Draghi warns of dangers of ‘cliff-edge Brexit’

There could be “significant” risks to financial stability if the UK stages a “cliff-edge Brexit”, European Central Bank president Mario Draghi has warned.

If the UK managed an “orderly withdrawal” from the European Union there would be only a “limited overall risk to the euro area’s financial stability”, Draghi said in Indonesia on October 12. “However, the uncertainty triggered by a cliff-edge Brexit could have the potential to pose a more significant downside risk to financial stability.”

His warning came as UK prime minister Theresa May reportedly rejected an outline Brexit deal prepared by British and EU negotiators.

May sent the UK’s senior Brexit minister, Dominic Raab, to Brussels on October 14 to state that plans for Northern Ireland to remain part of the EU’s single market were unacceptable. A meeting, planned to take place today (October 15) between UK and EU civil servants working on Brexit plans, was cancelled.

The ECB will continue to “monitor developments” in the negotiations between the UK and the EU until the former’s scheduled departure date of March 29, 2019, Draghi said.

He also stressed that the senior managers of private financial institutions bore the most responsibility for preparing for any disorderly Brexit.

…the private sector is primarily responsible for making adequate arrangements to prepare itself for any scenario

Mario Draghi, European Central Bank 

“In view of the prevailing uncertainty about the outcome of the negotiations, and the ensuing legislative and regulatory decisions, the private sector is primarily responsible for making adequate arrangements to prepare itself for any scenario,” Draghi said.

The same message has been a consistent theme of recent speeches by other senior ECB officials, including chief banking supervisor Danièle Nouy. 

Draghi was speaking at the meeting of the International Monetary and Finance Committee in Bali, where he is present as an official observer. UK finance minister Philip Hammond was also there, as was International Monetary Fund managing director Christine Lagarde.

Hammond also made an official statement to the IMFC meeting, which notably did not mention Brexit. He has made several public statements criticising the proposals of some of the more hardline Brexit supporters, and calling for continued strong economic links between the UK and the EU.

The IMFC meets under the auspices of the IMF, with a membership composed of central bank governors, finance ministers and other senior economic officials. South African Reserve Bank governor Lesetja Kganyago is the committee’s current chairman.

Warning on independence

In remarks after his speech, Draghi singled out Turkey’s government for endangering the independence of its central bank, saying this was one example of a growing trend. “Just look at what President Erdogan asked the central bank to do about a month ago,” Reuters reported Draghi as saying.

Turkish president Recep Tayyip Erdoğan said any policy rate hike by Turkey’s central bank would be “a tool of exploitation” on August 11, in one of a series of highly emotive attacks made by him on tighter monetary policy.

The ECB president told journalists that governments were asking central banks to change policy rates, cancel debt and buy bonds, among “other things”, Reuters reported. Draghi did not mention US president Donald Trump, who said on October 10 that he thought the Federal Reserve had “gone crazy” by raising policy rates.

“I think the Fed is making a mistake. They are so tight,” Trump told reporters. In remarks broadcast on October 14, he once again criticised Fed chair Jerome Powell, whom he nominated. “I put him in and I’m so far very disappointed,” the US president told CBS news.