Weidmann: Keep spell of uncertainty as short as possible

Bundesbank President Jens Weidmann has called the Brexit vote in the United Kingdom a turning point in the history of the European Union. "This decision is very regrettable and, in my eyes, a mistake. But it should be respected and we will have to deal with it," Mr Weidmann remarked at an event hosted by the Munich Volkswirte Alumni-Club, noting that the vote should be regarded as a warning shot in the debate on institutional reform in the euro area.

The event saw Mr Weidmann being awarded the Hans Möller Medal as a token of gratitude and in recognition of his services rendered in the name of economic theory. Mr Weidmann used his acceptance speech to urge both the EU and the United Kingdom to quickly enter into level-headed negotiations to hammer out their future relationship. "Neither party will have anything to gain from erecting trade barriers," he said. Negotiations should not revolve around treating the UK better than other countries such as Switzerland or Norway, "nor, however, should the objective be to make a political example of the UK," he stressed.

Cool response in financial markets

Mr Weidmann interpreted the cool response to the vote in financial markets as a sign that the vast majority of banks had treated the Brexit scenario with the seriousness it deserved and had been prepared for that outcome. Another reason why the referendum outcome had not unleashed disruption or even panic, he added, was that banks nowadays were far more resilient than they were as recently as the autumn of 2008.

Mr Weidmann expects banks' already beleaguered earnings to remain under pressure as long-term interest rates retreat and the yield curve continues to flatten out. "That alone is reason enough to doubt that we are already seeing the new equilibrium prices in the financial markets," he emphasised.

The Bundesbank president went on to say that there was no way of knowing just how grave the economic repercussions of Brexit would really be. The sharp depreciation of sterling, he explained, would probably dampen the impact on the aggregate UK economy for a time. What counted, he said, was to keep the spell of uncertainty as short as possible.

Mr Weidmann predicts that the UK economy will bear the brunt of the Brexit fallout, though the pace of euro-area activity might decelerate a little as well. And there is no way of telling what the political implications will be, he told his audience. Brexit also looks set to drag on activity in Germany, Mr Weidmann said, pointing to the UK's role as the German economy's third most important export destination.

"The Frankfurt financial centre alone might see new opportunities opening up," Mr Weidmann explained, though that would also call for political backing. "We should welcome any businesses that shift their activity from London to Frankfurt," he stressed.

No further monetary policy easing

In the wake of the Brexit vote, Mr Weidmann sees no need for any further loosening of euro-area monetary policy. "Monetary policy is already in highly expansionary mode, and it is doubtful whether easing it further still would deliver any stimulus whatsoever," Mr Weidmann cautioned. Monetary policy can be as easy as it likes, he remarked, but that cannot prevent political uncertainty from dragging on the economy. "The crisis that has now engulfed the European Union is a political one that needs to be resolved in the political sphere," he emphasised.