The Cost of Brexit

 

WEEKLY COMMENT 9-02-2017

By Barry Edwards

The Cost of Brexit

 

Now the government is properly authorised by parliament to activate article 50 of the EU treaty, the reality of the cost of exiting is the main subject under discussion by economists, journalists and commentators. What this really entails has been described in a paper from the Centre for Economic Reform (CER) written by Alex Barker, the Brussels bureau chief for the Financial Times. It is an easy to read well written document explaining the fundamental financial commitments that the UK is committed to with the EU and how it all might be finalised. If you click on the link below you can read the paper (15 pages);

http://www.cer.org.uk/sites/default/files/pb_barker_brexit_bill_3feb17.pdf

The following is taken from the summary to the paper to set out the framework of the discussion;

“Britain’s EU exit bill is possibly the single biggest obstacle to a smooth Brexit. The European Commission calculates that the UK has €60 billion of charges to settle. Britain is confident it will face down what it considers to be spurious demands. Both sides are entering the Brexit money negotiations with unrealistic expectations. Ultimately, this political collision could bring the Brexit talks to a sudden and premature end.

The issues are surmountable. In pure economic terms, even that €60 billion estimate is relatively insignificant, especially when paid over many years. But disputes over EU money are almost always highly-charged and occasionally nasty. A mismanaged negotiation of the bill could easily poison Brexit divorce talks and future UK-EU trade relations.

The make-up of the bill is little understood, even by EU-27 countries. The €60 billion covers Britain’s potential obligations in three main areas: legally binding budget commitments that will be paid after Britain leaves; pension promises to EU officials; and contingent liabilities – such as bailout loans to Ireland – that would only require payments in certain circumstances.

The most legally contentious relate to support for EU investment projects that will be paid for after Britain leaves. These liabilities come in two forms: project commitments that have yet to be paid; and structural funds promised to EU member-states, which will largely be turned into ‘budget commitments’ and paid for between 2019 and 2023.

Both sides are confident in their legal case, and it is hard to predict who would prevail in court. There are few clear legal precedents regarding the liability of departing members of international organisations. But in the Brexit talks, the issues will largely be settled by politics, not law. Some EU negotiators want Britain to promise to honour its financial obligations as a precondition for trade and transition talks.”

Unfortunately, this subject was not debated prior to the referendum which does challenge the credibility of many of the Brexit politicians and supporters. Because this is the case, many people are blissfully unaware that there is a cost to exiting the EU and the now famous statement ‘saving £350 million a week for the NHS’ is proven to be completely false. However, the UK is now about to start these talks so understanding what is at stake is relevant to all of us.

The EU budget is not managed like the member states, it is a consortium of commitments some of which are unfunded by contributions. It is these liabilities that currently amount to €241 billion of which the UK is liable for 12 or 15% depending on which method is used for the calculation. The table on page 10 shows method one the maximum is €57.4 – 72.8 which nobody expects will be the final bill at the end of the negotiations. Method two is €47.9 – 60.9 and method three is €24.5 – 33.4; therefore the range is quite large depending on how the talks go.

Some of these liabilities may never be called and consequently the payment arrangement will almost certainly be spread out probably for many years ahead. You will have to read the paper to follow the intricacies of procedure but it is very likely a payment of between €2.45 – 7.28 per annum for 10 years will be agreed and if it is the lower figure some funds will have to be paid up front. The higher figure is not far off the current net contribution which would mean some people might complain bitterly which may lead to demands for another referendum.

If the UK refused to pay anything, which is unlikely, the other net contributors would have to make up the difference which would mean for instance Germany paying another €15 billion and The Netherlands €4 billion. That would not go down well politically at all so a deal will be done for that reason alone. In my view, the lower figure will be a fixed payment with extra payments for the unexpected calls on funds for a specific period. That should be acceptable to most people and the deal could be done. Logic is not necessarily how politics works so who knows but common-sense dictates an arrangement like that prevailing.

Once this deal has been done then the trade deal can be negotiated, that is another story altogether which will unfold gradually over the years to come.

That’s all for this week, more observations next week.