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Why we should not pay the mooted “Brexit bill”

Not one of the main elements of the mooted “Brexit bill” is a genuine liability!

In considering the EU’s demand for an exit fee of €60bn plus, the Government may decide that the sums involved are not worth the cost of failure to reach a trade agreement. However, the issue is a minefield – politically in Britain, in potentially souring relations between Britain and the EU, and in determining who blinks first in the coming negotiations.

The public has not been prepared for a big exit bill – quite the reverse. It would need a lot of explaining, particularly as legal advice on both sides is that the exit fee is not legally enforceable. Not one of the main elements of the exit bill is a genuine liability. The €60bn demand has been invented by the Commission. They need to fill the large hole in the EU budget left by the loss of the British contribution. No member state wants to pay more or receive less. They are united on this and will be outraged if we refuse to pay. For either side, giving way will weaken their negotiating position. Paying the exit fee will not guarantee an acceptable free trade agreement. It may make it less likely. The main elements of the original €60bn exit fee, analysed in detail by two think tanks, Bruegel and the Centre for European Reform, are:

€8bn for future pensions for EU civil servants
€29bn for projects authorised in recent EU budgets
€17bn for approved projects to be authorised in future EU budgets
€9bn of contingent liabilities from EU loans and guarantees

Some offset payments to Britain reduce the overall total to €60bn. It has recently been reported that the EU will increase its demand to around €100bn by adding in post-Brexit farm payments and administration charges, but with little explanation.

For pensions, Britain is being asked to pay twice – for today’s pensioners and for tomorrow’s. Yet like Britain, the EU has no pension fund to provide for future pension: they are paid from current spending. The UK is paying our full share of pensions for the EU’s current pensioners. We contributed fully to the pensions of those who were pensioners when we joined the EU. No other EU member will pay into a fund for future pensions: they will be paid out of current spending in the years when they fall due, assuming the EU lasts that long.
About four-fifths of the exit bill consists of €46bn of future projects for regional spending, research and agricultural support. These will be funded by future EU budgets after we have left. The money will be spent in every EU member state except the UK. €29bn of this arises from the EU’s habitual practice of authorising, in each budget, far more spending than its members are willing to pay for. In its own ineffable way, the Commission simply goes ahead and gets both approved, leaving an ever-growing gap to be funded somehow in the future. This increasing backlog of approved projects is known as “Reste à Liquider” (RAL), translated as “yet to be paid”. The other €17bn consists of promises to find investment funding for yet more projects which will be budgeted for by the EU after we have left. Only the EU could think that this ever-expanding backlog of projects approved for some time in the future represents a genuine liability which we should pay now. Approved projects can be cancelled – and they probably will be when funds are tight. The remaining members can decide whether or not to spend the funds.

The net budget contributors (Germany, UK, Holland, Sweden and Denmark) all reject the principle that the RAL should be paid off, and insist on annual payment ceilings. The whole backlog is unlikely ever to be paid off.
As a final touch, the EU also wants us to pay up front for the €9bn contingent liabilities from EU loans and guarantees, with a promise that they will refund the money if the loans are ever repaid. Not many loan guarantors are so generous as to pay up front in case there is a default.

The EU insists on agreeing to the exit fee principles before trade talks can start. This will focus media attention on how the claim is made up and will reveal that it does not stand up to scrutiny, either legally or in principle. They argue that Britain approved the EU budget and future funding framework, and therefore is obliged to fund the spending commitments. Our legal advice is that no law or treaty compels Britain to make payments to Brussels on leaving the EU. As the EU is a separate legal entity, Britain can argue that EU funding obligations are the legal responsibility of the EU, not of its current members. They should be covered by EU assets or by ongoing EU members in future budgets. The EU’s own legal advice also says that the exit bill is legally unenforceable, according to leaked minutes from their negotiating team. EU treaties say nothing about a leaving payment, even in Article 50, which deals with leaving the EU. Most of the claim depends on EU budgeting procedures and whether commitments made during it are legally binding. The budgeting procedures are based on the EU treaties, and Article 50 says that the EU treaties cease to apply to Britain two years after triggering Article 50, whether an agreement has been reached or not. The battle over the exit bill will, therefore, be political rather than legal.

The EU will take a very tough line on their demands, hoping to bully us into submission. The loss of the British contribution gives them a huge budget problem. Member states are united on two things: that they themselves will not fill the gap, and that Britain must be made to pay in the short term. Credit rating agency Standard and Poor’s has concentrated minds by warning that the EU’s credit rating could be downgraded if the UK refuses to pay the €60bn. The shocked and antagonistic reaction of EU leaders when Theresa May quoted her legal advice in her meeting with Juncker was a sign of weakness, not strength.

They have no Plan B if the British don’t pay. Paying the bill won’t guarantee a reasonable free trade agreement. Two major early concessions – on the payment itself and on the principle of not talking about trade until the EU considers enough progress has been made – would weaken our position. David Davis himself set out, in a 1988 book, two key ground rules for negotiation: don’t be the first to make a concession, and make small concessions rather than large ones. If we pay up, EU leaders will know that a tough approach works, and walk all over us. We must openly prepare now to be able to walk away with no deal so that the EU knows that we mean what we say. The chances of reaching agreement do not look good.