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AMU Europe Intelligence

The EU Budget Black Hole Means The U.K. Can Ignore EU Rules

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The U.K. left the EU on January 31 and has until December 31, i.e. 11-months to reach a trade deal with will its European neighbours.

The landscape is clear. The U.K. left the EU as it no longer wanted to be a rule taker. Instead it wanted to forge its own path in the world whilst enjoying a cordial relationship with the EU in matters of defence, security and of course trade.

Know Your Numbers

David Frost, prime minister Boris Johnson’s Europe adviser said that the U.K. would not be threatened into following EU rules in the future and is ready to trade with the bloc on basic international terms if needs be.

This really ought to ring alarm bells in Brussels just as much as the U.K. might be secretly concerned.

In services the U.K. runs a surplus of £28 billion (€34 billion or $36 billion). However, this is overshadowed by the deficit the U.K. has with the EU in goods. That is worth £94 billion (€113 billion or $122 billion). These figures show that it is the interest of the EU to find a deal with the U.K. as in the event of “no-deal”, the U.K. will not pay a previously agreed sum of £39 billion (€47 billion, $51 billion).

Money’s Too Tight To Mention

One reason why the EU needs to realise it must do a deal with the U.K. is that the payment is needed as a partial patch for the gap that has appeared in the EU budget given that the departing nation was a net contributor to the EU budget.

The seven-year EU budget was put forward by EU council president and former prime minister of Belgium, Charles Michel on Friday, February 14. However, EU net paying countries showed no love or romance as they pushed back against the latest idea.

His proposal was posted in good time ahead of a meeting of EU leaders on Thursday, February 20. It was similar to the plans of the Finnish EU presidency on overall spending as Michel proposed 1.074% of the EU’s gross national income (GNI), in excess of €1 trillion ($1.18 trillion).

However, this is more than the 1.0% that has been demanded by Germany, the Netherlands, Denmark, Sweden, and Austria, all of whom are net contributors to the EU budget. This now carries an annual black hole, that needs urgent attention of €12 billion ($15 billion) since the U.K.  left the bloc.

Austria’s prime minister Sebastian Kurz, who acted as spokesman for Austria, the Netherlands, Denmark, and Sweden, argued in a letter to the “Financial Times” that a smaller EU required a smaller budget.

Kurz wrote:

“Now that we have a smaller union of 27 member states, we simply have to cut our coat according to our cloth. The responsible approach in this situation is to prioritise in the interest of our taxpayers,”

Free To Spend

There are more problems for the net contributors as Charles Michel has added additional funds worth €6 billion ($7 billion) for a “Cohesion Policy”. This is a scheme to assist poorer regions via a capital transfer to the least developed regions from the well-off ones and give the recipients greater autonomy on how they spend the money.

The worry among the net contributors is that such freedom to spend will see money directed to short-term programmes that may be designed to win votes as against investing in the long-term development of a struggling economy.

The Common Agricultural Policy may have fallen from 73% of the EU budget in 1985 to 37% in 2017, however, it and other subsidies make up the largest share of the EU budget.

One ought to ask, “What are subsidies?” In effect they are transfer payments to inefficient or even redundant parts of an economy.

Is it then any surprise that the net payers are arguing that more money should be dedicated toward new challenges, such as digitalisation, climate change and security?

Sebastian Kurz added

“It is crucial for the EU’s legitimacy that we focus a significantly higher share of the budget on meeting today’s challenges: fostering an innovative and competitive economy, the fight against climate change, migration and security,”.

No Go

The proposals Michel has made target cutbacks in defense spending…oh my, that will not please the U.S. and a reduction in farm support. That latter point will be vetoed by France.

Another problem is that lies within Michel’s program is that a lump-sum rebate that is payed to the largest contributors will be phased out by 2027. In effect it means that that Germany, the Netherlands, Denmark, Sweden, and Austria would be financing 75% of all net payments to the EU.

The EU needs to wake up and realise it must mend its own fences as against continually playing tough with the UK. It needs the money more than the U.K. needs a deal. The EU has a surplus with the U.K. and given Germany, the largest net contributor has 6.7% of its exports heading to Britain one can be sure a deal will be done by December 31. The real fact is that the EU cannot afford not to.

 

This article was written by Stephen Pope from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

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