Brexit could deliver 'significant' blow to eurozone, ECB warns

European Central Bank
Policymakers warned that Brexit could hamper the euro area recovery

Brexit could send shockwaves around the wider European continent, delivering a “significant” blow to the eurozone, policymakers have warned.

Minutes of the European Central Bank’s latest meeting, which took place ahead of the UK’s referendum, revealed that officials were worried a vote to leave the European Union could result in “significant, although difficult to anticipate, negative spillovers to the euro area”.

Policymakers feared that Brexit threatened both trade and financial market shocks to the eurozone’s economic recovery. Members of the ECB’s governing council highlighted that the June 23 poll came at a time when weakness in emerging markets and other risks were weighing on the currency bloc’s outlook.

The central bank raised its concerns at a time when the prospect of a Brexit result appeared unlikely. Records of the ECB’s June 2 summit noted that “concerns over a possible leave vote… had abated somewhat until the day before the current meeting”.

Officials even concluded that “the balance of risks to the euro area growth outlook had improved”. Analysts at Citi said that the "mild optimism [of the minutes] contrast with today's reality".

Mario Draghi, the ECB president, warned ahead of the UK vote that it would be "very difficult to foresee the impact and various dimensions of how the vote in the UK will impact markets and the economies of the eurozone".

He said: “It would be difficult to speculate about one outcome, we’re trying to be ready to cope with all possible contingencies." Mr Draghi insisted that the central bank had “done all the preparation that is necessary”, and explained that the central bank had made plans to stabilise jittery markets if the need arose.

Mario Draghi
ECB president Mario Draghi has warned that Brexit would result in economic uncertainty

Yet the minutes also showed that the ECB’s committee was considering unleashing further stimulus ahead of the Brexit vote, with “broad agreement” that there was a need to monitor inflation and affirm a “readiness to act by using all the instruments available… if warranted”.

Jennifer McKeown, of Capital Economics, said the ECB could pump up its quantitative easing scheme in the wake of the UK referendum result, increasing monthly asset purchases from €80bn (£68bn) to as much as €100bn.

The governing council noted that it could run into issues “sourcing sufficient volumes of public bonds”, given that some have begun to trade with strongly negative yields. The ECB has previously ruled out buying bonds yielding less than the level of its main interest rate. That deposit rate currently stands at minus 0.4pc.

Ms McKeown suggested that the ECB might alter its asset purchase programme accordingly, which “could involve buying German bonds with yields below the deposit rate, or even dropping the requirement that purchases are made in proportion to eurozone countries’ contributions to ECB capital”.

License this content