IMF chief Christine Lagarde and Chancellor George Osborne are in cahoots
If the International Monetary Fund and its co-conspirators in the Treasury wish to deter undecided voters from flirting with Brexit, they have certainly failed in my case.
Having listened to their irritating lectures, I am more inclined to opt for defiance, for their mask of objectivity has fallen. There can no longer be any doubt that they are playing politics with the democratic self-determination of this country.
The Fund gives the game away in point 8 of its Article IV conclusion on the UK economy. It states that “the cost of insuring against a UK sovereign default has doubled (albeit from a low level)”. Any normal person who does not follow the derivatives markets would interpret this as a grim warning from global investors.
Yes, the price of credit default swaps on 5-year UK debt – the proxy we all use - has jumped from 17 to 37 since late last year. But the IMF neglected to mention that it has risen from 15 to 33 in Switzerland, from 26 to 43 in France, and from 45 to 65 in Korea.
The jump has almost nothing to do with Brexit, and the IMF knows this perfectly well. The French have an expression that will be familiar to the IMF’s Christine Lagarde: ils font feu de tout bois.
Her own IMF mentor and long-time chief economist, Olivier Blanchard, told me last month that there was no risk whatsoever of a sovereign bond crisis, or a Gilts strike, or a sudden stop of any kind. “Will financing be more difficult after Brexit? Will investors see the British government as more risky? I don’t think so,” he said.
Professor Blanchard, who recently stepped down from the Fund and is free to speak his mind, says there may be a price to pay for Brexit but it is impossible to calculate.
The IMF has said Brexit consequences range from 'pretty bad to very, very bad'
“The cost of exiting will not be seamless, and the uncertainty will last for a very long time afterwards. Firms deciding whether to locate a plant in the UK or in the Continent will wait. Investment will drop,” he said. But he also said weaker pound would cushion the effects of falling investment to some degree.
So bare this in mind when you comb through today’s Article IV statement with its delicious mix of precision and selective vagueness on the alleged damage of Brexit.
The hit ranges from 1.5pc to 9.5pc of GDP. Note the decimal points. The range depends on whether it is “a la Switzerland, a la Norway, or a la WTO,” said Madame Lagarde.
Perhaps it is churlish to point out that the IMF completely missed the onset of the global financial crisis, and was blindsided when the US fell into recession in November 2007. The Fund’s staff were still predicting sunlit uplands as far as the eye could see, even when the blackest of black storms was upon them.
The IMF misjudged the fiscal multiplier horribly in Greece
Its forecasts for Greece were wrong every single year following the rescue of the euro and the North European banking system in 2010, otherwise known by some cruel twist of language as the Greek bail-out.
They originally said the Greek economy would contract by 2.6pc in 2010 and then recover briskly. What actually happened – as predicted at the time by the Indian member of the IMF board – was the most spectacular collapse of a developed economy in the post-war era.
Output ultimately fell by 26pc from peak to trough. To its credit, the IMF later admitted that it had horribly misjudged the fiscal multiplier. Indeed.
I don’t wish the denigrate the Fund. 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.
Its analysis starts from the static assumption that the EU would be in any fit state to dictate anything after the loss of its second biggest economy and leading military power. It states that any new trade deal with Britain would require unanimous assent of all EU countries, raising “considerable political risks”.
This is true in a narrow sense, but you can equally turn it on its head. If any of these countries attempted to wreck Germany’s trade relationship with Britain, they would further poison the internal chemistry of the EU itself.
The same is true if they attempted to prevent an amicable settlement that Holland, Denmark, Sweden, and Finland might want for reasons of democratic and cultural affinity, or a settlement that Poland and the Baltic states sorely need to ensure that British boys will still die willingly for Gdansk (so to speak) to uphold the NATO alliance.
If front line states on the Russian border took steps that seriously harmed Britain, they would ensure the destruction of NATO, which matters more to them than some academic point about EU trade policy. Yes, there are some capitals in the EU that might wish to play rough. They would bring the whole EU temple crashing down on their own heads if they tried.
In my view, Italy’s finance minister Carlo Padoan was closer to the truth this week in warning that Brexit could set in motion powerful centrifugal forces, risking the disintegration of the bloc. It would be all the more imperative to the EU to behave with restraint.
Be that as it may, there is a dishonesty in so much of the talk on trade. The IMF says Britain’s commercial arrangements with 60 non-EU economies - now under the auspices of the EU - would lapse automatically, and would have to be renegotiated. They know full-well that this is a canard.
These deals 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.
As Richard North from EU Referendum points out, 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.
I will return to this theme in more depth in coming days, but what is clear is that the dire outcomes presented successively by the US President Barack Obama, the Treasury, the OECD, the Bank of England, and the IMF, would occur only if the world’s leading countries actively chose to cause the very havoc that they so decry.
There may be compelling reasons for Britain to remain in the EU, 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.
