Yves Mersch, member of the executive board of the European Central Bank. Picture: REUTERS
Yves Mersch, member of the executive board of the European Central Bank. Picture: REUTERS

Frankfurt/Paris/Vienna — European Central Bank (ECB) officials stepped up the urgency of their warnings that Britain’s messy divorce from the EU could further damage the currency area’s slowing economy.

Speaking a day after the UK parliament rejected the government’s Brexit deal in a landslide, Austria’s Ewald Nowotny said uncertainty over the way forward could hurt sentiment in the eurozone. In a newspaper interview, executive board member Yves Mersch called the UK’s departure a potential source of “unnecessary shocks”.

“Brexit — from the banking point of view — is not so much a technical problem, because here we are pretty well prepared for whatever outcome there will be,” Nowotny told a conference in Vienna. “But it could be a psychological problem. And as you know, 50% of economic thinking is psychology.”

Until now, ECB officials have said they were confident that Brexit will have minimal consequences beyond the financial sector and pose little immediate risk for the economy. Nowotny’s comments suggest concern may be deepening as the March deadline approaches and euro-area growth is already slowing.

ECB President Mario Draghi told European legislators on Tuesday that the bloc was not headed for a recession, even though the slowdown could last longer than expected. That underscores the need for continued stimulus. Nowotny and Mersch backed that view.

British lawmakers defeated Theresa May’s Brexit divorce deal by a crushing margin on January 15 2019, triggering a new confidence vote and yet more political upheaval that could lead to a disorderly divorce or even a reversal of the 2016 decision to leave.

A spate of disappointing data from across the 19-nation bloc in recent weeks has led investors to question whether the central bank will be able to start raising interest rates this year. Officials hold their next policy meeting on January 24, the first since ending asset purchases in December.

ECB Governing Council member Francois Villeroy de Galhau told the French parliament on Wednesday that any increases in rates would be “extremely gradual and dependent on the economic situation”.

“The current economic situation encourages pragmatism,” Villeroy said. “It’s our duty, vis-a-vis our mandate for price stability, to take into account the environment we’re in.”

Nowotny urged British politicians to quickly offer a way forward.

“Nothing is as damaging as this long and pronounced period of uncertainty,” he said. “It’s this kind of dichotomy that if you look at the real numbers one could feel a very positive sense, if you look at the psychological side, you could see quite a number of dangers that might come up.”

Bloomberg