The UK needs to be better prepared for a “no deal” Brexit to show Brussels there is a “credible” alternative should the negotiations fail, a former Bank of England governor has said.

Mervyn King, who served as Bank of England governor for a 10-year period, including the 2007-08 financial crisis, said failing to agree a trade deal was “not the first preference of anybody” but more work needed to be done to show the European Union that the UK was serious about walking away if there was no agreement.

The prime minister, Theresa May, has insisted “no deal is better than a bad deal”, indicating the UK would leave the EU and rely on World Trade Organisation rules after Brexit if what is on offer from Brussels proves unacceptable.

King, now Lord King of Rothbury, told BBC Radio 4’s Today programme: “If you are going to have any successful negotiation, you have got to have a fallback position which the other side understands and believes is credible. So we need to able to say if we can’t reach an agreement we will nevertheless leave and we can make it work.”

He added: “It’s not the first preference of anybody, I’m sure. But it’s got to be a credible fallback position otherwise those negotiating on the other side will not take any notice of what we would like to achieve in the negotiations – why should they, if we had absolutely no alternative but to give in to what they demand?”

The crossbench peer said both sides in the Brexit debate had become “very extreme” and even now much of the media coverage was “hysterical”.

He told BBC Radio 4’s Today programme: “This ought to be something that people ought to be able to agree on, irrespective of whether they are in favour of Brexit or not, because we are where we are, and we are in a negotiation and it’s important that the negotiation succeeds.

“But it cannot succeed without a credible fallback position and that is something which I think is a practical thing that the civil service ought to be taking a lead on. It’s a doable proposition if we start now. We’ve probably wasted a year but we need to be much further along the road to making that a credible fallback position.”

Asked whether hardship was a price worth paying for leaving the European Union, King said: “I don’t know what the economic consequences of Brexit will be, that’s the only honest answer.”

Brexit minister Steve Baker has confirmed the government is preparing for all outcomes of the Brexit talks, including the “unlikely” scenario of failing to strike a deal with Brussels.

In a letter to Labour MP Chuka Umunna of the Open Britain campaign group last month, Baker said: “In relation to a ‘no-deal’ scenario, any responsible government would be prepared for a range of possible outcomes from the negotiation, and this is what we are doing.”