Explaining Brexit’s Costs and Whether Britain Will Pay UpBy
European Commission President Jean-Claude Juncker has promised it will be “hefty." British Foreign Secretary Boris Johnson said Europe can "go whistle" if it expects the U.K. to pay it. It’s the itemized bill the European Union wants to deliver to the U.K. when Prime Minister Theresa May’s government carries out its plan to leave the bloc. The total charge could reach 60 billion to 80 billion euros ($67 billion to $90 billion), according to European leaders, which would be more than the annual British defense budget. The topic figures to be one of the early flash points in the Brexit negotiations, ultimately shaping how amicable the breakup is and what replacement trade deal May is able to land.
1. Why is there a bill to pay?
European Commission negotiator Michel Barnier wants the British to cover their liabilities and commitments to the EU budget -- even, perhaps, ones that don’t come due until after Brexit. Commission spokesman Margaritis Schinas likened it to leaving a bar but still needing “to pay for the round you ordered."
2. What charges are on the bill?
Nobody knows for sure. That’s a subject for the Brexit talks. They could include pension payments to EU officials, guarantees on loans such as the bailout of Ireland, and spending on infrastructure and structural funds agreed on but still to be financed. The EU’s guidelines for the talks say Britain must “respect the obligations resulting from the whole period of the U.K. membership,” a reference to the seven-year budget period that runs through 2020. The EU has also suggested Britain should help cover the cost of programs to improve democracy and the rule of law in nations including Turkey, as well as the cost of relocating EU agencies, such as the European Banking Authority, from London.
3. How much might Britain owe?
Though 60 billion euros is the number making the rounds, the Financial Times estimated it could balloon to 100 billion euros in gross terms. Oxford Economics suggested the bill should be closer to 47 billion euros. The Centre for European Reform said it could be 73 billion euros. Bruegel, a think tank, says the U.K. could seek to offset part of the bill by claiming a share of joint EU assets that could total as much as 154 billion euros. Barnier said the EU won’t agree to that. The Institute of Chartered Accountants in England and Wales, which included such offsets in its calculations, says the net cost to the U.K. could be as low as 5 billion pounds.
4. Is this really about money?
Partly. EU officials say making Britain pay is a matter of fairness -- not punishment -- and is an important precedent to establish in case other separatist movements push to leave the union. That said, the money does matter. Once Britain leaves, the EU will have to plug a hole in its budget of about 10 billion euros, which will mean increasing contributions from the remaining members, cutting spending or finding alternative sources of revenue.
5. What is the U.K.’s position?
The British government said in July that it "will work with the EU to determine a fair settlement of the U.K.’s rights and obligations" -- its first acknowledgment that a bill of some amount might need to be paid. But Johnson said the dollar amounts being discussed by the EU "seem to me to be extortionate.” Brexit Secretary David Davis has repeatedly rejected the notion of paying a gross 100 billion euros, describing just 1 billion pounds as "a lot of money." The Times newspaper reported on March 4 that government lawyers had found no legal obligation for the U.K. to pay up. A study by the House of Lords also questioned whether there was a legal requirement to pay and calculated the bill could be as low as 15 billion euros. May has said "money paid in the past" into joint EU projects and the European Investment Bank should be taken into account. When all is said and calculated, Johnson said May 13, Brussels could end up owing Britain money.
6. Where does the bill fit into the larger Brexit talks?
It could be among the first items addressed. “We have to resolve the British budget issue straight away,” Sandro Gozi, Italy’s junior minister for European affairs, said in March. But the British would prefer to address everything -- immediate costs and long-term ties with the EU -- at the same time, in part so trade-offs can be made. If May agrees to pay a large amount, to avoid a disruptive exit and to preserve trade ties, she’d invite criticism at home. If a deal is reached to spread payments over time, Brexit hardliners will say the split isn’t happening fast enough.
7. Is there wiggle room?
Barnier, the EU’s negotiator, has said he has "never quoted" the numbers being circulated and that the final amount will "depend on the methodology." The EU may allow talks to turn to trade before the two sides agree to a specific exit bill, two people familiar with the matter said. Negotiators would seek to agree on a formula to calculate liabilities and leave the amount until later, perhaps until almost the eve of Brexit. May has also held out an olive branch with her Conservative Party’s election manifesto, saying any settlement would be drawn up “in the spirit of the U.K.’s continuing partnership with the EU.” She may decide paying something is worth it for continued trade ties.
8. What’s the worst-case scenario?
The Europeans deliver a hefty bill, May balks, and talks break down. A guiding principle voiced more than once by British officials is that "no deal is better than a bad deal." If the two sides can’t rectify their differences within two years, then the U.K. would fall out of the EU without a pact, resulting in World Trade Organization tariffs on U.K.-EU trade -- and no payment of any outstanding bill.
The Reference Shelf
- The EU’s draft negotiating mandate.
- U.S. Brexit Secretary David Davis threatened to walk away if presented with an unreasonable bill.
- A QuickTake Q&A on whether Brexit will be hard, soft or scrambled.
- How the U.K. might maximize its negotiating position.
- Britain’s bar tab shouldn’t delay Brexit talks, Bloomberg View’s Mark Gilbert writes.
- A QuickTake explainer on why Britain voted to quit the EU.
- Sign up for Bloomberg’s Brexit Bulletin newsletter.
- Follow @Brexit on Twitter for full coverage of Britain’s exit from the EU.