London’s status as a global financial center could be eroded should Britain vote to leave the European Union, International Monetary Fund chief Christine Lagarde warned Friday, saying the impact would range from “pretty bad to very, very bad.”
The global body that promotes financial stability said the city’s powerful financial services sector would lose clout because of the loss of so-called “passporting” rights. These rights allow professionals to work in any EU country, without seeking separate licenses in each of the bloc’s 28 nations.
Such rights are critical for Britain, because so much of its economy is based on services, particularly in financial fields like accounting, banking and tax consultancy.
Lagarde described the impact of a so-called Brexit in a June 23 referendum as severe, adding that it could potentially push the country into a recession. It reinforced a similar finding by the Bank of England on Thursday.
The Bank said the economy would slow sharply, and possibly even enter a brief recession.
“A vote for exit would precipitate a protracted period of heightened uncertainty, leading to financial market volatility and a hit to output,” the IMF said during its regular health check of the UK economy.
Lagarde defended the decision to release the findings of the report, despite criticism that the IMF was wading into domestic politics.
“We are doing it because it is a significant downside risk, number one, and because it is not just a domestic issue,” Lagarde said. “It is an international issue. I don’t think that in the last six months I have visited a country anywhere in the world where I have not been asked ‘what will be the economic consequences of Brexit?'”
A sudden stop to investment in key sectors of the economy such as commercial real estate and finance could exacerbate Britain’s record-high current account deficit, the report said.
“Such market reactions could sharply contract economic activity, further depressing asset prices in a self-reinforcing cycle,” the Fund said. It also repeated a warning that a Brexit shock could upset the global economy.
British voters have been bombarded with Brexit warnings in recent weeks.