The EU’s obsession with Britain’s money exposes its own vulnerability

The EU’s obsession with Britain’s money exposes its own vulnerability

It has been fascinating to observe the EU’s rather curious manoeuvres as it tries to bag its last few handfuls of British cash, like a hungry chipmunk desperately scrabbling around for some last-minute nuts before it beds in for a long winter hibernation.

For an organisation which likes to think of itself in terms of lofty, high-minded ideals, it is a remarkably worldly concern which is clearly causing the most consternation in Brussels. Rather than losing sleep over the ‘four freedoms’ or ‘protecting the integrity of the single market’, it is the looming disappearance of almost 10% of the EU’s annual budget which is causing EU brows to furrow most deeply of all.

Michel Barnier’s press conference yesterday morning did not reveal a great deal that was not already known about the EU’s negotiating position. What his comments did reveal, however – particularly when he asked his audience to “imagine the political problems which might arise” should the EU have to drastically alter any of its ongoing programmes – was more about the EU’s internal concerns and insecurities. Money is very close to the top of them.

The reasons why are obvious. Facing ongoing dissent and discontent around the continent, the last thing the EU wants to have to do is tell member states that their handouts from the EU budget are going to be slashed by 10%, and that many of them may even shift from being net recipients to net contributors. A hefty lump sum from the UK would allow the EU to kick this problem into the long grass for the time being.

The EU also has fears over its various financial institutions, with specific references to the European Investment Bank, European Development Fund and European Central Bank being inserted between the first and final versions of the European Council’s negotiating guidelines. A sudden loss of British money could be a substantial blow to the health of these institutions and force further liabilities onto the main EU budget, further compounding the EU’s principal financial problem.

Barnier reconfirmed that the EU wants a multi-phase negotiation, with agreement needed on a minimal ‘Exit Agreement’ – covering EU citizens’ rights, the Irish border, the ‘Brexit bill’ and tying up a few other legal loose ends – before it is willing to discuss transitional arrangements, let alone a future trading agreement.

However, Barnier’s demands for now appear to stop at securing agreement on the methodology which would be used to calculate the bill, before the negotiations can progress, rather than on the precise final size of the bill itself – “sufficient progress” as described in the EU’s negotiating guidelines. It would be a largely futile exercise at this stage to try to make the EU to back down altogether on their timing demands, but this looser agreement should leave the door open for Britain to haggle over the exact figure later in the negotiations, something which the EU will inevitably dislike but will struggle to prevent outright, particularly given their own guiding principle of “nothing is agreed until everything is agreed”.

Barnier refused to be drawn on the exact size of the bill, ignoring the new €100bn figure which had appeared in the FT overnight. It seems unlikely that Barnier himself, who appears to be playing these talks in a broadly straightforward manner, was the source of this comedic new figure.

Indeed, it may even be an irritation from his point of view to have some of his more hardline colleagues throwing in another unwelcome distraction to the negotiations. Whatever the precise motivations behind the dumping of this new €100bn figure on the debate, it is clearly not achieving its intended purpose. The fact that these figures are now so transparently being plucked from thin air should at least put to rest those voices in the UK calling for Britain to simply get its chequebook out and blithely cough up whatever figure the EU has decided to conjure up in any given week.

This did not stop there being hints of a legal threat if Britain refused to pay the bill. Good luck to them. Article 50 of the Lisbon Treaty clearly states that “The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification”. Given that Britain’s financial obligations to the EU have all been made within the context of the EU treaties, it is very difficult to see what legal grounds the EU would have to pursue Britain for any money should the UK decide to leave with no deal at all, as a House of Lords report concluded in March this year. Of course, this is not a situation that either side wants, but the EU should bear it in mind before presenting excessive financial demands as if they are indisputable statements of fact and “incontestable” – as Barnier put it.

Britain must not underestimate the leverage that money gives it in the negotiations. The EU’s vulnerability in this area is why they wish to resolve it so early on and separately from the trade negotiations, where they feel less compelled to agree to a deal. Britain can gain major traction with a shrewdly negotiated compromise here, safe in the knowledge that our greater long-term growth prospects outside the EU will quickly outweigh any temporary fiscal hit the UK takes from paying a limited Brexit bill, provided that it is heavily negotiated down to a far more realistic size.

Agreeing to a few general principles on the methodology of calculating the bill looks unavoidable to allow the negotiations to move out of first gear, but Britain should not make the mistake of agreeing to any precise figure yet. We need only to remind the EU that “nothing is agreed until everything is agreed” if the EU then decides to start dragging its feet over trade in a year’s time. A return to the negotiating table will be a far more appealing prospect to them than a looming black hole in the EU budget and the pandemonium that will trigger across the continent.



Rather than Michel Barnier’s press conference itself, it is the annex of the document released alongside it yesterday, containing the European Commission’s draft negotiating directives, which is most instructive in terms of the EU’s approach going forwards. Not to be confused with the European Council’s broader negotiating guidelines released over the weekend, these set out the Commission’s approach to the first phase of the negotiations, and the Brexit bill in particular, in significantly more detail.

Among the key passages related to the ‘financial settlement’ are:

  1. There should be a single financial settlement related to :

– the Union budget

– the termination of the membership of the United Kingdom of all bodies or institutions established by the Treaties (e.g. the European Investment Bank, the European Central Bank);

– the participation of the United Kingdom in specific funds and facilities related to Union policies (e.g. the European Development Fund and the Facility for Refugees in Turkey).

In addition to the obvious demand for a financial settlement relating to the EU budget, notably the EU once again namechecks the key institutions vulnerable to Brexit, as mentioned above.

  1. This single financial settlement should be based on the principle that the United Kingdom must honour its share of the financing of all the obligations undertaken while it was a member of the Union.

This is the EU’s baseline demand, although the fact that they are calling for the settlement to be based on this “principle” hints at their awareness of the lack of any formal legal basis for demanding payments in the absence of any legal structure to enforce them, should Britain decline to reach an agreement.

  1. …In addition, the United Kingdom should fully cover the specific costs related to the withdrawal process such as the relocation of the agencies or other Union bodies.

This includes EU agencies like the European Banking Authority and the European Medicines Agency. Brexit Secretary David Davis has previously expressed his intention to try to keep these agencies in London, although this may be one fight the UK will not be able to win with the EU. The demand for Britain to pay the relocation costs is rather petty and a potential source of British irritation but probably not worth picking a major fight over either. There will be more than enough of a fight on the EU side as different member states battle it out amongst themselves over which countries will take the much-coveted agencies after Brexit.

  1. The calculation method should be based on official consolidated annual accounts… The obligations should be defined in euro.

Those accounts, of course, are the same ones which have not been given a clean bill of health by the EU’s own auditors for two decades, although we can safely assume that this isn’t a tongue-in-cheek reference to that. The demand that the bill is paid in euros is not surprising, although it could inadvertently end up being one of the largest foreign exchange bets of all time.

  1. The calculation method of the United Kingdom’s obligations towards the Union budget should be based on the own resources decision and take into account the historical evidence of its share of the financing before the withdrawal date.

The ‘own resources’ decision is a decree handed down by the European Council in 2014 relating to the funding of the EU budget. Notably, it explicitly references “the existing correction mechanism in favour of the United Kingdom” – Margaret Thatcher’s rebate – so British negotiators should be wise to any possibility of their EU counterparts mysteriously forgetting to include it in their calculations.

Net recipients of the EU budget should be very interested to read the second part of this clause, calling for the calculation to “take into account the historical evidence of its share of the financing”. If we take Britain as net contributor of somewhat over €10bn a year, which corresponds to a putative exit bill of €100bn, then by the same logic, Poland, as a net recipient of around €10bn a year, would therefore be owed €100bn by the EU if it chose to leave. Greece would be in line for a handy €50bn, which might only go part way towards repaying its colossal sovereign debt fuelled by the deep structural flaws of the euro, but would certainly be a good start.

Conspicuous by its absence is any reference to “the historical evidence of Britain’s share of the financing” of accumulated EU assets. The Brussels-based Bruegel think tank has estimated the EU’s total assets as over €150bn. It would be brazen indeed for the EU to claim it was calculating the bill in an objective and rational manner if it chose to include only liabilities without assets.

  1. Modalities of payments should be agreed in order to mitigate the impact of the withdrawal on the budget for the Union.

This is the EU’s major problem here summed up in a sentence.

  1. The Agreement should therefore contain:

(a) A calculation of the global amount that the United Kingdom has to honour in order to settle its financial obligations toward the Union budget, all institutions or bodies established by the Treaties, and other issues with a financial impact. The global amount may be subject to future annual technical adjustments.

This is essentially a catch-all summary clause designed to make sure that the EU can claim a lot of money from the UK, even if it has forgotten to mention elsewhere what it is for. The prospect of so-called “future annual technical adjustments” at the whim of the European Commission is unlikely to be a palatable prospect to the UK.

(b) A schedule of the annual payments to be made by the United Kingdom and the practical modalities for making these payments.

Much of the rest of the wording is slightly unclear on the issue of how the bill will be paid but seems to imply a single lump sum payment. This clause, however, suggests that the UK will be asked to pay in annual instalments. With the EU’s current Multiannual Financial Framework (and the UK’s last) ending in 2020, it is unclear on exactly what basis the EU would be expecting sizeable payments to continue beyond then. Nor does it mention whether the UK would continue to receive payments already obligated to it back from the EU budget during this time – for instance, agricultural subsidies under the CAP – although one can have a good guess on what the EU’s position on this is likely to be. 

(c) Transitional rules to ensure control by the Commission (or, where applicable, another body responsible under Union law before the withdrawal date), the Court of Auditors, OLAF and the power to adjudicate of the Court of Justice of the European Union for past payments/recovery orders to United Kingdom beneficiaries and any payments made to United Kingdom beneficiaries after the withdrawal date to honour all legal commitments (including possible loans) authorised by the responsible entity before the withdrawal date.

The controversial issue of the European Court of Justice is actually raised far more prominently in these negotiating directives with regard to the rights of EU citizens, but it rears its inauspicious head here in the form of an enforcement mechanism for whatever schedule of payments the UK agrees to.

While this again reinforces the suspicion that the EU is aware that it does not have any viable enforcement mechanism available if the UK does not sign up to an agreement, it sets the scene for a nasty spat. The EU is desperate to keep a foot in the door for its overpowered and politicised Court, which has always been far too close to the European Commission for comfort. For that very reason, the UK will be determined to avoid a situation where the ECJ continues to be able to flex its legal muscles in the UK for years to come after Brexit.

(e) Specific rules to address the issue of contingent liabilities assumed by the Union budget or specific institutions or bodies or funds (such as loans made by the European Investment Bank and the European Investment Fund).

Hidden in this final clause is another potential sting in the tail. Being tied into contingent liabilities of the EU’s financial institutions runs the risk of the UK again being forced to pay for eurozone bailouts in the future, as the EU gets around its ‘no bailout’ rule by the backdoor by using loans from the European Investment Bank to prop up tottering economies brought to the brink by the euro itself. The UK must tread extremely carefully here.

Overall, there is something of a platform on which the UK and the EU can build in the negotiations, but the details already throw up a number of highly contentious sticking points which will need to be addressed. The EU has understandably drafted the guidelines to give itself the maximum possible advantages in calculating the Brexit bill, but it will have to give significant ground on some of the details if it is to avoid scaring Britain off altogether – and avert a funding crisis which could have acute consequences for itself. Britain has every reason to stick to its guns and wait for the EU to blink first.
Photocredit: EPP Group in the CoR