The International Monetary Fund this week kicked off its annual meeting in Washington on the typically downbeat note we have come to expect from these events. The global economy is weak and fragile, it warns in its latest World Economic Outlook, prompting a destructive backwards slide into protectionism, economic malpractice and reduced openness.
This sub-par growth, moreover, “risks perpetuating itself” because of “the negative economic and political forces it is unleashing”. Brexit is cited as a prime example of this potential plunge into the abyss.
Maurice Obstfeld, the IMF’s chief economic counsellor, goes further. Brexit, he says, is part of a political backlash “that blames globalization for all woes and seeks somehow to wall off the economy from global trends rather than engage cooperatively with foreign nations”.
I was a remainer, but I can’t accept this interpretation of Britain’s vote to leave. Mr Obstfeld doesn’t overtly lump Brexit in with Trumpism, but he might as well have done. His meaning is clear, and as seems ever more frequently to be the case with the IMF, he could not have been more wrong about it.
Nobody yet knows how Brexit will pan out. Lots of things could go wrong, not least a defensive and vengeful reaction from the the European Union that attempts to lock Britain out of the single market. But on present evidence, Brexit is a very long way from the sort of protectionist, inward looking, reactionary force Mr Obstfeld imagines.
To the contrary, as articulated by the new Government, Brexit is about embracing the many positives of globalisation and standing up for free trade, not turning the nation’s back on them. Economically, Brexit will undoubtedly be difficult and troublesome, but it is most unlikely to be disastrous.
Not for the first time, the IMF has become captive to “group think” and powerful establishment forces. Over the last ten years, the fund has been pretty much wrong about everything of substance. It failed to see the financial crisis coming, and it failed to anticipate the eurozone debt crisis, having essentially become a cheerleader for integrationist ambitions of monetary union.
It then proceeded to become part of one of the biggest economic policy blunders of the modern age, over-riding its own rules and conventions to save the euro and bailout the bankers. It has also been consistently wrong about the UK. Some serious soul searching is in order. The very purpose of this institutional corner stone of the post-war, Bretton Woods economic settlement is being called into question as rarely before.
Time and again, the IMF has been found guilty of faulty forecasting, analysis and policy, undermining its authority and impugning its reputation as a non partisan organisation that can be trusted with the economic world order. Too often it becomes captive to powerful political interest in its membership, as occurred in Britain’s referendum campaign when it was used as a key part of George Osborne’s “Project Fear”. In one scenario examined by the IMF, the possibility of a relatively mild reaction to Brexit was at least entertained. But these nuances got lost in the overall message: that the consequences of a vote to leave would be “bad to very, very bad”. So far they have not been.
Yet the big failure was over the euro, the subject of a lacerating report by the IMF’s Independent Evaluation Office (IEO) a few months back. First the IMF ignored the design flaws at the heart of European monetary union, and therefore completely failed to see its propensity to crisis.
Then, as the debt meltdown began, it remained upbeat about the health of the European banking system, taking at face value the self interested reassurances of national and euro area regulators.
And finally it squandered the fund’s resources on an unprecedented scale supporting the continuation of a currency which for some of its members had become an economic doomsday machine. Ensuring the single currency’s survival was routinely prioritised over the individual nation’s best interests.
This needs to be said, not least as the IMF probably gets more publicity for its views than any other organisation. One cannot stop the IMF from forecasting, nor would that be desirable. However, the IMF should do some soul searching; show a little humility; consider its views in the context of opinions by independent and experienced commenters with sound analytical records, and above all, resist the temptation to issue politically biased forecasts.
Unfortunately, that is a big ask.
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