With all the high-drama, will-they-won’t-they brinkmanship, it is easy to overlook one rather basic point about Brexit: what will the impact be for the EU itself? According to the latest EU Budget, the UK is set to contribute around €18.3 billion for 2018, and could expect to receive back €7.3 billion in spending. So, if the UK were to disappear from the scene, it would create an €11 billion black hole in the EU’s finances. How will the EU fill this? That is the question which I examine in a paper published today by The Red Cell. At one extreme, the EU could cut its expenditure on the remaining EU27. At the other, it could ask those members to contribute more to maintain the original plans. Either way, the EU finances are constructed on reasonably predictable lines, with “own resources” composed of customs duties, a share of local VAT revenue and the balance shared out according to the relative Gross National Income of each member (plus or minus agreed rebates). EU spending programmes are also reasonably stable in terms of each member’s receipts. So it is possible to re-run the EU’s 2018 Draft Budget for either policy option, and score winners and losers. And here we hit a major snag. Because 80% of customs duties are ear-marked to the EU as own resources, it makes a difference whether or not there is a UK-EU Deal for tariff-free access for British exports. It is possible to project that the revenues potentially on offer for the EU could be in the region of €7.1 billion, wiping out two-thirds of the Black Hole at a stroke. Furthermore, UK exports are not distributed evenly across the EU27, and the liability to pay up to Brussels kicks in automatically, and irrespective of the size of a country’s economy. So in fact there are four distinct policy options for the post-Brexit EU Budget: spending cut/Deal; spending cut/No Deal; contributions hike/Deal; and contributions hike/No Deal. The difference between them (which I model in my paper) can have a very significant impact on how much EU membership is worth to each country. Unsurprisingly, most of the financial shortfall created by Brexit will be borne by the bigger, richer “usual suspect” net contributors. Surprisingly, a significant bloc of countries are only relatively marginally affected in terms of their budget contributions whether a UK free trade deal is reached or not. What is of greater impact to them is whether the Black Hole is filled by increased contributions or spending cuts. In fact, most countries are worse off if a UK-EU Deal is reached. Germany is much better off in immediate financial terms if the EU decides to close the Black Hole by reducing its spending, and couples this with a free trade Deal with the UK. In contrast, Italy, and to a lesser extent France, are markedly better off if the EU opts to increase member contributions and does not reach a Deal with the UK. Spain will suffer badly in relative financial terms whatever happens. It will either become a net contributor to the EU Budget or see its net receipts more or less eliminated. The country’s least-worst results occur if the Black Hole is closed by increased member contributions. Ireland will also suffer badly in relative terms either way, but it will incur absolutely punishing burdens if no UK-EU trade Deal is reached. The other major potential losers in relative terms are Belgium, Croatia and Cyprus. They are exposed to extremely heavy post-Brexit burdens depending upon which outcome is followed. In her Florence speech, Theresa May promised to honour the UK’s financial commitments under the current EU Multi-annual Financial Framework (MFF), in much the same way as you sometimes have to pay a penalty to get out of a bad phone contract. All that does is defer the arrival of the Black Hole to the setting of the next MFF, which runs from 2021. A cynic – none of whom, I’m sure, read BrexitCentral – might wonder if the demand that the UK agree upfront to pay a “divorce fee” is designed to evade hard choices. That only defers resolution of the structural deficit within the EU budget which my paper considers. Another cynic might think that the sight of all that lovely tariff income counting as “own resources” may explain why the Commission does not seem to be treating a Brexit Deal with much urgency. Putting the interests of the EU Budget ahead of the long-term benefit of the consumers and businesses of Europe would be a very short-sighted way to run a trade policy. In the end, a compromise somewhere in between spending cuts and increased contributions will in all likelihood be reached. What the findings of my paper indicate, however, is that the attractiveness of a compromise to any of the EU27 is affected by whether or not there is at the same time a trade deal with the UK. This gives a far more nuanced understanding of the Brexit negotiations, because how the EU intends to fill the Black Hole becomes a factor. The fate of a UK/EU Deal may not depend on anything which the UK does or offers. It is just as likely to be influenced by arguments between the EU Commission and key member states as to how much spending the EU will undertake.