The multi-billion-euro exit charge that could sink Brexit talks

The Economist


The mother of parliaments has spoken. On February 8th a large majority of MPs backed a bill authorising the government to begin Britain’s withdrawal from the European Union by triggering Article 50 of the EU treaty. (A few dissenters were told off for singing “Ode to Joy”, the EU’s anthem, in the chamber.) After approval from the Lords, it should become law in March. But a different sort of Brexit bill is approaching, and will be harder to manage. It could yet scupper the whole process.

Before Britain’s referendum last June, Leave campaigners promised voters that Brexit would save the taxpayer £350m ($440m) a week. That pledge was always tendentious. But officials in Brussels are drawing up a bill for departure that could mean Britain’s contributions remain close to its membership dues for several years after it leaves. In a new report for the Centre for European Reform, a think-tank, Alex Barker, aFinancial Timescorrespondent, puts the figure at anything between €24.5bn ($26.1bn) and €72.8bn.

The bill comprises three main elements. All, in Brussels’s view, derive from the legal obligations implied by Britain’s EU membership. The first, and largest, covers the gap between payments made in the EU’s annual budget and the larger “commitments” made under its seven-year budgetary framework, approved by Britain and the 27 other EU governments. This overhang has been steadily growing. Britain’s share of what Eurocrats call thereste à liquider(or amount yet to be paid) would be around €29.2bn, Mr Barker estimates.

Pensions make up the third component. The liabilities for the EU’s unfunded scheme stand at over €60bn. Britain may be prepared to cover its own nationals. But European officials insist that all liabilities are a joint responsibility, as Eurocrats work for the EU, not their national governments. This may be the fiercest row of all.The second element covers investment commitments to be executed after Britain leaves the EU in 2019. Most of this is “cohesion” funding for poorer countries (think motorways in Poland). Mr Barker reckons Britain’s share could amount to €17.4bn. The government will struggle to explain why voters should be on the hook for payments made after Brexit. But the European Commission will argue that Britain’s approval of the current budget, which runs until 2020, obliges it to cough up.

Brussels’s demand will combine these three elements with afew miscellaneous items, and may adjust for Britain’s share of EU assets, its budget rebate and payments it is due from the EU (see chart).

Michel Barnier, who will lead negotiations on behalf of the commission, is said to consider that the bill stands between €40bn and €60bn. The upper figure has anchored debate in Brussels, but attracts few takers in London. Some Brexiteers believe Britain has no obligation to pay anything at all once it leaves. If a compromise cannot be reached, Britain might find itself hauled before the International Court of Justice. The talks may be over almost before they have begun.

Sequencing presents a second problem. Mr Barnier insists on settling the bill and other divorce terms before substantial talks on the much bigger matter of a post-Brexit settlement, including a trade deal, can begin. But British officials want to negotiate in parallel, and perhaps to link the departure sum to the degree of access Britain will enjoy to the EU’s single market after it leaves. The law lends Britain half a hand: Article 50 says that a departing country’s withdrawal agreement shall take account of “the framework for its future relationship” with the EU. But hardliners like France insist on keeping the two issues apart. And with only two years to conclude an Article 50 deal, Britain cannot waste time talking about talks.

Some British officials note that the other EU governments can tweak Mr Barnier’s negotiating guidelines if they find his line too tough. Britain might seek to exploit this by offering sweeteners: defence co-operation with the Baltics, perhaps, or infrastructure grants to Poland. The trouble is that reducing Britain’s bill means cuts to the overall budget, which would irk countries that do well from it, or extra payments from the wealthier governments to make up the shortfall. That creates an unusual alignment of interests among the 27. “If there’s one thing net payers and net recipients agree on, it’s to make the bill for Britain as high as possible,” says an EU official.

Most governments do not rule out a compromise. German officials, for example, will consider opening trade talks before the divorce is settled, so long as Britain accepts the principle that it has obligations that extend beyond its departure. As for the figure itself, like all EU budgetary negotiations it will be resolved via late-night Brussels summitry. “It’s like buying a carpet in Morocco,” says Jean-Claude Piris, a former head of the EU Council’s legal service. “The figures are always negotiable.”

But there are reasons to fear a breakdown. Theresa May, the prime minister, has done little to prepare voters for this debate. Neither her speeches nor the government’s white paper on Brexit have said anything about an exit payment. A whopping financial demand will therefore inflame Britain’s tabloids, limiting her room for manoeuvre. More worryingly, both sides believe they hold the whip hand. British officials think the hole Brexit blows in the EU’s budget will force the Europeans into compromise for fear of getting nothing if the talks derail. EU officials, for their part, are convinced that the prospect of no withdrawal agreement, and therefore no trade deal, will terrify Britain into submission. “They’ll be begging on their knees at the WTO,” says one.

The EU is skilled at brokering compromise on budgets. Perhaps that will prove true for the Article 50 talks, too. But two things set the upcoming negotiation aside. First, there is no precedent. Second, goodwill towards Britain has largely evaporated; it will be negotiating with the EU as a third country, not a partner. Informal meetings between British and European officials have already witnessed blazing rows. About the only thing the sides agree on is that they may be heading for deadlock.

(The Economist)