Brexit: More on the exit costs

It has widely been suggested that the European Commission will try and extract a high price from the UK in terms of the Brexit bill when it finally departs the EU which I looked at last week (here). But a report published today by the UK House of Lords (here) makes the point that “the UK will not be legally obliged to pay in to the EU budget after Brexit.”

The argument hinges on what happens if the Article 50 legislation expires without an agreement. One school of thought argues that under international law (the Vienna Convention on the Law of Treaties, established in 1969) “obligations undertaken when the UK was still bound by the EU Treaties would not disappear at the moment of Brexit.” But another interpretation is that Article 50 offers no provision for measures to be applied in the event that the UK and EU fail to come to an agreement. Indeed, there is no provision to decide who is the competent jurisdiction to adjudicate on post-Brexit matters or conflicts. So if the Article 50 negotiations fail there is no way that the UK can be held to account.

The problem is, of course, that there is no simple legal answer to the question and like economists, lawyers tend to offer a range of different opinions. Prime minister May has already suggested that the UK will be willing to make some form of contribution so the idea of making no payment is unlikely. Equally, however, it suggests that the €60bn bill which Michel Barnier, the EU’s chief negotiator, is reportedly aiming for will be rejected outright by the UK. But this is when matters start to get tricky because a large part of the time available under the Article 50 arrangements will be wasted trying to resolve this problem. This, of course, plays to the EC’s advantage because even if it has no realistic possibility of securing a €60bn payout, it can tie the UK in knots for months. Then when it does finally get round to discussing trade arrangements, the UK will have little time to respond and may be forced to accept an arrangement which can only be described as a second best option.

Precisely because the UK government wishes to maintain close ties to the EU, it will be almost morally obliged to make some sort of payment. Ingeborg Grässle MEP, Chair of the European Parliament Budgetary Control Committee, suggested in testimony to the Lords that a figure as low as €22bn might be sufficient to cover the UK’s obligations. I reckon that is the sort of figure the government could live with.

Looking further ahead, there is the question of how much the UK will have to continue to pay in order to maintain access to certain EU projects. On a per capita basis, calculations presented in the Lords report suggest that at €115 per annum, Norway pays around 45% more than the UK does now (€79). Of course, Norway pays for access to the single market which PM May has already ruled out for the UK. But if the UK wants to continue accessing the EU market it will need to pay – either in the form of an annual membership fee or via tariffs. As Richard Ashworth MEP noted in his Lords testimony, a regular annual payment to the EU budget might work out far cheaper than paying tariffs. In his view, “the tariff  that will  be  paid ... seems to be a very, very substantial sum of money indeed ... I do not think it has dawned on people yet quite how big that sum is going to be.”

That being the case, the prospect that the UK continues to pay an annual fee for tariff-free access to the EU is a realistic one. But how high would the subscription cost be? Let us start from the premise that the UK will pay no more than half its current net cost. That would put the upper limit at around £5bn per annum. The government could claim that this represents a significant saving on its current bill (almost £20bn) and that it has saved £15bn per year. However, the reality is that since the UK receives back almost half its gross contribution in terms of rebate, agricultural subsidies and other items, the actual savings are relatively small. Continuing to pay a contribution to the EU is not what Brexit supporters had in mind during the referendum campaign. But if the UK is able to get away with a £5bn (€5.8bn) annual contribution and a one-off exit payment of €25bn, that would count as a good deal in my book. If I were on the UK negotiating team, that would certainly be an outcome I would be pushing for.