Britain crashing out of the EU without a deal would inflict significant economic pain across Europe leaving the region without any winners, the International Monetary Fund has warned.
Staging an intervention as the new Brexit secretary, Dominic Raab warned Europe to prepare for a no-deal scenario, even as the IMF said such an outcome would hurt the UK most but would also have damaging economic consequences for Ireland and other EU nations.
Using its annual health check for the euro area, the Washington-based fund said economic growth across the 27 remaining EU states would fall by as much as 1.5% by 2030, should Britain fall back on World Trade Organization rules for its trading relationship with the EU after leaving next year.
While economic output for the UK would drop by more than twice that amount – wiping out almost 4% of GDP – Ireland would suffer by almost as much given its strong ties to Britain and shared border. The Netherlands, Denmark and Belgium, with similar close proximity and trading links, would also lose around 1% of GDP.
Smaller nations with deep financial links to the City of London, such as Malta, Cyprus and Luxembourg, would also be negatively affected by a hard Brexit, the fund warned.
The IMF said the long-run impact from a hard Brexit would be spread across the EU given the economic and financial ties spanning the region, which have grown closer by about 40% over the past quarter century. The UK ranks among the EU’s three largest trading partners, accounting for 13% of trade in goods and services, while there are complex supply chain links between companies across the bloc.
Warning that the lack of progress between Brussels and Westminster in Brexit talks has raised the risk of a disruptive exit, the fund said: “The strength of euro area-UK integration implies that there would be no Brexit winners.”
Mahmood Pradhan, the deputy director for the European department at the IMF, told journalists: “We are very concerned. It’s quite late in the process and we don’t see any clarity yet on the future relationship and we’re getting near some important deadlines.”
While hopes remain for a deal by the time the EU Council meets in October ahead of the UK’s formal departure in March next year, ministers are preparing to release more than 70 documents setting out preparations business would need to make were the UK to leave without an agreement. The European commission also plans to release an advisory document to the EU27 on the consequences of a breakdown in talks.
Although such an outcome would be highly damaging for the region under the IMF predictions, the fund also warned that a free trade agreement between London and Brussels – the option preferred by Theresa May – would still have many negative consequences for both sides.
Assuming the UK leaves the single market and the customs union, while striking a broad free trade agreement, the IMF said GDP could drop by as much as 0.5% across the EU. Britain and Ireland would again suffer losses above the average, at more than 2% of GDP.
The IMF said a “relatively benign” Brexit scenario, whereby Britain remained a member of the European Economic Area – similar to the arrangement for Norway – would cause “negligible” losses.
This is not the first time the fund has intervened in Brexit. Ahead of the referendum two years ago, the IMF warned Britain that voting to leave the EU would trigger a stock market crash and a recession in 2017, drawing angry reactions from Brexit campaigners who attacked its record on economic forecasting.
Pradhan said the fund was open to scrutiny about its models, but added: “We believe [the latest assessments] are reasonably robust. There’s always an amount of uncertainty about these estimates and we would acknowledge that.”
While the British economy avoided recession and the stock market hit a record high, the UK has fallen to the bottom of the G7 growth league and households have lost £900 each because of higher levels of inflation, according to the Bank of England. Share prices rose after the pound plummeted in value immediately after the Brexit vote, because many FTSE 100 companies are highly international and make a large proportion of their profits in foreign currencies.