IMF chief warns of Brexit harm

by Jack Schickler | 13.05.2016

A day after Mark Carney highlighted the economic risks of Brexit, International Monetary Fund (IMF) chief Christine Lagarde gave an equally stark warning.

Visiting the UK as part of the IMF’s regular procedure for monitoring member countries’ economies, Lagarde said the uncertainty that would follow a vote to leave the EU would weigh on investment and growth. In an accompanying statement, the IMF notes quitting the bloc would affect trade arrangements not just with EU countries, but with the 60-odd nations with whom the EU has a free trade deal – and, in Lagarde’s view, negotiating new deals could “take years”. Lagarde also highlighted the risk of an “adverse market reaction” to Brexit, including a “significant depreciation” of the pound, and “large contractions of investment and consumption” – meaning lower growth, fewer jobs and higher prices.

Even after that uncertainty has been resolved, she added, there would be a long-run impact. The IMF cites estimates of the economic damage as varying between 1½ and 9½% of our economy – which Lagarde sums up as ranging from “pretty bad to very, very bad”. While the exact figure depends on the relations the UK negotiates after a Brexit, in any of these scenarios, the costs would outweigh the fiscal benefit from not paying into the EU budget, according to the Fund.

Out campaigners Leave.EU immediately dismissed the predictions, saying the IMF’s track record in such matters was “laughable”. But the weight of economic opinion is against the Brexiteers – even anti-EU Gerard Lyons admits that leaving the EU would create an immediate economic shock that depresses the economy. The main economic defence of Brexit, written by Lyons and others, downplays the economic damage of leaving the EU only by assuming that Brexit would be accompanied by radical deregulation. Workplace rights would be slashed and import tariffs unilaterally cut, wiping out UK manufacturing.

In her press conference, Lagarde thanked the UK authorities for their “cooperation”. Blogger Euro Guido draws attention to this, and adds that she was then “forced to deny the Treasury wrote any of the report”. But there does not seem to be anything untoward here. It is a standard part of the IMF’s Article IV consultations that member countries provide information to the IMF, and an obvious courtesy that Lagarde thanked British officials for doing so. If it’s really that easy to influence the report card your country gets from the IMF, someone should tell Greek Prime Minister Alexis Tsipras.

The IMF’s concern over Brexit comes as no surprise given Lagarde’s earlier interventions, and there were few new figures in today’s statement. More detail will follow when the IMF publishes its final report – which Lagarde announced would be on 16-17 June, just one week before the referendum.

Edited by Sebastian Mallaby