EU member states will suffer long-term damage equivalent to about 1.5% of annual economic output by 2030 if Britain leaves the bloc without a free trade deal next year, the International Monetary Fund warned on Thursday (19 July).
The damage for the UK would be much higher, amounting to almost 4% of its GDP, warned the Washington-based institution.
“The strength of the euro area-UK integration implies that there would be no Brexit winners,” the IMF said.
The publication of the report, related to the euro area policies, comes following recent infighting in the UK government which has slowed down the progress of the talks and increased the likelihood of a no-deal scenario.
On Thursday, the European Commission published a Communication to help to prepare businessmen and other stakeholders for a hard Brexit as from 29 March 2019.
On his way into the first meeting with the EU’s Brexit negotiator, Michel Barnier, Britain’s Brexit minister Dominic Raab said on Thursday that he was “ looking forward to intensifying, heating up negotiations and making sure we are in the best position to get the best deal”.
The IMF has estimated the EU’s lost economic output in case of no deal would be around $250 billion, and cost more than a million jobs across the bloc.
The Fund notes that “there is significant cross-country heterogeneity” though.
Very open economies such as Ireland, the Netherlands, and Belgium are among the most exposed to Brexit-related economic shocks. Ireland is the only EU27 country which is projected to suffer economic losses of a similar magnitude to those estimated for the U.K.
Germany would also suffer due to industrial supply chains.
The institution warned that losses would depend on bilateral integration with the U.K., sectoral specialization, the positioning of sectors within the global supply chain and the degree of substitutability between London and euro area capitals as financial centres.
Those with closer ties with Britain (Ireland, Luxembourg, Netherlands, Belgium, Malta, and Cyprus) would also suffer disproportionally.
The IMF said its study showed a bigger negative impact on the EU from Brexit than some previous work because it modelled the disruption to manufacturing supply chains as well as the effect of tariffs and reduced financial services trade.
The Washington-based body also urged the EU to continue to allow London-based ‘central counterparties’ (CCPs) that clear global financial trades to handle euro transactions – something the European Central Bank has previously resisted.
CCPs are a critical element for financial stability. The ECB and the Commission warned that systemic CCPs clearing euro-denominated contracts would have to be based in the continent. But the London-based LCH, the only affected firm, and which is responsible for 75% of euro clearing, says that could increase costs and affect the stability of the financial system.
“The potential forced relocation of a globally systemically important CCP to the EU should be viewed with great hesitation,” the IMF said.
The economic damage from Brexit would be minimal if Britain were to adopt the European Economic Area model (like Norway) or ‘soft Brexit’. This option has been rejected by Theresa May, as it would largely require Britain to stick to EU rules.
This scenario – in which access to the single market is preserved while the customs union is sacrificed – would imply an almost zero economic cost (0.06%) for the EU as a whole, for both output and employment.
Meanwhile, a free trade agreement for manufactured goods – an option closer to May’s recent proposal – would reduce long-term EU losses to 0.8% of GDP, or around $130 billion.
The IMF did not estimate the costs of Brexit for Britain in this paper, which accompanies a two-yearly assessment of the EU, though earlier this week it downgraded its forecast for British growth this year to the weakest since 2012.
Earlier this year Bank of England Governor Mark Carney said Britain’s economy was around 1.5-2.0% smaller than it would have been if the public had voted to stay in the EU – not far from what the IMF forecast for a ‘limited’ Brexit scenario.