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ECB plays down Brexit threat to eurozone economy

The European Central Bank has ruled out the possibility that Brexit could pose a major threat to the euro area economy, rejecting warnings from the Bank of England that a messy UK withdrawal could leave EU companies without vital services.

Vitor Constâncio, the ECB’s vice-president, said on Thursday that Brexit could “really not harm significantly the ongoing recovery in the euro area” and that financial firms were already adapting by relocating activities to Europe.

“The point is that of course Brexit is very significant for the UK, but in view of the relative size it is much less meaningful for the rest of the EU,” said Mr Constâncio in a video on the ECB’s website.

The ECB’s conclusions — in the latest of its periodic reports on financial stability — run counter to officials’ arguments in Britain, where the City’s role as a major financial-services provider to European companies is seen as one of the country’s strongest cards in its negotiations with the EU on a new trading relationship.

Mark Carney, governor of the Bank of England, suggested this year that a severe Brexit could be a “Jenga” moment that led to a breakdown of financial flows, hurting the City of London’s European customers even more than the UK itself.

However while the ECB acknowledges that the outcome of the negotiations is unclear, its report suggests a UK exit “is likely to have limited implications for the euro area economy and financial stability.”

Among its findings is that euro area companies listed at most 15 per cent of their total debt and equity on UK exchanges over the past decade.

Derivatives transactions conducted in London amount to around one-fifth of euro area companies’ “total hedging activities” to manage their financial risks, the ECB said, adding that much of that trading was done with US, Japanese and Swiss broker-dealers operating in the City.

Specifically, the ECB played down the risk that European companies “would face restrictions in accessing wholesale and retail financial services”, saying some would continue to be supplied from the UK while others “will be provided by EU-domiciled entities instead”. Relocation of firms to the continent would further mitigate any impact, it said.

“The beneficiaries of relocations are likely to be existing EU financial centres that already have infrastructure in place that can be scaled up,” the ECB said, adding that “in the longer term, a new equilibrium may even be beneficial” for some euro area financial firms “looking to take advantage of the business opportunities created by Brexit”. 

The ECB’s intervention comes less than a month before the expected start of formal Brexit talks, intended to ensure a smooth departure for the UK in March 2019.

While playing down the risks from Brexit, the ECB nonetheless urged banks and other financial firms “to undertake all the necessary preparation”, saying the transition could cause “frictions” as companies will have to adapt to a new legal situation.

The bank also acknowledged in the report that Brexit may well lead to increased financing costs for businesses, although even these, it said, were “likely to be modest”.