Philip Lane, governor of the Central Bank of Ireland and a member of the European Central Bank’s governing council, said the Brexit negotiations were the issue that merited his closest attention this year — and emphasised London’s importance in providing financing to the rest of the bloc.
“The City of London is the wholesale headquarters of the EU,” Mr Lane told the Financial Times. “If there is a genuine shock and we have a Brexit without a transition period, then that is a financial stability risk.”
The UK struck a divorce deal with the bloc last month, but negotiations are set to become more complicated this year, with Britain seeking to agree the terms of a standstill transition of “about two years” by the end of March, and a longer-term accord on future ties by the autumn.
All three elements would form part of a package that would need to be ratified by the time Britain leaves the bloc by March 29 2019 to avoid a “cliff-edge” Brexit in which the UK exits without a transition deal.
“Brexit is a bigger headache if there is no trade deal; that is what we are looking at most closely, that and [the impact on] financial services,” Mr Lane said.
Mr Lane is viewed as the best economist on the 25-member ECB governing council and is touted as a possible future vice-president of the bank.
To some extent, his comments echo remarks by Mark Carney, governor of the Bank of England, who has argued for similar reasons that Brexit poses a bigger risk to EU rather than UK financial stability. Mr Carney said last year that without transition arrangements, there could be what he called a “Jenga” moment with “unforeseeable moves for markets” and the EU’s access to hedging particularly affected.
But to date such concerns have been broadly played down by the ECB, with Mario Draghi, the bank’s president, arguing that Brexit costs will be containable and concentrated in Britain.
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