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Brexit and the EU budget: threat or opportunity?

Jörg Haas and Eulalia Rubio, research fellow and senior research fellow,
Jacques Delors Institute

February 20, 2017

While the Monti report on the European Union own resources is about to be released in the next few weeks, another budget issue is opened for discussion – the Brexit consequences. A recent paper
1 of Delors Institute, the summary of which is published below, sheds lights on the principal challenges and draws up some development paths.

We learn that the Britain’s net contribution to the EU budget is around €14 billion in spite of a rebate of more than €6 billion granted since 1984 and primarily funded by France, Italy and Spain. Based on an estimation of duty and tax receipts from British imports of at least €4.6 bln, the 27 remaining countries would need to find €10 bln, meaning 6.9% of the EU budget, in order to conserve the current scope of EU policies.

If it is not inconceivable that the UK, following Norway at present, may contribute to the EU budget up to €3 bln to €4 bln, most of the variables examined in different scenarios involve a contribution increase and an expenditure reduction. The beneficiaries of the « rebate on the rebate » – i.e. Germany, the Netherlands, Denmark and Austria – would be particularly concerned. However, as these nations are already net contributors, the hierarchy of recipients/contributors should be nearly unchanged. The authors identify a key country group whose current close-to-balance contribution should be decisive to revitalize the European construction. In this group we can find France, Ireland, Italy and Spain.

While the debate on the German growing trade surplus (+278 Md€ en 2016) raises questions about the competitive advantage that Germany is enjoying with a devalued euro compared to what would happened with the mark, some quantified estimations can be made for the Brexit impact on the EU budget. Having a fiscal surplus for the third consecutive year despite a 2.5% expansion of expenditures on average over the last 10 years, it is understood that Germany has taken its fiscal matters seriously and made the 3%-of-GDP deficit rule the foundation of the single currency. With €10 bln equivalent to 0.7% of German budget, we can clearly see the responsibility of Germany for the EU construction as well as its interest to maintain a devalued euro.

Momagri Editorial Board

The withdrawal of the United Kingdom from the European Union (Brexit) may affect the EU public finance in various ways. One-off impacts like breakup costs attract much attention now, but the structural effects should be even more significant in the medium term. Without the UK, the EU budget would be hit with a permanent lack of resources.

We estimate that the budget shortage induced by the Brexit (Brexit gap) could sum up to around €10 billion per year. EU Member States will have to decide whether they can fill in this gap by 1) increasing national contributions, 2) reducing expenditures or 3) combining these two options. We will examine here the scenarios that illustrate the consequences of each alternative for each and every country.

We will then analyze the implications of these scenarios to the next negotiation round of the multiannual financial framework (MFF) to start in 2018. We expect difficult talks as the Brexit should probably strengthen the existing divisions between the net contributors and the net recipients of the EU budget.
  • The net contributors would have to bear the most part of the extra efforts if the contributions were to be raised. Countries that are enjoying a « rebate on the rebate » would be particularly concerned.
  • Nations that benefit from the EU cohesion policy and the common agricultural policy must be the most severely hit by a budget cut.
The negotiating power of the two groups will depend on their composition and the legal framework.
  • There exists a key country group whose net contribution per capita is close to balance (in particular France, Ireland, Italy and Spain). They might favor either an expenditure reduction or a contribution rise.
  • The question « What would happen if no agreement on the new MFF were to be reached by 2020? » could become much debated. The relevant legal provisions have been vaguely formulated and depend on the timing of the Brexit implementation.
The Brexit may give an opportunity to reform the EU budget. The net contributors could agree on a contribution hike in exchange for a fundamental expenditure improvement. An even more ambitious option would be to simultaneously reform the EU income system based on the Monti Report proposals.

If the EU cannot secure an agreement on any of the above-mentioned solutions, the Brexit will then be a threat to the bloc’s budget. Member States may try to balance the budget by curtailing unallocated expenditures (e.g. those on infrastructure or research) which are vulnerable but essential, by expanding contributions, and by introducing some additional rebates to obtain the consent of the most impacted net contributors. This would be the fulfillment of an inefficient and opaque system for many years to come.

1 http://www.institutdelors.eu/media/brexitbudgetue-haasrubio-ijd-jan17.pdf?pdf=ok

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Paris, 23 March 2017