The UK government is said to be ready to agree an ‘improved’ offer on the financial settlement with the EU, also known as the Brexit ‘divorce bill’. Some sources have suggested a figure of £40bn. But whatever the exact number, the more important question is what, if anything, the UK would be getting in return.


Starting from first principles, the ‘divorce bill’ is the amount of money that the UK is expected to pay to settle its share of the financial obligations accumulated by the EU while the UK was a member. It should therefore be separate from any costs that might arise after Brexit as the result of new agreements, such as continued participation in EU research and education programmes, or Norway-style payments in return for tariff-free access to the Single Market. In any event, countries are not usually expected to pay a fee just to start trade talks.


What’s more, the UK would be on strong legal ground if it simply decided to stop contributing to the EU budget after March 2019. This is based on the argument that Article 50 will end all Treaty obligations at this point, including financial obligations, unless there is some agreement to the contrary. Indeed, the UK should receive some money back, including the €3.5bn (£3.1bn) in capital that the UK has contributed to the European Investment Bank (EIB).


Nonetheless, the UK has said it will look past the strict legal position and honour commitments made during the period of membership. This is presumably because this is seen as ‘the right thing to do’ but also to secure a better deal in negotiations over the future relationship. Consistent with this, David Davis has stressed that the financial settlement should be in accordance with both the law ‘and the spirit of the UK’s continuing partnership with the EU’. And the Prime Minister said in her Florence speech, ‘I do not want our partners to fear that they will need to pay more or receive less over the remainder of the current budget plan as a result of our decision to leave’.


The ‘current budget plan’ here refers to the EU’s Multiannual Financial Framework (MMF), which runs from 2014 to 2020. In effect, the UK has therefore already offered to pay an amount equivalent to its expected annual contributions between March 2019 and the end of 2020. These numbers are not yet fixed. UK sources have suggested a figure of around £20bn, but this is at the low end, and the EU will be thinking in euros anyway. However, the total on this basis would be unlikely to exceed €25bn (£22.5bn at current exchange rates), net of the UK’s rebate and EU spending in the UK.


This would, of course, be far below the bill of around €100bn (£89bn) suggested by some EU officials earlier in the negotiations. That figure was always ridiculous, as it assumed that the UK would have to pay its full share of all the EU’s gross liabilities (with no allowance for assets) and a large chunk on top for the contingent liabilities of the EIB as well.


However, the EU is still expecting the UK to make a further large contribution, perhaps another €25bn, towards spending that has already been agreed in principle but could take place well after 2020, including long-term commitments known by the French term ‘reste à liquider’ (RAL). The EU is also reported to be asking for €10bn towards the pensions of EU officials. This implies a total bill of around €60bn (£54bn), even before considering the EIB.


A revised UK offer of €45bn (£40bn) would therefore fall well short of the EU’s demands. The EIB issue should at least be relatively easy to resolve. The EIB is reluctant to repay the UK’s capital until the loans this money is helping to back actually mature. But the sums are small and mostly invested in worthwhile projects (some in the UK itself) that make a reasonable return. It would certainly make more sense for the UK to leave its capital with the EIB than to make large contingency payments now against the possibility that some borrowers might default.


The case for making a clean break appears to be stronger in respect of pensions. Unfortunately, the EU’s estimate of the liabilities here is highly sensitive to the assumptions made, particularly the choice of discount rate. One solution might be for the UK to continue contributing towards the pensions of all EU officials every year, as it does now. That would be hard to explain to the British public. Another might be for the UK to take full responsibility for the EU pensions of the relatively small number of UK nationals, but not the rest. That would probably be unacceptable to Brussels. It therefore seems likely that the UK will end up making an additional one-off payment for pensions too.


However, even if £40bn were enough for the EU, many would ask why the UK should stump up anything at all. This is a political judgement that can perhaps only be made by the people in the room. In favour, £40bn (or more) might be a small price to pay in return for a ‘good deal’ with economic benefits potentially lasting many decades. Looked at this way, £40bn could be thought of a one-off payment equivalent to only a few billion each year (and much better value than HS2!). What’s more, since the ‘divorce bill’ is money that the UK would have to pay anyway if it had remained a member, it would be wrong to regard it as an additional cost of Brexit.


Against this, what would the British taxpayer be getting in return, especially if the default position is that the UK could walk away without paying a penny and ‘no deal’ would not be the disaster many fear? ‘Goodwill’ alone is surely not enough, and should in any event be shown by both sides.


At the very least it seems reasonable to expect the EU to agree to fast-track talks on a comprehensive free trade deal, including an explicit agreement on a time-limited transition period where trade remains as frictionless as possible. The UK could then make some of the money conditional on the success of these talks – perhaps anything more than the €30bn (£27bn) or so required to cover the period until the end of 2020 and something for pensions.


This might just about be acceptable to the British public too. But I don’t envy the job of those trying to sell it.

 

Julian Jessop is Chief Economist and Head of the Brexit Unit at the IEA. He has thirty years of experience as a professional economist in the public and private sectors, including senior positions at HM Treasury, HSBC and Standard Chartered Bank. Prior to joining the IEA in March he was a Director and Chief Global Economist at the leading independent consultancy, Capital Economics. Julian has a First Class degree in economics from Cambridge University and post-graduate qualifications in both economics and law.

3 thoughts on “Is the EU’s goodwill really worth £40bn?”

  1. Posted 20/11/2017 at 14:55 | Permalink

    The demand that the UK pay towards future EU pensions is a strange one because EU pensions are funded on a pay-as-you-go basis. It’s not as if there is a fund which is deficit that needs to be topped up.

    When the UK joined the EEC (as it then was) it started immediately to pay its contributions which funded current EU pensions and pension entitlements built up before the UK was a member. The UK didn’t receive a rebate on its contributions to account for this. On this basis, it is difficult to understand why the UK has a liability for EU pensions when it is no longer a member as well.

  2. Posted 21/11/2017 at 00:43 | Permalink

    I am a chartered surveyor and have been negotiating deals all my professional life (over 30 years). I have never offered clients money without conditions on the eventual deal. Nuff said?

  3. Posted 21/11/2017 at 14:07 | Permalink

    Surely if the UK leaves the EU then the EU should adjust its spending commitments accordingly, recognising the shortfall it will have in its funding once the UK has left. That means adjusting its spending programs to reflect the change in resources it has at its disposal.

    If some areas are genuine commitments – decisions made and long term spending obligations entered into during the UK’s many years of active membership and not now avoidable – then perhaps we should honour our share of those. Pensions are the obvious example. Maybe its the British Press but the impression is often given that the EU is going far beyond that and are using a much looser definition of commitment.

    I thought I heard the other day that the costs of some firms relocating from the UK to European countries were to be picked up by the UK government. This sounds odd to me. Especially given that we are not asking them to leave and the only reason they would do so would be because of pressure from EU governments / institutions or the trade barriers the EU might erect if such companies continue to be based in the UK. Sorry to be vague and imprecise about this. I think it was reported on the BBC Radio 4 “Today” programme on Monday 20.11.17.

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