Stay up to date with notifications from The Independent

Notifications can be managed in browser preferences.

Brexit threatens new UK recession says former Bank of England rate-setter

Adam Posen described the vote as a “horrible self-inflicted wound”.

Ben Chu
Thursday 21 January 2016 13:53 GMT
Comments
Small firms looking to expand overseas say they need clarity on Britain’s future in Europe
Small firms looking to expand overseas say they need clarity on Britain’s future in Europe

A “no” vote in the European Union referendum runs a serious risk of pushing Britain back into recession, a former member of the Bank of England’s Monetary Policy Committee has warned.

Adam Posen, who served on the MPC between 2009 and 2012 and is now President of the Peterson Institute think tank in Washington, described the vote as a “horrible self-inflicted wound”.

Speaking on the side lines of the World Economic Forum in Davos Mr Posen told The Independent the Bank of England may ultimately need to put up interest rates very sharply and rapidly in order to help support the value of sterling if foreign investors decide to yank capital out of the UK in the coming months.

With GDP growth already slowing, a large increase in the cost of borrowing could easily plunge Britain back into recession.

“If I was voting [on the Bank of England’s MPC] today I would still vote against a rate rise for the time being because the inflation figures are so poor. But also because you may need to raise rates if the Brexit worries become acute. That’s because of [the risk of] capital outflows weakening sterling” he said.

Mr Posen also said he was “horrified” at the prospect of the UK referendum being held as early as June, while the European migrant crisis is still raging.

“That would play into the hands of the no campaign and make it impossible for the rest of Europe to come up with a reasonable offer [to Mr Cameron]” he said. “The idea that in the midst of an existential migrant crisis the [UK] Prime Minister is saying ‘we’re not participating but now you’re going to do something for me – right now ‘ I think is just bad diplomacy”.

Mr Posen said that on pure economic grounds one would want to hold the referendum as soon as possible to minimise investor uncertainty, but that “you want to weigh the timing uncertainty issue against the probability of getting the right result”. He said: “I’d rather they did it for late this year.”

Mr Posen said that if the British people did vote to leave the EU an exit negotiation with the rest of Europe would likely drag on for years and “maybe as many as five”.

“There is no legal status quo ante” he said. “You cannot just rip off the band aid. If you do you will create even more uncertainty. I believe Brexit in its own terms is a mistake. But even if you don’t, if you are realistic about the potential gains of Brexit are they will be dwarfed by the damage that will be done by the run-up to the referendum and the aftermath – because that will last for a few years and it will be extremely severe.”

“It’s pretty bad- there’s nothing good here” he said.

Join our commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

Comments

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in