UK faces Brexit divorce bill of more than €20 billion

Britain is facing a divorce bill from the European Union for as much as 20 billion euros ($22 billion), according to a Financial Times analysis which shows the bloc’s shared budget is emerging as one of the biggest political obstacles to a Brexit deal.

More than 300 billion euros of shared payment liabilities will need to be settled in the divorce reckoning, according to EU accounts. It is a legacy of joint financial obligations stretching back decades — from pension pledges and multi-annual contracts to commitments to fund infrastructure projects — that Brussels will insist the UK must honour.

The sheer size of the upper estimate, which some EU-27 officials reckon is too low, threatens to poison the politics of the break-up and derail a Brexit transition and trade deal, according to several senior European figures involved in the process.

The 20 billion euros upper estimate covers Britain’s share of continuing multiyear liabilities, including unpaid budget appropriations of 241 billion euros, pensions liabilities of 63.8 billion euros and future contractual and other spending commitments totalling about 32 billion euros.

British Eurosceptic MPs are likely to react badly to the news that UK taxpayers might have to pay billions of pounds to Europe as the price of Brexit. One minister said: “It will have to be explained very carefully, to explain what we are getting in return for market access.”

The pound hit its lowest level on record on Wednesday, according to a Bank of England trade-weighted index, as markets priced in the possibility of a hard Brexit and the prospect of difficult negotiations with the rest of the EU.

Iain Begg, a London School of Economics expert on the EU budget who described the premise of FT calculations of the legacy bill as “completely sound”, said the budget fight was shaping up to be a “battle royal”.

The FT’s analysis is the first attempt to fully quantify the UK’s legacy liabilities in the EU budget, an issue expected to be a flashpoint in the formal exit talks.

To date, economic analyses of Brexit undertaken by bodies such as the UK Treasury have not taken full account of the cost of untangling EU budget commitments.

The precise withdrawal bill is impossible to calculate and will depend on a political deal. However, officials from four EU-27 countries who reviewed the FT’s estimates said they reasonably represented the sums at stake. Some questioned certain assumptions that reduced Britain’s exit bill, arguing that the UK must make good on all its spending promises, not just to 2019 but to the end EU’s long-term budget in 2020.

Brexit blows a hole in the EU’s budget, with potentially far-reaching political consequences. It confronts Germany, Italy, France and other net contributors with the dilemma of filling any gap or scrapping programmes that Brussels and eastern and central European countries see as legally binding promises.

Britain’s 20 billion euros reckoning would only cover spending already approved on projects within the EU-27, not the future shortfall created after 2019 by Britain’s withdrawal from the long-term EU budget.

It also excludes EU spending on UK organisations. Philip Hammond, UK chancellor, has pledged to protect the funding for most, but not necessarily all, of these programmes where a British organisation is involved.

Brexit campaigners claimed the UK could save £350 million a week by leaving the EU.

The budget will be a big factor in several aspects of the withdrawal talks. Senior EU diplomats expect the EU-27 to tie the settlement of Britain’s budget bill to any Brexit transition arrangements — a priority for UK business, which is keen to retain access to European markets while a long-term trade deal is agreed.

Jean Arthuis, chair of the European Parliament budget committee, said Britain should honour projects signed off when it was a member. “The UK can pull out of the EU but it cannot escape its obligations under international law, especially if it wishes to become a ‘global leader’ in trade,” he said. “This is a matter of credibility. Brexit is not a poker table.”

In addition to making good on previous promises, the EU-27 would demand future EU budget payments as a condition of single-market access.

Such a stance is likely to anger many campaigners against UK membership of the bloc.

Conor Burns, a Eurosceptic Conservative MP, said: “Leaving the EU doesn’t mean paying money into the EU, having free movement in the EU and applying the law of the EU. Those three things, I believe, were specifically rejected by the British people on June 23.”

But one former UK minister said: “We could actually end up paying more into the EU budget. That will be a big story in the next two years.”

The calculation

The FT’s analysis of the EU’s public accounts is intended to approximately quantify and share out payment liabilities that the UK has agreed as an EU member but which stretch beyond 2019, the exit date expected by Downing Street.

By aggregating liabilities such as unpaid budget appropriations and pension and spending commitments with a total of about 337 billion euros, it highlights the sheer scale of the bill Britain might have to settle before leaving the bloc.

When calculated according to the UK’s net contribution to the EU budget — roughly 12 per cent, after taking account of a rebate secured by Margaret Thatcher when she was prime minister — Britain’s share would be 40 billion euros. After making full deductions, including for the UK’s share of assets and expected EU budget spending in the UK, the exit bill to the EU stands at close to 20 billion euros.

It excludes so-called shared contingent liabilities of 57.8 billion euros and other loan guarantees of 21.4 billion euros. These liabilities and guarantees are joint pledges to stand behind assorted EU lending and activity, from outstanding EU bailout loans to Portugal and Ukraine and to estimated liabilities from dismantling a nuclear site.

The spending overhang

The most significant element of the divorce bill is a category item known as reste à liquider (RAL), which roughly translates as “yet to be paid” and represents EU appropriations on specific projects that will be paid for in the future. The commission describes these as legally binding pledges.

Britain has, to date, largely ignored this “commitments” overhang. It instead focused on keeping down the annual budget payments, a strategy that is part of the reason why the EU’s unfunded commitments — the equivalent of an unpaid credit card bill — have ballooned in recent years as schemes are signed off but bills are not paid.

At the end of 2015 the RAL stood at 217.7 billion euros, more than four times its size in 2000. The size of the RAL fluctuates but the FT estimates it could rise to a maximum of 241 billion euros by the end of 2018. Several senior EU diplomats and politicians confirmed that Britain’s share would be demanded in Brexit talks.

Mr Arthuis, the European Parliament’s budget committee chair, said Britain had “commitments to honour”. “It is ultimately up to Brexit negotiators to decide but the RAL will probably fall under the withdrawal agreement foreseen by Article 50 [formal divorce talks],” he said.

The offset

There are factors that bring down the leaving bill in net terms. The UK is expected to lay claim to a share of the EU’s multi-annual assets, which, at book value, are about 22.5 billion euros. This would reduce the Brexit bill by about 2.7 billion euros. London would be likely to request a revaluation of property.

On average, about 45 per cent of Britain’s post-rebate contribution comes back to the UK in public and private receipts, according to FT calculations. This is why the gross 40 billion euros contribution bill would come down to 20 billion euros in net terms.

There is one further hitch. As the Thatcher rebate on contributions is paid to Britain in the following budget year, Britain in 2019 would also expect a 6 billion euros refund from its 2018 budget contribution.

The EU-27 politics

Making Britain pay its EU debts is one issue that unites the EU-27. François Hollande, the French president, last week noted how Thatcher “wanted to stay in Europe” but demanded “a cheque in return”. “Now, the UK wants to leave and pay nothing,” he said. “It’s not possible.”

But there are differences of views emerging on the bill. The commission is taking a hardline position on Britain making good on liabilities it signed up to as a member, according to several senior EU-27 officials. “They are on a crusade,” said one.

Net contributor countries such as Germany, Italy, France and the Netherlands face a dilemma: they would be expected to cover any Brexit-related budget shortfalls, yet know that demanding too much from Britain risks killing an exit deal.

At the same time, some big net recipients of EU funds — including among Baltic states and in eastern Europe — expect Britain to go even further. Some want the UK to settle its promises made when signing up to the EU’s 1 trillion euro long-term budget, which runs from 2014 to 2020. There is some sympathy for this view within the commission. This would almost double the FT’s upper estimate of the bill.

The looming challenge has been noted in some quarters of Westminster. Andrew Tyrie, the chair of the Commons Treasury select committee, wrote that even if the UK decided against participating in EU budget programmes, “it could be as late as 2023” before Britain has settled all the liabilities “for commitments entered into during our time as a member state”.

Nick Clegg, the former deputy prime minister, said Prime Minister Theresa May had already promised to carry on making EU payments by vowing to still take part in European security and crime-fighting measures.

“It’s a measure of the government’s double standards that it won’t come clean to MPs and the British people about the consequences of its own approach,” he said.

Source: The Financial Times