Is Money The UK’s strongest Card?

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per person (Figure 1) of the 10 net contributors to the EU budget the UK is in eight place (the figures are slightly out of date but probably won’t have changed significantly).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).

Fig. 1 EU Budget contribute per person in 2014 for normally net contributor countries

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.

And:

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.

Conclusion

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:

  1. Are the Brexit team as incompetent and hapless as they seem to be?
  2. 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).
  3. 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.
  4. 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.

Comments

  1. Peter May -

    If option 2 represents optimism then you must feel as depressed as I do…

    If the Irish veto progress until the border is sorted that should concentrate minds and show that a hard border is impossible because there is literally no time to create it – neither for Britain nor the EU, then that would be a first small step of hope.

    1. Sean Danaher -

      Hi Peter,
      I feel depressed about the whole thing, possibly not as deeply depressed as my wife, who feels I’m lucky being Irish. Regarding option 2 I think it is not far from Ian Dunt’s position http://www.politics.co.uk/blogs/2017/11/17/week-in-review-brexiters-are-their-own-gravediggers Worth reading bit he has this to say about Davis’s Berlin speech:

      What is extraordinary is how tone deaf it was. “Putting politics above prosperity,” Davis said, “is never a smart choice”. This was greeted with astonishment. After all, Europeans have spent the last 18 months watching Britain doing exactly that. But Davis does not really know this, because he has not been meeting with Brexit critics. He has been meeting with Brexit supporters. His own staff should plainly have been able to draft a speech which did not make such elementary tonal errors, but they are evidently unable to do so.

      On the Irish Veto, if anything Leo is hardening his stance https://www.rte.ie/news/brexit/2017/1122/921997-coveney/ and I can’t see the Irish backing down. Its the right thing to but also it would be politically impossible; being seen to capitulate to the UK would be electoral suicide.

  2. Graham -

    Seems to me the 4 options are not mutually exclusive.

    Re Option 2 and suggestions of a “religious cult” I came across an interesting interpretation of “austerity” in “Undoing the Demos” by Wendy Brown (a book I only managed to read part of as I found her style hard going). She suggested austerity could be viewed as “sacrifice” and she discusses some of the history of the concept and the way it has been used philosophically, religiously and in actual practice, such as with the “sacrificial victim”. She says: “As we are enjoined to sacrifice to the economy as the supreme power and to sacrifice for “recovery” or balanced budgets, neoliberal austerity politics draws on both the religious and secular, political meanings of the term.” So Brexiteers may be willing to sacrifice a “Deal” (and 99% of UK Citizens) for the promised land of “Taking Back Control”.

    Option 4 reminds me of “Democracy in Chains” by Nancy MacLean in which she argued that US democracy is in danger of being captured (already has been?) by a group of billionaires, especially the Koch brothers, whose guru is the late Nobel Prize winning economist James Buchanan. I have no doubt that the same is happening here.

    Re Option 4. Any failure will be blamed on an intransigent, unreasonable EU. It could get quite ugly.

    The answer to Option 1 is “Yes”.

  3. Sean Danaher -

    Indeed Graham, there are also rumours that there is considerable Murdoch money in Legatum (and probably also in Atlantic-Bridge) Murdoch’s aim has always been to rule the world via the media and he has been spectacularly successful “When I go into Downing Street, they do what I say; when I go to Brussels, they take no notice.”

    I think the US is a democracy in name only, a super majority of the Republican Party and I would have thought a large number of Democrats have sold their soul to the devil so to speak. Ivan Horrocks also thinks it has been going on in the UK for many years http://www.progressivepulse.org/uncategorized/democracy-in-chains-a-us-export-thats-not-as-new-as-some-might-claim

    Maybe 1,2 and 4 are all true. I think the UK and EU are so far apart talks will inevitably break down. The EU will be intransigent. I expect it to get very ugly .

  4. Tom Leonard -

    Can someone please explain to me how it is the interests of the EU (or individual EU member states individually:

    1. For the UK to fail post-Brexit (economically or politically)?

    2. For the UK to go too far outside the tent of the EU post-Brexit?

    3. For ordinary activities such as aviation to fail post-Brexit?

    I’d have thought the ‘you don’t want this to happen’ card was a pretty strong one. Maybe I am missing something.

    The exit bill itself is a triviality in the big scheme of things. Peanuts, will be long forgotten.

    1. Sean Danaher -

      Tom
      a very good point. The exit bill itself is a triviality in the big scheme of things. Peanuts, will be long forgotten. Absolutely agree but the media seem fixated by it.

      I think however the primary focus of the EU is the survival of the EU. For the continental countries the EU is far more than a trading block. As Graham said on another post “I have to think the British, or at least the current politicians, really don’t understand the horrific trauma that most of continental Europe went through from WW1 and the Russian Revolution to Nazism, fascism in Italy and Spain the totalitarian takeover of Eastern Europe and the millions of deaths, horrors of a brutal war and the dislocation all that entailed. While we luxuriate in our “Finest Hour” and endless tv repeats of “plucky” Britain standing alone and films of Dunkirk, (again) and Churchill (again), France and Germany decided something had to be done to prevent another destructive war and so what eventually became the EU was born.”

      What economic assessments I’ve seen indicate that in most hard Brexit scenarios the economic damage to the EU as a whole will be slight, certainly an order of magnitude lower than the damage to Britain.

      Even Michael O’Leary thinks an aviation deal will be done, but the French and Germans would like some months of chaos and solutions which will increase their market share. They don’t particularly like Ryanair or Easyjet.

      I’m not sure they have factored in political failure. My view is that Brexit will be very negative for the UK and the harder the Brexit the worst it will be for ordinary people. The worry is that revolutions often come in pairs, as in Russia and Iran, with a soft democratic revolution which fails, followed by a totalitarian revolution. Ivan Horrocks (if I understand him correctly) think the more fanatical of the Brexiteer power-brokers want to reduce the status of an average citizen to something like that of a Russian serf in the 19th cent. The double revolution model is troubling as it is possible some sort of totalitarian take over to happen if Brexit goes really badly for the UK. Britain is still a heavyweight in military terms; there is the possibility of a real war never mind a trade war.

      I think the EU now sees Britain as outside the tent but would offer the UK something like a Canadian model trade deal. The problem is services of course. All the public focus seems to be on goods, which the UK is not very good at (having lost much of its manufacturing base in the Thatcher years) but excels in services.

      i’m Irish and that is the EU member state which will be most affected. The bottom line is that about 12% of our exports go to the UK and 25% of the imports are from the UK. On paper this is manageable as we can always buy or goods elsewhere and the 12% figure has been in long term decline anyway. The real problem is with agri-business where 40-45% of exports go to the UK. A lot of this is perishable as well. Also even though the regional economic disparity is much less in Ireland than the UK, a hard Brexit will disproportionately affect rural Ireland and the border region, which is already the poorest. Trans-shipment of goods will also be a big problem as Dublin-Liverpool-Felixstowe for example is a major tran-shipment route. There is the Irish border issue as well. The Irish definitely want as soft a Brexit as possible.

      Not sure if any of that helps.

  5. Robin Stafford -

    All of the above – which leads directly to 4. Pessimistic but I fear the most likely option

    We hear about the costs of leaving in terms of payment to the EU and lost trade but we are not hearing about the costs of setting up all the agencies and bodies needed to replace what the EU does today – with costs shared between 28 countries. Not to mention all the additional customs staff and systems, or even the costs of DEXEU itself. It’s a potentially long list. It would also show just how much the UK has benefited from the EU in cost terms, which the Remain campaign failed to do.

    Wonder how one might tackle something like this? Has someone done it already?

  6. Sean Danaher -

    Hi Robin
    Regarding setting up UK agencies as opposed to sharing between 28 countries must cost a fortune
    an excellent question and one my wife (a very senior medic) is very concerned about
    She was despondent when the Medicines agency move was awarded to Amsterdam
    It made things real
    I had rather hoped the banking agency came to Dublin but they drew lots at the end and it went to Paris
    To do a good job of costing would be a tremendous amount of work
    I might try scoping this next week
    Thanks again for a very good question

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