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EU Referendum: blowhards at the IMF

2016-05-14 06:20:41

We knew this was coming. When the IMF last month offered less than favourable comments on the effect of Brexit on the British economy, they also said that they were preparing a special supplement to their "Article IV" annual country assessment. And, as promised, here it is.

Writing of the "possible economic effects of an exit from the EU", however, they seem to be making the most pessimistic construction of event possible. And one can only assume – although probably correctly – that this is a deliberate attempt to interfere with our referendum, with a view to influencing the outcome in favour of the "remain" proposition.

A crucial part of their case is that a vote for exit would precipitate "a protracted period of heightened uncertainty, leading to financial market volatility and a hit to output".

We actually deal with this yesterday in respect of Carney's comments, and that claim is no more valid coming from the IMF than it was from the Bank of England.

For sure, one might expect short-term market volatility, but there is absolutely no good evidence that there will be an adverse effect in the medium- to longer-term. After the initial market shock (much of which will be discounted anyway, as is invariably the case with such things), a properly handled post-vote process need not cause any undue alarm.

But, says the IMF, following a decision to exit, the UK would need to negotiate the terms of its withdrawal and a new relationship with the EU, unless it abandoned single market access and relied on WTO rules, which would significantly raise trade barriers. It seems likely, it then says, that ratification of a new deal would require unanimous consent of all EU member governments, making agreements subject to considerable political risks.

This, of course, would only apply with a comprehensive free trade agreement which, as a mixed agreement, would require ratification by all 28 states (including the UK). But, in the event of the UK going down the Efta/EEA route, there would be no such requirement and none of the political risk to which the IMF lays claim.

Needless to say, the IMF hasn't finished there, arguing that, as EU-level agreements also cover the UK's trading relationship with 60 non-EU economies (and prospective arrangements with another 67 countries are in the works), the UK would also need to simultaneously renegotiate these arrangements, or else see them revert to WTO rules.

These processes and their eventual outcomes, it says, could well remain unresolved for years, weighing heavily on investment and economic sentiment during the interim and depressing output. In addition, volatility in key financial markets would likely rise as markets adjust to new circumstances.

This point, however, is picked up by Ambrose Evans Pritchard, citing this writer. These deals, he says, could be switched easily enough under the principle of "presumption of continuity" enshrined in international law. All they need do is to sign a document of continuation in force, an administrative procedure.

Variants of this have been done repeatedly: after the Czech and Slovak "Velvet Divorce", after the break-up of Yugoslavia, or in the post-colonial transition.

As to many of the other points made by the IMF, Ambrose deconstructs them with considerable finesse, also dwelling on the organisation's less than stellar record on its recent predictions.

Noting that it completely missed the onset of the global financial crisis, that it was blindsided when the US fell into recession in November 2007, and its forecasts for Greece were wrong every single year following the rescue of the euro and the North European banking system in 2010.

"I don't wish to denigrate the Fund", says Ambrose. "It remains a superb institution. I use its research all the time in my work. But on this occasion it has been misused for political purposes".

"There may be compelling reasons for Britain to remain in the EU", he adds, "but they have nothing to do with the bogus claims advanced today by the IMF. So take your rotting pile of damp wood elsewhere Madame Lagarde".

And this is possibly our saviour. Damaging as the claims are, on their face, and high may their prestige be, the relentless attacks on Brexit by the IMF, the Bank of England and others are so extraordinary one-sided that they are quite obviously politically motivated.

Most assessments, the IMF tells us, point to sizable long-run losses in incomes, as increased barriers would reduce trade, investment, and productivity.

The wide range of estimated losses - from 1½ to as much as 9½ percent of GDP - does not represent fundamental disagreement among these experts that exit would be costly, but largely reflects differing assumptions about the UK's future economic relationships with the EU and the rest of the world.

Basically, it argues, this is the difference between Norway, Switzerland and WTO, with even the offset savings of one-half of one percent of GDP in EU contributions being insufficient to wipe out the 1½ percent loss in what is argued is the best-case scenario.

Yet, there is absolutely no reason why the Efta/EEA option, with continuing external trade enabled by the "presumption of continuity", should carry any economic penalty. Even with ongoing payments to the EU and clearing our RAL liability, one would expect this Brexit option to be economically neutral.

Herein, though, lies an important, basic point. There would almost certainly be substantial economic penalties attached to the bilateral route, and the costs of the WTO option would be prohibitive. If anything, a loss of 9½ percent of GDP through this route is an understatement.

Had the cost-free exit already been mapped out by the official leave campaign, there would be less room for the likes of the IMF to play its dire little games. It claims would already have been pre-empted and discounted.

However, our one advantage seems to be that the "remains" are overplaying their hand. The torrent of FUD has reached such proportions that each additional day stretches their credibility, which must now be at breaking point.

Now, I think, would be a good time for a counter-attack. Short of a plague of boils and the death of the first born, there is little the IMF or any other institution can offer that could be worse. Flexcit round the corner, offering a risk-free option, might be just what is needed to sweep away the IMF blowhards.