Britain’s strongest card, money, is pretty weak

Britain’s strongest card in the negotiations is the money that the 27 claim it owes to the EU. But the money card gives Britain a pair rather than a flush. No wonder its overall negotiating position is so weak.

Since 2011, the UK’s net contribution to the EU has averaged £9.6 billion (€10.6 billion) a year, the second largest of any member-state in absolute terms. The EU’s budget runs in seven-year cycles, with the current one running from 2014 to 2020. If the UK leaves the EU with no deal on the money in March 2019, the EU stands to lose two years of UK net contributions, in 2019 and 2020.

Some spending agreed in this budget round – largely on infrastructure and other funding for economic development – will not be disbursed until after 2020. Add in EU officials’ pensions, contingent financial guarantees and loans, and farm payments in 2019 and 2020, and the upfront bill the UK is being asked to pay is €82-€113 billion, depending on the calculation made.

Rather obviously, these are very large sums of money. But it does not follow that no deal would lead to much fiscal pain for the other 27 countries. The simplest way of filling the hole in the budget would be to divide the UK’s net contribution in proportion to the size of each remaining member-state’s economy. This would mean that each member-state would have to contribute 0.1% of GDP more to the EU budget annually, until the UK share of the EU’s current liabilities were paid off.

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Compare that to the fiscal cost of no deal for the UK. It would save 0.4% of GDP by ending payments and receipts from the EU budget. But, according to the Office of Budget Responsibility, the UK’s budget watchdog, Britain’s economy would only have to shrink by 0.6% as a result of Brexit for that fiscal gain to be wiped out, because tax revenues would fall.

Most credible forecasts estimate that the hit from Brexit would be far higher than this, with the consensus in the 3-6% range if the UK traded with the EU on World Trade Organization terms only. No deal would therefore lead to a big hole in Britain’s public finances – and one that is far larger than the losses that the 27 member-states would incur.

Of course, the political danger that Theresa May would face if she walked out of talks would not simply be fiscal. No deal would lead to chaos at the UK’s ports and on the Irish border, as the EU would impose tariffs and other customs checks on UK exports. There would be huge legal uncertainty over whether British goods and services could be sold in the 27 other states. This would almost certainly result in a recession – and one that would have been inflicted by May’s failure to negotiate a deal. It is hard to imagine the prime minister – or her government – surviving that outcome.

John Springford is director of research at the Centre for European Reform

This column is an abridged version of an article that has appeared on the CER’s website

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Edited by Hugo Dixon