Where is €40bn for the EU going to come from?

Where is €40bn for the EU going to come from?

In her Florence speech, the Prime Minister suggested that the UK should pay a divorce settlement in the region of €20bn to the EU27. More recently there has been talk of this payment being doubled to €40bn. These are huge sums of money. Incurring liabilities on this scale is not just a question of the considerable impact it will have on living standards. It also raises the question of how such astronomical sums are going to be raised at all.

Recent ONS figures show how dire the starting point is. In 2016 the UK had a total balance of payments deficit with the EU27 of £111bn, continuing the pattern of recent years. This was made up of deficits on trade of £82bn, on income of £18bn and net transfers of £11bn. While we have a trade surplus of £14bn on services, we are lumbered with a much larger deficit on goods of £96bn. The income deficit stems mainly from the flow of dividends and profits to the EU27 from the sale to them of UK rail franchises, power companies, utilities, airports, and so on; plus remittances from EU migrants. The final £10bn is the net cost to the UK of our contribution to EU budgets.

Of course, all these deficits stem from different sources, but they share a fatal characteristic in common: they suck demand out of the UK economy, transferring claims on resources from the UK to foreign interests, and piling up a mounting accumulation of debt and liabilities.

It is against this backdrop that the huge potential divorce bill has to be considered. If we stay in the EU for a transitional period, the £111bn deficit registered in 2016 is likely to be replicated several times over before we finally leave. An additional £40bn – if the bill can be contained – will push our total balance of payments deficit with the EU27 higher still.

This might make some sense if our sales to the EU27 were much higher than they are. In fact, between both goods and services they total no more than about £240bn a year. This means that the total deficits we are likely to have with the EU over the coming years will very probably represent more than 50% of the value of all the sales revenue we receive from the EU27 over the same period. This really is a terrible situation – with unsustainable and ultimately unbearable consequences for the UK economy.

Something has to give. In my view, it is clear that we should focus on the exchange rate. The UK cannot go on indefinitely with a balance of payments deficit of 6% of GDP. We will never sell enough services abroad to fill the gap, and we will never produce enough manufactured goods to enable us to pay our way in the world without an exchange rate which makes it profitable to invest in light manufacturing in the UK – instead of getting practically everything in our shops made overseas. How low would the pound have to be for this condition to be fulfilled? Probably around parity with the US dollar – about 25% below where it is today.

Far from being a disaster, this realignment would be a huge boon to the UK economy. It would enable us to reindustrialise, to get our rate of investment up, to get our trade and balance of payments deficits under control, to reduce our need for borrowing, to get the economy to grow at 3% or 4% per annum, to rebalance the UK economy between London and the regions, to get productivity rising again, and to allow real increases in wages to materialise.

Far from being a source of strength for the UK economy, the Single Market has been a poisoned chalice. The only way out of this bind for the UK is for us to trade out of our current difficulties. By creating the right conditions for a manufacturing revival we could do it.