Divorcing, or quitting a club?

Stepping back a bit, the term ‘divorce bill’ is actually a little misleading. The EU existed before the UK joined and will (probably) last long after the UK has left. It is not therefore a simple matter of dividing up assets and liabilities in the same way as a divorcing couple might sell the family home or fight over custody of the dog.

A better analogy is leaving a club. The UK agreed to pay membership fees in return for access to the facilities and services provided by the EU and now needs to close its account. What’s more, these should be sums that the UK would have had to pay anyway even if it remained a member. As such, the exit bill would not be an additional ‘cost’ of leaving (as many Remainers like to claim).

UK is on strong legal ground, but should be flexible

This still begs the questions of why the UK’s contributions should not simply cease in March 2019 and, especially, why the UK should continue to pay towards EU spending that will take place after the UK’s departure. Indeed, the House of Lords has concluded that, on the basis of Article 50, the UK would be on strong legal ground if it declined to pay any divorce bill at all.

But this approach may backfire. A more flexible stance should increase the chances of getting better terms on other aspects of the negotiations which will ultimately be more important – including a bespoke free trade deal. Rather than sticking to the letter of the law, the UK could earn some goodwill (and tangible benefits) by focusing on the spirit of the past and future relationship.

A cut-off date of 2020 would be fair and reasonable

In particular, the EU made long-term financial commitments during the period of the UK’s membership, (mostly) agreed by the UK, and on the assumption that the UK would continue to contribute. Given this, there is a decent case for arguing that the UK should make its usual payments until the end of the EU’s current Multiannual Financial Framework (MFF), which runs from 2014 to 2020.

This is similar in principle to quitting a club: if you have signed up to a long-term subscription you might still be liable for the whole amount even if you decide to leave early.

My back-of-the-envelope calculations suggest this would imply a divorce bill of no more than €25bn (net of the UK’s rebate and EU spending in the UK), to cover the period from March 2019 to the end of 2020. I would add a few smaller one-off items, notably a contribution to pension payments for EU officials, which would take the total bill to around €30bn (approximately £26bn).

This would be equivalent to significantly less than three years of the UK’s current annual contributions – arguably a small price to pay to secure a better relationship with substantial advantages long into the future. Depending on how the negotiations play out, it could also cover an interim period after March 2019 when the UK is benefiting from any transitional arrangements.

But the EU is padding the bill

However, the EU is asking the UK for a lot more, including large contributions to spending which could take place long after 2020. The calculations here become hugely complicated, but the Bruegel think tank has made heroic efforts and the FT’s Alex Barker is good on the politics.

In a nutshell, EU officials have demanded that the UK contribute its full share of the following: current spending up until at least 2020, including on the Common Agricultural Policy and EU running costs; long-term capital spending, including structural funds; and money allocated in current and past MFFs that has not yet been paid out (known by the French ‘Reste à Liquider’). There is some overlap between these categories, but the key point is that the UK’s usual annual payments would not be enough to cover all of them.

Frankly, this is going too far. The EU needs to adjust its spending to reflect the fact that one of its biggest net contributors is leaving. A grace period until the end of 2020 would surely be long enough.

The EU is also asking the UK to make large upfront payments for contingencies that may never arise – and then wait years for a repayment. The main item here is guarantees on loans made by the European Investment Bank. It would make more sense to amend the paperwork so that the UK can remain a counterparty on the current terms, rather than require large payments back and forth.

Split the difference?

Altogether, the EU’s demands add up to a gross bill of around €100bn. And on this basis, the net bill would still be at least €60bn, and probably much more, even after allowing for the UK’s rebate (itself in doubt), EU spending in the UK, and future refunds on contingency payments.

Fortunately, these are early days in the negotiations and there is surely room for compromise. As it happens, the figure of €30bn suggested above would be consistent with meeting half way between the EU’s net €60bn and the UK’s fall-back position of zero. But if there is ‘no deal’ by March 2019, the UK should be ready to start saving money straightaway.

 

Julian Jessop is Chief Economist 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.

1 thought on “The Brexit ‘divorce’ bill: let’s be reasonable – but not too generous”

  1. Posted 30/06/2017 at 12:17 | Permalink

    The UK has never achieved anything EU negotiations by making a ‘good-will gesture’. The EU has always simply pocketed the concession and restated its original demands. Tony Blair for example made a good-will gesture by giving up half the UK budget rebate in return for the promise of a review of Common Agriculture Policy spending. That later review concluded their was nothing wrong with the CAP so Blair failed to reduced CAP waste. The structure of the Brexit negotiations is similarly split between a first phase where the UK is expected to concede what the EU wants and a 2nd phase where the EU will discuss topic such the UK is interested in. The very fact the EU has insisted on two phases of talks is strong evidence that goodwill gestures from the UK in the first phase of talks will not yield anything in return and the 2nd phase of talks is merely a carrot to encourage the Uk is making early concessions in a bid to chase a will o’ the wisp trade deal that will never transpire. 45 years of EU membership should have thought us not to be so naive.

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