The discussion about how much the United Kingdom will pay for leaving the European Union has been going on for a few months now. Some sources claim that Brexit may even cost the UK up to 100 billion euros. Nevertheless, the eventual amount will most likely depend on the political consensus between London and Brussels. A commentary from the Cinkciarz.pl senior analyst, Marcin Lipka.
The first analysis concerning the Brexit bill appeared shortly after the Brexit referendum. In October 2016, the Financial Times wrote that leaving the EU may cost the United Kingdom approximately 20 billion euros, only to suggest one month later that the bill may increase to 40-60 billion.
Demands from Poland
Bruegel has made a series of analyses since the beginning of this year. However, this leading European think tank only defined the range for the Brexit bill (25.4 billion – 65.1 billion euros), instead of indicating a specific amount. Nevertheless, it was the calculations from Alex Barker (chief editor of The Financial Times department in Brussels) that attracted the most attention. At the beginning of May, Barker estimated that the Brexit bill will reach the level of 100 billion euros. This is a result of additional demands regarding the agricultural policy from both Poland and France.
Taking into consideration that the obligation of paying contributions to the EU was the main argument in favour of Brexit, 100 billion euros may seem an impressive amount for the Brits. The United Kingdom has approximately 26 million households. Therefore, a simple calculation shows that each of them would have to pay approximately 4000 euros for Brexit.
However, looking at the contribution that the United Kingdom made to the EU budget, 100 billion euros may sound quite abstract. Over the past five years, the UK contributed approximately EUR 7.5 billion net per year and the hypothetical bill is an approximate equivalent of a thirteen-year contribution. This alone seems very difficult to accept.
Past, ongoing and future bills
What kind of arguments would be able to justify such a high fee for the United Kingdom? Payments for the EU budget are comprised of many components. They are funds for ongoing purposes, as well as long-term obligations, which are a result of particular programs of the EU.
According to both Bruegel and The Financial Times, the largest of these components are the obligations that were generated in the past, but haven’t been cashed in yet (for example, roads). The Financial Times also emphasized that these obligations are at the level of 241 billion euros of which 36.2 billion falls to the United Kingdom (at the end of 2018).
Another significant portion of the Brexit bill is other planned commitments (OPC) for the years 2019 and 2020. These are investment projects for less developed regions of the EU. In this case, the estimated United Kingdom’s contribution is at the level of 27.6 billion euros.
Pension benefits for the EU clerks are also an interesting category. They are financed directly from the EU budget. According to the Centre for European Reform, the average annual pension benefit is at the level of approximately 67 000 euros. The Financial Times estimated that this increases the Brexit bill by 10 billion euros.
The EU will also demand a contribution to the annual budget for the years 2019 and 2020. Their basic element are subsidies for farmers, which will cost the United Kingdom 24.7 billion euros. Last but not least, is to secure a portion of loans for other countries. According to Bruegel, at the end of 2015 the EU loans for several countries all over the world (mainly for Portugal, Ireland, Romania and Ukraine) were at the level of 56 billion euros. The Financial Times estimated that Brussels will demand London to pay 11.9 billion euros to secure these loans.
What do Brits think?
According to the legal analysis that was ordered at the beginning of this year by the House of Lords, the United Kingdom has no obligations to the EU. Therefore, it’s likely that London will start the Brexit negotiations from the position of the UK not having to pay anything, since the Brits made the decision to leave the European Union.
If Brussels demands the British obligations to be fulfilled within the forthcoming years, a portion of these funds will most likely return to the UK from the EU budget and decrease the Brexit bill. However, according to Bruegel the EU may demand the bill to be paid in advance and then gradually pay its debts to the United Kingdom.
Such fairly high demands may be a result of the definitely better position of Brussels. If the negotiations are broken off and the EU closes the Single Market for British goods and services, Britain would lose more than the EU.
Long negotiations and political solutions
So far, Brussels hasn’t presented the exact calculations regarding the Brexit bill. Usually, the EU representatives mention a value within the range of 50 billion – 60 billion euros. However, this is more of a confirmation of the amounts which are being suggested by journalists, rather than their own calculations. The Brits also haven’t shared any calculations, except for the opinion that those made by information agencies are definitely too high.
The forthcoming months are unlikely to cause the EU nor the United Kingdom to specify their standpoints. As soon as this happens, the discussion is likely to include not only a specified value of the Brexit bill, but also the entire package of new rules of the relationship between London and Brussels. The latter would cause the discussions to be strongly based on politics, rather than on specific calculations.
The aforementioned matter may appear fundamental for the pound. If the consensus becomes endangered and the United Kingdom strives for a hard Brexit, the country may lose access to the EU market and the pound may depreciate significantly.