Sketching the budgetary implications of Brexit

Activating Article 50 (possibly by 9 March) will set in motion a 2-year period during which the terms of UK withdrawal from the European Union should be decided. Among the wide-ranging dimensions of Brexit, the budgetary one is often referred to but rarely examined in depth. Yet the enormous implications of Brexit on UK and EU budgets will create challenges and opportunities that deserve careful consideration.

The playwrights of the Brexit novel seemingly lack a fitting template, and every step of the unchartered way thrusts actors into a crossroad. A warning should be issued against the temptation to castle their positions: that chess move will not ensure the best protection of their financial interests, especially if the broader framework is considered. Article 50 was crafted to organise withdrawal, not to encourage it. Whereas procedural rules have been widely commented, most observers fail to address two deliberate gaps left by that provision, which will be key if negotiations fail:

  1. a) transitional measures to govern the post-Brexit period, and
  2. b) judicial/arbitral redress for post-Brexit conflicts.

Indeed, the current legal framework of UK-EU relations will expire by 8 March 2019.Only two options may replace it: a withdrawal agreement in force or a legal void (if the treaties “cease to apply” to the UK). Unanimous agreement by the European Council to extend negotiations seems implausible because a winner would possibly arise from a ‘no-agreement’ scenario.

Legal void implies the lack of provisions in force to sustain mutual claims. The tiniest disagreement might lead parties to question previous budgetary obligations, including the Multiannual Financial Framework, the Financial Regulation, annual budgets, sectorial regulations governing EU funds, and even individual spending decisions. The collapse of the Treaties would do away with not just the binding nature of EU legislation for the UK, but also the UK’s legal standing before the European Court of Justice (ECJ). Directly and individually concerned individuals would continue to enjoy the right to bring proceedings to the ECJ if, for instance, the Commission interrupts post-Brexit grant payments; but the UK (no longer a Member State) might refuse or be refused access to the ECJ.

The UK and the EU would go back to the cold realm of general international law, where sovereign states solve their disputes through diplomatic means or retaliation, for lack of effective international jurisdictions. Fingers crossed a negotiated and comprehensive withdrawal agreement casts off that gloomy scenario.

Given that the UK is a net contributor to the EU budget (although less than Germany, the Netherlands or Sweden), Brexit will require rethinking the EU budget. Although the High Level Group led by Mario Monti explored options to recast the EU’s system of ‘own resources’, a raise in national contributions has been discarded by Germany. The best option seems a reduction in EU spending followed by a redefinition of the policy priorities worthy of economic support.

According to Ingeborg Gräßle MEP, Chair of the European Parliament’s Committee on Budgetary Control, when negotiations open EU delegates will hand the UK an invoice in the order of EUR 20 billion, building on multiannual commitments previously assumed under the Multiannual Financial Framework (a 2013 Regulation now binding for the UK).

The Framework imposes annual ceilings to EU spending in each policy area and runs until 2020. Most importantly, the MFF represents member states’ commitment to finance these priorities, as the EU constitutional framework requires balancing EU revenue and expenditure. The EU does not accept Brexit as valid ground for the UK to simply walk away from its budget commitments before 2020, and even after that. Considering that specific spending decisions are adopted several years after the commitment of funds, UK liabilities might extend well beyond 2023. Yet this logic supposes the UK will maintain a financial tie to the EU, something it seeks to avoid.

Besides, pressing too hard might prove counter-productive, for no current legal basis ensures post-Brexit judicial redress should the British refuse to pay the bill.

From the UK side, word is that it will fight for its share of the European budget pie:

  • First, the UK will claim a share of EU’s assets (eg. EU-owned buildings). This is unlikely to succeed. Brexit is neither a distribution of inheritance nor the liquidation of a company, but withdrawal from an international organization whose budget is inspired by a logic of redistribution. The EU’s headquarters were purchased with EU funds and no additional contribution was demanded from acceding states; likewise, withdrawing states should not expect a share of Union’s assets, be it buildings or financial instruments.
  • The UK’s demand to purchase its shares in the European Investment Bankseems feasible, although negotiations will first have to clarify if the Bank’s equity is established at book or market values.
  • The UK will also reject its liability for of the pensions EU officials of British origin. These workers cannot be fired after Brexit. In my view, redistributive budgeting implies that social security rights engendered against the EU budget should be covered by it, not by the state of origin. After all, the EU continues to pay the pensions of the four Norwegians officials hired in 1972, when it seemed Norway would join the EU.
  • Lastly, the UK will seek to engineer a framework for cherry-picking EU policy areas in which it desires to continue participating, in exchange for budget contributions. Two models with varying scope and nature allow for it. The “Norwegian model” establishes a fee for access to the internal market, in the form of a financial mechanism outside the EU budget which channels funds towards environmental projects in Eastern Europe. The integrity of internal market would require accepting the free movement of workers; therefore, this choice presents little appeal for the UK. Conversely, under the Israeli model, third countries contribute to the EU budget to participate in specific programs (notably Horizon2020). Both models feature an EU strong enough to impose its own priorities and claim a significantly higher fee than the one paid by member states for similar advantages.

Bearing this complex backdrop in mind, let’s hope that the hawkish initial positions give way to common sense and pragmatism. A budgetary stalemate would benefit no one.

By María-Luisa Sánchez-Barrueco, Senior Lecturer in EU Law & Politics at the University of Deusto (Bilbao, Spain), founding member of EUFINACCO research network on EU Financial Accountability

Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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