiently flexible” and could “be revisited to preserve the substantial degree of monetary accommodation necessary” to meet the central bank’s objective of pushing inflation to its target of just-below 2 per cent. The rate was 0.5 per cent in October.

Pressed by one lawmaker on Monday that the lack of a decision so far about the future of quantitative easing is creating its own uncertainty, Draghi pushed back. “We don’t have the same view,” he said. “This is a Governing Council decision, which will be taken in December.”

Bloomberg