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Analysis
Reaching a compromise on Brexit

Reaching a compromise on Brexit

UK under no legal obligation to pay commitments

by Meghnad Desai in London

Tue 7 Mar 2017

When it comes to the financial cost of Britain’s exit from the European Union, there is no definitive figure on which everyone can agree. A report published on 4 March by the EU Committee of the House of Lords emphasises the complexity of the budgetary issues and the lack of a fixed time frame.

The Financial Affairs Subcommittee, of which I am a member and which is behind the report, points out that the EU has a multiannual financial framework which determines a seven-year spending plan. The current cycle runs from 2014-20. If the UK exits in March 2019, it would leave 21 months before the cycle ends. As the MFF is agreed unanimously, the question remains as to what the UK's obligation is.

But the MFF is a plan. The actual spending is in terms of annual budgets to which members contribute. The UK contributes 12.5% to the budget. But if one removes the rebate and deducts what the UK gets back in terms of EU programmes, the contribution comes down to 5%. If the UK is liable for its share of the budget for the remaining nine months of 2019, that figure would depend on whether the gross or net share is considered.

But budgets are never that simple. The MFF has multiyear projects. Imagine a five-year investment programme of €20bn launched in Slovenia in 2016. Each year, one-fifth of that €20bn would be committed and spent out of the annual budgets. The unspent balance of €8bn by 2019 is a part of what is called ‘reste à liquider’, or the outstanding commitments. The total RAL is around €200bn.

Then there are pensions. EU employees contribute to their pensions but the scheme is pay-as-you-go and not funded. The pensions are an EU responsibility, given their status as employers. If the UK is liable for the British citizens employed by the Union (who make up 4% of staff), that would mean employees are not EU personnel but agents of member governments. That cannot be in the spirit of the EU. Or it could be argued that the UK has some commitments to continue contributing till the final UK employee is gone. There is no clear guidance here.

When it comes to paying, anyone who bandies about whole numbers is just testing public opinion. The report gives minimum and maximum amounts under various assumptions. The UK could be assessed at 0% or 4% for pensions. It could be charged anywhere between 5% to 12.5% for budgetary items such as RAL. The range, considering the various possibilities for calculating the UK’s liabilities and share of RAL, is between €30bn-€85bn.

The legal opinion provided by the House of Lords’ expert witnesses is that, in the case no agreement by the end of the two-year period after invoking Article 50 of the Lisbon treaty, the UK is under no obligation to pay. It would be prudent not to reach that point, but arrive at a reasonable compromise.

But then reason has not prevailed so far on either side.

Prof. Lord (Meghnad) Desai is Emeritus Professor at the London School of Economics and Political Science and Chairman of the OMFIF Advisers. He is a Member of the EU Financial Affairs Sub-Committee of the House of Lords.

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