London’s status as a global financial centre could be eroded should Britain vote to leave the European Union in a June 23 referendum, the International Monetary Fund (IMF) warned on Friday.
The global body that promotes financial stability said the city’s powerful financial services sector would lose clout because of the loss of so-called “passporting” rights. These rights allow professionals to work in any EU country, without seeking separate licenses in each of the bloc’s 28 nations.
Such rights are critical for Britain, because so much of its economy is based on services, particularly in financial fields like accounting, banking and tax consultancy.
IMF managing director Christine Lagarde described the impact of a so-called Brexit as severe, adding that it could potentially could push the country into a recession. It reinforced a similar finding by the Bank of England on Thursday.
“A vote for exit would precipitate a protracted period of heightened uncertainty, leading to financial market volatility and a hit to output,” the IMF said during its regular health check of the UK economy.
Lagarde defended the decision to release the findings of the report, despite criticism that the IMF was wading into domestic politics.
“We are doing it because it is a significant downside risk, number one, and because it is not just a domestic issue,” Lagarde said. “It is an international issue. I don’t think that in the last six months I have visited a country anywhere in the world where I have not been asked ‘what will be the economic consequences of Brexit?’“
A decision to exit would mean that Britain would need to negotiate the terms of its withdrawal and a new relationship with the EU — a process that would take time. The IMF pointed out that there are EU-level trade deals with 60 non-EU economies, together with prospective arrangements with another 67 countries. Negotiations to address this would take time.
“These processes and their eventual outcomes could well remain unresolved for years, weighing heavily on investment and economic sentiment during the interim and depressing output,” the IMF said. “In addition, volatility in key financial markets would likely rise as markets adjust to new circumstances.”
As he stood beside Lagarde, treasury chief George Osborne said the IMF had made it clear that the impact of a Brexit on hiring and investing already underway would be a “mere taste” of things to come.
“Put simply, the IMF says a vote to leave costs us money,” he said.
A group campaigning to leave the EU said the IMF was just an elite trans-national organisation that has gotten economic forecasts wrong in the past. The IMF has admitted, for example, that it miscalculated the effects of the Greek crisis.
“Why should we listen to it, exactly?” Leave.EU co-founder Arron Banks said. “Very few people in the media ever pause to ask that question, but its track record is laughable. Its forecasts are never right, it backed the euro and it didn’t see the financial crisis coming.”