22 January 2016

The Independent: ‘Self-inflicted wound’ of EU vote could drive UK back into recession, says Adam Posen

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 from 2009 to 2012 and is now president of the Peterson Institute think-tank in Washington DC, described the forthcoming vote as a “horrible, self-inflicted wound”.

Speaking on the sidelines of the World Economic Forum, Mr Posen told The Independent that the Bank might ultimately need to put up interest rates very sharply and rapidly – in order to help support the value of sterling – if foreign investors decided to pull capital out of the UK in the coming months amid uncertainty about a British exit from the EU, or Brexit. 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 MPC] today, I would still vote against a rate rise for the time being because the inflation figures are so poor,” he said. “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.”

Mr Posen also said he was “horrified” at the prospect of the referendum being held as early as June, while the migrant crisis still rages. “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 David Cameron],” he said. “The idea that in the midst of an existential migrant crisis, the Prime Minister is saying, ‘We’re not participating but now you’re going to do something for me’... I think this is just bad diplomacy.”

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

If the British did vote to leave the EU, he said, exit talks with the rest of Europe would probably drag on for years and “maybe as many as five”. [...]

Full article on The Independent

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