Does the recent UK offer to up the “divorce bill” from €20 to €40bn, but only if there are considerable concessions in terms of trade, give the UK much leverage? The hard Brexit faction seems absolutely convinced that only by threatening to walk away and playing “hard ball” can a good deal be extracted from the EU.
There are two issues. The first is that whereas €40bn sounds like a lot of money, is it really so in terms of the size of the overall EU budget? The second issue is that the EU simply sees the money in terms of a “bar bill” – a matter of settling existing accounts and totally decoupled from any talks on the future relationship. Sadly the UK is outgunned and outclassed, but as money is one of the few bits of leverage available to the UK is it worth having a go, or is it likely to backfire spectacularly? It is worth checking the facts before coming to a conclusion.
How much is the UK Contribution?
According to Richard Barfield’s Brexit Fact Base (p25), which is an extremely good resource, the UK net contribution to the EU in 2016-17 was £8.1bn, but the UK receives significant funds secured through competitions (including money received for research in UK universities). NAO estimated these at £1.4bn for 2014. Assuming a pessimistic estimate of £1.0bn for 2016/17 this results in a UK net contribution of £7.1bn.
The UK contribution also includes the UK’s share of the EU’s international aid budget. The UK’s share was about £1bn in 2015/16, which counts towards the UK’s overseas aid target of 0.7% of GDP. To meet the target after leaving the EU, the UK would still need to spend that £1bn on aid. Therefore, the UK could only ‘save’ £6.1bn (£117m/week), not £7.1bn and of course nothing like the infamous £350m per week as claimed by the Leave campaign.
In terms of budget contribution per person (Figure 1) of the 10 net contributors to the EU budget the UK is in eight place (the figures are slightly out of date but probably won’t have changed significantly). Of course the UK with 66M people is the second most populous country in the EU and on a country basis the UK makes the 2nd largest net contribution. (France which has a population and GDP very similar to the UK benefits greatly from the CAP, given its very large agricultural sector).
How Much is the “Bar Bill”?
According to John Springford’s Centre for European Reform article:
If the UK leaves the EU with no deal on the money in March 2019, the EU stands to lose two years of UK net contributions, in 2019 and 2020. Some spending agreed in this budget round – largely on infrastructure and other funding for economic development – will not be disbursed until after 2020. Add in EU officials’ pensions, contingent financial guarantees and loans, and farm payments in 2019 and 2020, and the upfront bill the UK is being asked to pay is somewhere between €82 and €113 billion, depending on the calculation made. (After a decade this would fall to between €42 and €75 billion, as the UK received its share of EU spending and was paid back for its share of loans.)
It seems therefore that the €40bn figure is at the low end. The EU however simply sees the bill as one already agreed by the UK. Non payment is viewed as the act of a scoundrel and likely to poison future relationships for decades. It is not looking for an exact figure. What it looks for however is agreement on the methodology for calculating the bill rather than some haggled fixed amount as if bidding over a carpet at a Turkish Bazaar.
A far more informative way of estimating the size of the bill is to work in percentages. If the UK were simply to walk away, “no deal is better than a bad deal” would it damage the EU very badly? The answer is no. If the gap in the budget were filled simply by requiring contributions from the EU27 states to pay more to fill the hole according to GDP it would amount to less than 0.1% of GDP. The EU is however examining the rebate structure. The UK rebate is of course the largest and best known but the Netherlands, Sweden, Germany and Austria have smaller rebates. Either way the damage to the EU will be minimal. In essence however, prompt payment of the “bar bill” (with a smile) is a gesture of good will. As Chris Kendall says in negotiating: Goodwill is your most valuable resource, hoard it and spend it sparingly.
How Much would walking away hurt the UK?
Again the Centre for European Reform document puts this very well:
Compare that to the fiscal cost of no deal for the UK. It would save 0.4 per cent of GDP by ending payments and receipts from the EU budget. But, according to the Office of Budget Responsibility, the UK’s budget watchdog, Britain’s economy would only have to shrink by 0.6 per cent as a result of Brexit for that fiscal gain to be wiped out, because tax revenues would fall. Most credible forecasts estimate that the hit from Brexit would be far higher than this, with the consensus in the 3 to 6 per cent range if the UK traded with the EU on WTO terms only. No deal would therefore lead to a big hole in Britain’s public finances – and one that is far larger than the losses that the 27 member-states would incur.
Of course, the political danger that Theresa May would face if she walked out of talks would not simply be fiscal. No deal would lead to chaos at the UK’s ports and on the Irish border, as the EU would impose tariffs and other customs checks on UK exports. There would be huge legal uncertainty over whether British goods and services could be sold in the 27. This would almost certainly result in a recession – and one that would have been inflicted by May’s failure to negotiate a deal. It is hard to imagine the prime minister – or her government – surviving that outcome.
The UK is in a very weak position and the latest ploy is likely to backfire. Rather than increasing the EU’s confidence and trust in the UK it is likely to do the exact opposite. The monies which seem vast are really not that important in terms of the overall EU budget. Again, it seems that the UK is negotiating with the fantasy EU of the tabloids rather than the real EU of which it has been core member for 44 years. This begs the questions:
- Are the Brexit team as incompetent and hapless as they seem to be?
- Do the Brexiteers exist within a bubble where they have surrounded themselves with true believers like a religious cult and genuinely believe their strategy is sensible? The “no deal is better than a bad deal” line seems to have traction with a considerable percentage of the general UK public and appeals to the patriotic flag waving drumbeat emotions of the English (and the DUP voting NI Unionists).
- If the power-brokers behind Brexit are indeed Legatum and “Atlantic bridge”, possibly they are wrapped up in the Anglo-Saxon confrontational approach and don’t understand this approach is anathema to the EU and will backfire spectacularly.
- Is there a deliberate strategy to make the Brexit talks fail destructively to reap the rewards of “chaos capitalism” whilst simultaneously propagandising that it is a sensible way forward? Have the Mail, Sun and Telegraph fallen for this hook, line and sinker or more sinisterly are they part of this strategy?
In my optimistic moments I think option 2. In my pessimistic moments I think option 4.