The law justifying Britain’s Brexit bill is hotly contested, the variables in the calculation are legion and the negotiation has yet to start.
But there can be no doubt that the EU’s €100bn demand to settle Britain’s exit dues is one of the biggest political dangers in the Brexit process.
The Financial Times estimated the bill using the EU’s negotiating guidelines, the more detailed draft mandate for the bloc’s negotiator, Michel Barnier, and conversations with diplomats and officials involved in Brexit talks.
Barnier’s initial approach
At the behest of member states, the opening position is more stringent than the methodology underpinning the €60bn bill referred to by Jean-Claude Juncker, European Commission president. The tougher stance amounts to a gross settlement of €91bn-€113bn, which over many years would net off at about €55bn-€75bn.
Mr Barnier’s core argument is that Britain made legally binding financial commitments that it must honour on exit. He wants the bill covered in a single “global settlement”, which the UK can then discuss paying in instalments.
The commission initially looked at three main types of liability, which primarily come due between 2019 and 2025.
The biggest were:
● EU budget items (such as road or rail projects) that had yet to be paid (a category, formally known as rests à liquider, which amounts to about €241bn).
● Other legal commitments to projects that would be initiated after Brexit takes place in 2019, such as investment projects in less developed regions, in rural areas and for fisheries (a total of up to €172bn).
● Long-term obligations and liabilities such as pension promises and contingent loan guarantees.
Mr Barnier then planned to offset this by reimbursing the UK with a share of EU assets (buildings such as the Berlaymont, the European Commission headquarters), its normal budget rebate and EU spending that would have taken place in the UK.
Contingent liabilities — financial hits that may occur in the future — would be paid if and when any losses were suffered. Britain’s share would be based on its historic contribution, arguably between 12 and 15 per cent, depending on how the rebate is handled.
Member states’ harder line
This position was toughened up by member states in the past few weeks. Most importantly, a group led by France and Poland demanded that Britain pay for not just longer term legal commitments that Mr Barnier identified, but normal annual budget spending in 2019 and 2020.
Although Britain signed up to the EU’s seven-year budget plan that ends in 2020, Brussels did not originally demand that London provide funding for annual budget outlays after Brexit. The new position maximises possible liabilities covered in the Brexit settlement, and effectively asks the UK to see out the full 2014-2020 long-term budget.
Asking Britain to share in this €182bn of other planned commitments in 2019 and 2020 is hugely contentious, not least because of the post-Brexit activity it would fund: farm subsidies in France that Britain has long campaigned against, and the administration of the EU.
British farmers would still receive EU payments, but the net bill for Britain would be €10bn-€15bn, according to estimates of the Bruegel think-tank. Put crudely, for two years after leaving, Brexit Britain would be paying for the waiters at EU summit dinners, and probably subsidising the vegetables to boot.
For legal reasons, Germany and France were also unconvinced that Britain deserved a share of assets of the union. This raises the UK’s net exit settlement by €3bn to €10bn, depending on whether just long-term assets such buildings are counted, or cash is included as well.
The final tweak is in the way that contingent liabilities are handled. The commission originally wanted to ask Britain to cover its share of losses on loans or guarantees at the point they arise.
The new approach would ask Britain to make a lump-sum payment upfront to cover the liabilities, which would be reimbursed over coming years. This method — requesting provisions for a rainy-day fund — increases the upfront Brexit settlement by €9bn to €12bn.
Adding it all up
Mr Barnier insists there will be no final number for the Brexit bill until the end of the Brexit process. But the EU is insisting that Britain agree part of the methodology for it, including a definition of liabilities, before trade talks can begin.
There will be a lot of clever political tricks used if there is a deal on the Brexit bill. The UK may want to stagger the contributions, hide controversial liabilities (such as pensions for EU officials) in different line items and use favourable estimates of the net bill.
But at present Mr Barnier is insisting on a “global settlement” that will cover all the obligations Britain agrees to cover. This the FT estimates to be €91bn-€113bn and the Bruegel think-tank puts at €82bn-€109bn.
The net bill could look far lower than the headline payment. Some credits, such as the UK’s approximately €6bn rebate from 2018, would be deducted from the gross bill almost immediately. Other reimbursements would take more time. Farm subsidies would take a couple of years, EU spending on projects could take up to 2023 and some loan repayments would take a decade or more.
Overall this produces a net FT figure of €55bn-€75bn and a net Bruegel figure of €42bn-€65bn. The difference primarily comes from the FT only considering receipts to the UK exchequer (not Britain’s private sector) and using the European Commission’s stricter view of net pension liabilities.
The commission is willing to stagger the payments as long as it leaves Brussels with no gap in the EU budget, which would also avoid a huge gross payment. But this is a detail for the final stages of talks; at present the UK does not even agree with the notion of an exit bill. There is a €100bn divide to bridge, and not long to do it.