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Categorized | Economy

EU budget talks will be tricky

Posted on August 31, 2016


Budget negotiations among EU member states are never a pretty sight. With Britain on its way out of the 28-nation bloc, they are at risk of turning very ugly indeed.

Britain is one of the largest contributors to the EU budget. It pays in much more than it receives (according to the UK Treasury, Britain’s net contribution was £10.5bn in 2013, £9.8bn in 2014 and £8.5bn in 2015).

    Once Britain is out, the other 27 governments will face a range of politically unpalatable choices. First, they could leave the EU’s 2014-20 budget unchanged at €1.087tn and ask each member state to compensate for Britain’s departure on a scale proportionate to its gross national income.

    Barbara Böttcher and Laura Rosenberger of Deutsche Bank Research calculate that, under this formula, Germany would pay an extra €1.9bn a year, France would stump up €1.4bn and Italy €1bn.

    Germany, having racked up an €18.5bn budget surplus in the first half of 2016, equivalent to 1.2 per cent of annual economic output, might fork out this extra money without much domestic political controversy.

    But would the same be true for France and Italy, where economic growth ground to a halt in the second quarter of this year? The French and Italian political classes and voters might resent paying more into the EU coffers, when their governments are under persistent pressure from Brussels to curb their budget deficits.

    Under the Deutsche Bank scenario, Poland, Spain and other net beneficiaries from the EU budget would receive less EU money after Britain’s departure. How would that go down in Madrid, Warsaw and other capitals?

    As a House of Commons Library briefing paper explains, Britain is, on a per capita basis, the third largest net contributor to the EU budget. In 2015 the largest was the Netherlands (€331 per head), followed by Sweden (€262), Britain (€215), Germany (€211), Denmark (€175), Austria (€109), Finland (€96), France (€92), Italy (€59) and Cyprus (€32).

    All other 18 EU nations were net recipients — though the data are somewhat distorted for Belgium and Luxembourg, which are classified as net recipients largely because the EU spends billions of euros on administrative costs in these two countries.

    The conclusion is clear. If the EU decides not to change its 2014-20 budget, Britain’s departure will push up the contributions of some states and push down the receipts of many more.

    Of course, other possibilities exist. For example, all net contributors could pick up the British tab. That would go down like a lead balloon in the Netherlands and Sweden, where suspicions of EU spending appetites run high.

    Perhaps all net recipients might agree to receive less? It is hard to see Greece, Hungary, Slovakia and others accepting this.

    Why not, quite simply, cut the EU budget? That will never happen — the uproar at the European Parliament would be off the Richter scale.

    The final option would be to soften the blow of Britain’s departure by letting it keep access to the EU’s single market in return for a helpful but smaller UK budget contribution. This seems politically impossible in present British conditions.

    To sum up, among all the awkward consequences of Brexit, the difficulties surrounding the EU budget promise to be among the most acute.

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    Background reading

    Theresa May is meeting her cabinet at Chequers today for what is being described as a brainstorming session over Brexit. As the FT reports, she has ruled out holding a referendum or an early general election to ratify whatever deal the UK strikes with the EU.

    The FTs Chris Giles reports that the Bank of England’s interest rate cut in early August persuaded some consumers to reject saving and spend instead — before prices of imported goods increased.

    People who felt that they had been pushed to the margins of society were the driving force behind Brexit, according to research from the Joseph Rowntree Foundation. (Guardian)