The
Brexit Bill Britain's Departure Likely to Cost EU Billions
At
a summit in Bratislava this week, the EU wants to set the course for
its future without Britain. One important issue is likely to be
ignored by European leaders: The fact that Brexit is going to be
expensive for Europe, especially for Germany.
By Peter Müller,
Christian Reiermann and Christoph Schult
September 14, 2016
10:26 AM
There are times when
politics mirrors real life. Nobody knows that better than European
Commission President Jean-Claude Juncker, a man who makes no secret
of the fact that he has a wealth of experience, both privately and
professionally.
That's why he has a
very concrete idea for how the Europeans should act as Britain
departs the European Union. "When your girlfriend leaves you,
you shouldn't gaze after her forever," he recently quipped to a
group of people close to him. "At some point, it's time to start
looking around at other girls."
The Commission
chief's analogy, however, overlooks an important point: A
relationship is easier to dissolve if the couple hasn't been married.
When a decades-long marriage ends, though, the split can get very
complicated indeed -- and sometimes it is extremely expensive for one
of those involved.
That also applies to
the 40-plus year liaison between Britain and the EU. On June 23, a
majority of British voted to end their membership in the European
Union, a decision that was of global significance. The shockwaves
that the British vote unleashed through European capitals and
Brussels have anything but subsided.
Life Goes On?
When the leaders of
the remaining 27 EU members states meet on Friday in the Slovakian
capital city of Bratislava to discuss the consequences, the British
will no longer be at the table. German Chancellor Angela Merkel is
hoping that the meeting will send a message of a new beginning -- in
defense and security policy and on job creation measures,
particularly for Southern Europe. Life goes on, even without the
British: That is the message the summit is to send.
Nevertheless, the
coming years will be defined more by the impending divorce than by
vague summit memoranda. With Britain's exit, the EU will lose more
than just economic and political strength -- it will also see
billions of euros disappear from its budget. For Germany, in
particular, the economic consequences could be significant.
"Don't ask me
to tell you what will be the end of the road," Michel Barnier
said last week defensively, adding that the process hasn't even
started yet. The former French foreign minister and current EU
commissioner is in charge of negotiating with Britain on behalf of
the remaining member states and he enjoys the trust of German
Chancellor Angela Merkel.
Last Wednesday,
Barnier spoke publicly for the first time since his appointment as a
guest of the Brussels-based think tank Bruegel. The event took place
in an upscale automobile museum, with a Triumph Spitfire on display
near an Audi Quattro from the 1980s. But if Barnier has his way, this
may soon be all that remains of Britain in Brussels' European
quarter. "I am waiting to begin. I will be ready tomorrow to
negotiate, frankly speaking."
It's going to be a
difficult challenge -- that much is a given. Of particular
sensitivity will be the question as to whether EU citizens will still
have the unrestricted right to live and work in Britain, a key
component of the EU internal market. And of course, there is a lot of
money at stake.
10 Billion Euros or
Worse
Commissioned by the
European Commission and the General Secretariat of the European
Council, the first calculations on how expensive Brexit might be for
the 27 remaining member states have now been completed. According to
one paper, net revenues that flow into the EU from Britain each year
range from 14 to 21 billion euros. If you subtract the money Britain
gets back from Brussels, the EU budget would shrink by up to 10
billion euros per year.
But it could be even
worse. The rebate to Britain's EU contributions negotiated by
Margaret Thatcher has led to more than 110 billion euros in savings
for the British over the years. Given that other net payers,
including Germany, did not want to be made responsible for the
additional costs this created, they were also given a rebate. In
addition to Germany, the Netherlands, Sweden, Austria and Denmark
also currently enjoy a reduction in what they must pay into the
budget. After Brexit, this spat could intensify, especially given
that France, which is also a net payer, doesn't get any rebate at
all.
A paper by the
Center for European Policy (CEP), set to be presented in Berlin this
week, delivers numbers of a similar magnitude. The comprehensive
study on redistribution in the EU shows that the remaining EU member
states, above all Germany, are facing significant additional burdens.
From 2008 to 2015,
the United Kingdom's contribution to the EU rose each year, to the
point that it ultimately became the third biggest net payer into the
EU's budget, the paper notes, with the average yearly amount paid by
Britain pegged at 6.5 billion euros during this period. The only
countries that pay more for European unity are Germany and France.
In 2015, the study
found, Britain was in second place: The British paid 12.7 billion
euros more than they got back from the EU. By comparison, Germany
paid 15.6 billion. The paper also determined that the British paid
more into the EU per capita than Germany did that year. "After
this country's withdrawal from the EU, this net amount will have to
be redistributed among the other member states," writes CEP
report author Matthias Kullas. "The other major net payers --
especially Germany, France and Italy -- will be facing significant
additional costs."
Brexit could also
lead to painful shortfalls for the European Investment Bank (EIB),
Kullas calculated. If the British were to withdraw their share
capital in the development bank, it would result in a shortfall worth
billions. The EIB would be forced to make fewer loans -- loans that
are vital for infrastructure projects across the Continent.
According to Kullas,
the British have thus far borne the greatest burden at the bank.
Their share of total capital is 16 percent, but they only benefit
from 8.8 percent of the loans. No other country has a larger
imbalance.
A High Price for
Germany
German Finance
Minister Wolfgang Schäuble of Chancellor Merkel's Christian
Democratic Union (CDU) already had his experts calculate what Brexit
would mean for Germany's federal budget. His officials warned in an
internal recommendation that Britain's departure from the EU would
mean the "loss of the second biggest net payer." Following
Brexit, Germany's share of the overall economic strength of the EU
would rise from today's 21 percent to 25 percent. The consequence
would be the "increase of the German share of financing of the
EU budget by about 4.5 billion euros a year in 2019 and 2020,"
the officials wrote.
The assumptions were
based on the current financial framework and did not include "any
conceivable compensation." As an example, the paper cites
possible future contributions made by Britain if it continues to have
access to the EU internal market. The examples here being Switzerland
and Norway which, despite not being EU member states, contribute to
the EU's budget. The fees are essentially the price of admission to
one of the world's largest free trade zones.
As a member of the
internal market, Norway is required to pay about half what it would
be required to contribute as a full-fledged EU member state. If
Britain were to select this model, it would mean a smaller shortfall
for the overall EU budget.
The German Finance
Ministry paper also provides another example: a so-called "Lowering
of the Ceiling program." Schäuble's ministry believes it
possible that the EU would undertake significant fiscal
belt-tightening once Britain stopped paying into the EU budget.
For some time now,
experts at the Berlin Finance Ministry have been mulling over
possible "new priorities" for EU expenditures. "How
will the EU budget be shaped in the future?" asked the title of
one recent internal conference, to which Schäuble's ministry also
invited officials within the European Commission and other members
states to attend in Berlin in mid-July.
In order to reduce
the shortfall, other member states are likewise looking at ways to
reduce EU spending. The main area under review by the fiscal experts
is agricultural aid which, at around 55 billion euros each year, is
one of the largest line items on the budget. The direct payments
received by every European farmer for each hectare of land they own
without any stipulations, for example, has come under criticism.
Thus far, no one in
Berlin or Brussels is certain what measures will be used to protect
the EU from the challenges created by the departure of a member
state. It could be cost savings, continued contributions from the
British or an additional levy for the remaining member states.
Denial in Brussels
As long as Britain
hasn't taken the legal step of declaring its intent to leave by
triggering Article 50, senior EU officials are essentially ignoring
the issue. At a closed Commission meeting in the upscale Belgian
resort city of Knokke in late August, none of the top EU officials
present brought up the topic of Brexit. Last Wednesday, though, at
least one commissioner dared to broach the subject, with Günther
Oettinger of Germany admonishing his colleagues that they need to
finally start considering the effects Britain's exit might have on
the EU budget. His words fell on deaf ears.
"I consider it
to be very possible that the Brits will know exactly what they want
at the start of negotiations, but that Europe still won't be able to
speak with a single voice," European Parliament President Martin
Schulz recently warned. The difficulties begin with the fact that it
isn't yet clear what kind of future relationship the British will
seek with the EU. That, though, will determine the price of future
ties. It's clear that the government will not get the comprehensive
access to the European internal market it is hoping for without
paying a price. "If there is participation in several areas of
policy, then the amount a country is expected to deliver also
increases," says Jens Geier of the center-left Social Democrats
(SPD), who is deputy chair of the European Parliament's Budget
Committee.
One example are
programs aimed at promoting scientific research, like Horizon 2020.
Given the participation of such elite British universities like
Oxford and Cambridge, both the Europeans and the British have a
strong interest in continued cooperation. But if the British want to
tap the subsidies available through these programs, they will also
have to continue paying into them.
In addition,
expensive EU programs like regional subsidies are pegged to the
internal market. If London wants to continue its participation, it
will also have to pay its share. "The British could get into the
strange situation in which they pay into the regional policies but
don't get anything back again," says Geier.
Particularly
puzzling for the EU is the fact that it is soon scheduled to revise
its budget, the so-called Multiannual Financial Framework, with the
Commission slated to announce its suggestions in the next few weeks.
One of the main issues will be whether member states are prepared to
provide additional money to Brussels in light of the new challenges
created by the refugee crisis.
Sticking to
Principles
If the British
continue to delay their departure from the EU, a complicated
situation will arise. The member states will be forced to negotiate
the bloc's finances at the same time they begin Brexit negotiations.
But how will Brussels be able to determine its budget without knowing
how much the British government will be paying into it?
In this sense,
current talks between Brussels and Switzerland over a new framework
agreement could provide a model for negotiations with the British.
One of the main sticking points in the talks is the so-called free
movement of persons, with Brussels refusing to accept any
limitations. The message to the British is clear: This divorce may
get expensive, but the EU doesn't intend to abandon its principles.
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