The European Union desperately needs finance from Britain and will face severe knocks to its economy if  member nations do not agree to a transitional period to give banks and finance firms time to adapt to Brexit, Mark Carney has warned.

The Governor of the Bank of England wants a smooth changeover when Britain leaves the EU, to give companies time to adapt to the new setup, and avoid any wrenching change in the economy or in the financial markets.

That means Britain would not necessarily switch overnight from one regime to another when leaving the EU, which is expected to take place in early 2019.

“Banks located in the UK supply over half of debt and equity issuance by continental firms, and account for over three-quarters of foreign exchange and derivatives activity in the EU,” Mr Carney said.

“If these UK-based firms have to adjust their activities in a short time frame, there could be a greater risk of disruption to services provided to the European real economy, some of which could spill back to the UK economy through trade and financial linkages.”

That potential disruption comes from Britain’s status as the EU’s major global financial hub.

“The UK is effectively the investment banker for Europe,” Mr Carney said, noting that funds are raised by British-based banks from British-based investors, to fund economic activity.

“These activities are crucial for firms in the European real economy, and it is absolutely in the interests of the EU that there is an orderly transition and there is continual access to those services.”

The Governor has been criticsed for his interventions on Brexit in the past, facing accusations that he wanted the UK to remain in the EU and tried to sway the debate.

Presenting the Bank of England’s financial stability report, he sought this time to align himself with Theresa May.

“As the Prime Minister has said, it is preferable that the process is as smooth and orderly as possible,” he said.

“It is preferable that firms know as much as possible about the desired end point [of the Brexit negotiations] and as much as poss as soon as possible about the potential path to that end point.”

That should mean businesses on both sides of the Channel are able to prepare for Brexit when it takes place, minimising any disruption.

David Fuller's view

Some more common sense and leadership from Mark Carney, now that he no longer feels a debt of loyalty to David Cameron and George Osborne.  He is wise to direct these comments in the EU’s direction because one can hear the degree of panic and uncertainty coming from their officials.

Whether or not Italy actually pulls out of the Euro, as I think it should, or just struggles on in the manner of Greece, I would not be surprised to see the EU breaking apart in 2017.  How might that affect stock markets?

We can only guess because the failing EU could unravel in so many different ways.  However, starting with Italy, I maintain an initial sharp sell-off by the Italian SPMIB Index, followed by a sharp devaluation and reintroduction of the Italian Lira, would then be followed by a strong stock market recovery because the economy would be much more competitive. 

(See also yesterday’s lead item starting with Roger Bootle’s column)

The same would apply to other countries which decide to leave the Euro and return to their previous currencies. 

The Euro is currently weak but could actually strengthen as more southern European countries leave.  A Euro dominated by Germany and a few central and northern European countries could become quite strong. 

If the Euro is eventually abandoned in favour of a return to a European Free Trade area, probably under a different name and without a single currency, that could once again be quite successful.  After all, GDP growth was stronger and there were far fewer political tensions within the last European Free Trade area.  

Here is a PDF of The Telegraph’s article.