Constancio Says U.K. Has More at Stake Than Euro Area in Brexit

(Bloomberg) -- Brexit won’t derail the euro area’s economic revival and Britain has more to lose by quitting the European Union, according to European Central Bank Vice President Vitor Constancio.

“Brexit can really not harm significantly the ongoing recovery in the euro area,” Constancio said in interview posted on institution’s Youtube channel on Wednesday. “Brexit is very significant for the U.K., but in view of the relative size, it’s much less meaningful for the rest of the EU.”

The remarks, made alongside the publication of the ECB’s Financial Stability Review, underlines what’s at stake. EU leaders finalized their negotiating position a day after Britain threatened to quit talks on its departure unless the bloc drops its demands for a divorce payment as high as 100 billion euros ($112 billion). 

Bank of England Governor Mark Carney, ECB President Mario Draghi and several EU leaders have traded warnings about who would suffer the most in the separation, with London’s status as the euro area’s financial capital under threat.

“Overall, the risk that the euro-area real economy would face restrictions in accessing wholesale and retail financial services following the U.K.’s departure from the EU appears limited,” the ECB said in the report. 

Bundesbank Executive Board member Andreas Dombret has said that the biggest financial-stability risk a hard Brexit poses to Germany is a loss of access to London’s financial markets for German firms.

Hedging Activities

In its report, the ECB included statistics showing that U.K.-domiciled banks provide relatively limited services to non-financial firms in the euro area. They supply 1 percent to 2 percent of the external financing for the euro-area private sector. The report also said that derivatives transactions conducted in London amount to around one-fifth of the euro-area “real economy’s” total hedging activities.

“This notwithstanding, well-managed preparations will be essential as a relocation of financial services capacity during the transition from the current situation to the new equilibrium could, in some cases, face frictions,” the ECB said. Banks and other financial institutions should undertake any necessary preparations "in a timely manner,” the central bank said. 

Constancio said Brexit makes the EU’s goal of creating a capital-markets union in the euro area “more necessary,” a position often voiced by policy makers including Valdis Dombrovskis, the EU’s financial-services policy chief, in the context of Brexit.