Europe and Ireland must prepare for an influx of financial firms after Brexit, the head of the International Monetary Fund (IMF) has said.

Christine Lagarde said the EU needed to enhance its regulatory and supervisory capacities to cope with the likely influx of firms from London’s financial district.

Many firms are expected to relocate outside the UK if they lose their passporting rights after Brexit. Passporting allows a financial company authorised in one EU state to sell services and products in another.

“In the near-term it is critical to ensure that regulatory and supervisory capacities are prepared for the influx of financial firms that will move to continental Europe – and Ireland – as a result of Brexit,” Ms Lagarde said.

She was in Dublin to open a two-day conference on “The Euro at 20”, jointly hosted by the Central Bank and the IMF.

“We meet at a moment when the EU and euro area are in the midst of difficult decisions about their future. Populist movements – from Brexit to the recent Italian elections – have called into question the value of European integration.”

Ms Lagarde acknowledged the problems that came with integration. “Several of the countries hit hardest during the global financial and euro area crisis saw their income growth fall significantly behind that of their peers,” she said, noting many countries were only now recovering to pre-crisis levels.

Difficult moments

“It has been a complicated journey, full of difficult moments – but in each step we have learned valuable lessons… at age 20 the euro area is more mature – battle scarred, yes, but also stronger and ready to move forward.”

She said work was needed to enhance the euro area’s resilience and secure its future. “The euro area needs truly integrated financial and capital markets that allow companies to raise financing across borders more easily and support investment.”

Ms Lagarde also argued for steps to introduce greater fiscal risk-sharing while reducing underlying fiscal risks. “Greater risk-sharing combined with larger national buffers would allow countries to avoid having to raise taxes and cut spending when the next downturn comes.”

Rainy-day fund

The IMF recently introduced proposals for a so-called rainy-day fund for the euro zone or what it calls a central fiscal capacity. Ms Lagarde said such a fund could act as a buffer against future shocks, but acknowledged there were different proposals on the table.

“But no matter which proposal is eventually adopted, every country has a responsibility to comply with common fiscal rules and reduce public debt in places where it is too high.”