It’s time for the EU to relax draconian spend and tax rules

Last Friday I spoke at a Brexit lunch in London, and it turned out to be a rather interesting and illuminating experience.

I started off with the observation that I have struggled in recent months to identify any real economic upside for the UK resulting from leaving the EU, and that the only real issue in my mind is the magnitude of the potential downside in the short-term at least.

Longer-term the economy and every business in it would have no choice other than to adjust to the new trade regime in which the UK might find itself.

These observations went down like a ton of bricks with a certain segment of the audience, while others nodded in agreement.

Those who had voted to leave started to heckle me, and in turn those who believe that the UK should remain, started to heckle them.

Apart from the opprobrium directed at myself, it was fascinating to observe just how divisive the whole campaign has been and more importantly, how divisive it is likely to be over the coming years once Article 50 is invoked and once the trade negotiations begin.

It was pointed out to me just how great a country the UK is and how it would have the ability to thrive and prosper outside of the EU.

I hope this view is correct, but it is not a view shared by the IMF.

In its latest global economic outlook this week, the IMF does not have too many doubts, but has many concerns, about the possible impact of Brexit.

While acknowledging that the effects of Brexit are “exceptionally uncertain”, the IMF believes that it has the potential to significantly undermine the performance of the UK economy in 2017, in particular.

It is forecasting UK economic growth of 1.7% this year, and more worryingly, just 1.3% next year.

Such a growth rate would represent the lowest growth performance since the UK exited the global economic crisis in pretty emphatic fashion four years ago.

Since then, the UK economy has consistently surprised on the upside, but that is now in danger of changing thanks to the vote on June 23.

As well as directly undermining growth in the UK, Brexit is also expected to impact negatively on EU and indeed global growth.

It is not terribly surprising that any growth shock in the fifth largest economy in the world would have negative global repercussions.

The IMF is now forecasting global growth of just 3.1% this year and 3.4% next year.

Such a growth performance would be pretty anaemic, given that it includes growth in the emerging economies.

Eurozone growth is forecast at 1.6% this year and a pretty pathetic rate of 1.4% in 2017.

Such a growth performance should ensure that the ECB will have to press ahead with aggressive quantitative easing and a zero official interest rate policy for the foreseeable future.

The general tone of the latest IMF offering is one of concern and caution.

Apart from Brexit, a number of other risks are highlighted.

These include unresolved legacy problems in the European banking system, particularly Portugal and Italy; protracted financial market turbulence and global risk aversion; political divisions within many developed economies and a consequent shift towards more protectionist economic policies; and geo-political tensions and terrorism.

There are always risks and challenges on the horizon, but it does seem that those risks and challenges are greater at the moment than we have seen for some time.

The problem is that even the most optimistic amongst us would struggle to counter the risks outlined by the IMF.

It warns that there cannot be too much reliance on monetary policy, as in quantitative easing and artificially-low interest rates, and that other policies need to be utilised.

In other words, there is an onus to use old-fashioned fiscal policy to try to ignite meaningful growth.

As a start, it is clear that the EU needs to relax its draconian fiscal rules in an environment of such unprecedented economic difficulty.

Thankfully, the Irish housing plan this week should be good for Ireland on a range of fronts, but the bigger EU economies need to do likewise.

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