Brexit fears are fuelling market turmoil, says IMF chief

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Fears of a British exit from the European Union are adding to the list of concerns causing turbulence on global financial markets, the IMF’s managing director Christine Lagarde said on Saturday.

Speaking at the World Economic Forum in Davos, she called for a swift deal that would ensure the UK could remain in the EU, for the good of the European and world economies.

The comments came after a volatile week which saw sharp falls in world markets, triggered in part by concerns over a slowdown in the Chinese economy and uncertainty about the impact of the fall in the price of oil. On Wednesday, the FTSE index fell to its lowest level in more than three years, before recovering some ground later.

Lagarde said Europe’s overall economic outlook had improved recently and that she expected global growth this year to be 3.4%, up from 3.1% in 2015. However, she had two big concerns – a possible British exit from the EU and the threat of a collapse of the Schengen passport-free travel agreement under the weight of refugees.

With regard to “Brexit”, she said her worry was “whether there is a deal to be had between the United Kingdom and other members of the European Union, which we hope very much because it would really be conducive to more stability and more a cohesive economic zone”.

She agreed with those warning that the refugee crisis could “make or break” the EU’s Schengen agreement. Failure to handle the crisis could put the arrangement, seen as an essential element of the single market, at risk. However, Lagarde told a panel in Davos that a proper strategy and policy on how to manage the new pool of labour could add around 0.2 percentage points to growth across the eurozone.

Rachel Reeves, the Labour MP and member of the Commons Treasury select committee, says any prolonged global downturn could have a serious impact on the UK economy, and particularly George Osborne’s deficit-cutting strategy. Writing on theguardian.com, Reeves warns that George Osborne’s plan risks being blown off course, raising the possibility of more cuts or tax increases.

Citing recent calculations by the Office for Budget Responsibility, Reeves says a failure to rebalance the UK economy has placed it more at risk. “A surplus of more than £5bn would now be needed in the final quarter of this financial year to meet the chancellor’s targets. If that surplus doesn’t materialise, that means even more cuts and tax increases or further drift in the deficit reduction plans - already extended by five years.”

She also ridicules Osborne’s claim in his autumn statement in November that the good times were returning. “Just two months ago Osborne used his autumn statement to boast about the ‘improvement in the public finances’ that allowed him to U-turn on unpopular cuts to tax credits and policing while delivering a plan that would leave Britain ‘ready for whatever storms lie ahead’. It is extraordinary how quickly those words have come to seem so incredibly complacent.”

Osborne, also in Davos, said he was confident of an EU deal. “There is goodwill out there with the other member states, and the institutions of the European Union. We’ve now got to make it happen,” he said.

Powered by Guardian.co.ukThis article was written by Larry Elliott, Jill Treanor and Graeme Wearden in Davos, for The Observer on Saturday 23rd January 2016 20.01 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010

 

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