Brexit number crunch: the final bill the EU could accept

A fraught €100bn reckoning will begin next week as Brexit negotiators clash for the first time on Britain’s exit bill. In Brussels, the spreadsheets are primed.

In a secret briefing session ahead of the June 19 start of face-to-face negotiations, the European Commission recently presented its estimates to diplomats from the 27 remaining EU states.

The figures cast new light on the make-up of the EU’s demands, areas of potential compromise and negotiating tricks to bring a deal together. Both sides know the battle over the Brexit bill could make or break the process.

How much are the EU27 demanding?

The previously undisclosed commission estimates amount to a demand for a gross €86.4bn from the UK to honour financial commitments it made as a member state. In addition, Brussels wants Britain to cover €11.5bn of contingent liabilities, should for instance Ukraine or Ireland fail to repay loans, and meet €1.7bn in development funding pledges. That takes the total gross liabilities the EU wants the UK to take on to €99.6bn, compared with FT estimates of €100bn based on the EU’s draft negotiating mandate.

The net figures are considerably lower — €60.2bn, according to the commission figures. Those calculations exclude the European Investment Bank.

The sums in effect make good the EU’s 2014-2020 long-term budget, reducing the need for other countries to increase their contributions or face lower payments. They also include pension promises and other long-term EU liabilities (in total worth €83bn) that the bloc wants the UK to honour.

The commission estimates Britain’s share of EU liabilities as 13 per cent, using historic contribution rates. That takes account of Britain’s prized rebate, secured by Margaret Thatcher in the 1980s. But the EU side insists that applying the rebate to reduce the bill is conditional on the UK’s covering farm payments in 2019-20, since agricultural contributions made by Britain were the original reason for agreeing the rebate. Otherwise, the country’s share rises to 15 per cent.

What is most important to the EU?

The EU’s opening position takes the most expansive possible view of Britain’s obligations. In recent months the commission has significantly increased its original estimate for the Brexit bill — from €40bn net and €60bn gross to €60bn net and €86bn gross — after countries such as France and Poland demanded a tougher approach.

But as the EU bill has increased, the bloc’s specific demands have become more contentious. There is a hierarchy of interests and the most controversial parts may be negotiated away first.

The demands with the strongest legal backing are based on old commitments signed off in annual budget rounds, with the UK as a member. Those include Britain’s pension liabilities, as well as €251bn in budget commitments approved by the UK before 2019, known as reste à liquider.

An additional €133bn of promises Britain made to back projects are more contentious. These “structural fund” schemes are due to be provisioned for and paid only after Britain has left the union. The EU sees them as “legal commitments” that Britain must honour.

A third tier of demands was excluded from the original approach of Michel Barnier, the chief EU negotiator. Those cover annual EU spending that Britain would say the bloc can easily adjust post-Brexit. That includes €111bn of annual agricultural payments direct to farmers. Most contentious of all, it covers €87bn of other EU administrative and project costs, such as commissioners’ salaries and spending on borders. The EU side knows its argument regarding such areas is especially weak.

What is the EU bottom line for trade talks to begin?

Before opening talks on future trade with Brexit Britain, the EU’s leaders want to see “sufficient progress” on divorce issues. What that entails was left deliberately vague.

Britain could offer a general promise to honour obligations once an EU-UK trade deal is agreed. Mr Barnier, however, wants precise assurances. His mandate calls for an itemised list of gross commitments and the method for calculating Britain’s share.

Perhaps more important for the EU, however, is another number. Its first priority is avoiding having to reopen the EU’s long-term budget for 2014-2020. Around €20bn in net payments for 2019 and 2020 would probably be enough to avoid a nasty EU fight over the current budget, pitting net contributors such as Germany and the Netherlands against beneficiaries such as Poland and Hungary.

But more funds would be needed to close a gap after 2020 (there is a big overhang of unpaid bills), making the EU’s discussions on its next seven-year budget much more fraught.

For that reason the EU is looking for Britain to cover at least its commitments under the long-term budget, including the reste à liquider commitments and structural fund promises. That would take the total to €64bn in gross terms and €40bn net. But while such figures would probably be enough for Brussels, they could prove deadly in Westminster.

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Is there a way to make this look more acceptable for London?

There are various tricks to make the Brexit bill palatable. Under the EU’s approach, most of these options would open up in the second phase of Brexit talks, when the two sides discuss payment schedules.

Buy something else
Britain is more open to paying for a future relationship than settling an exit bill. A single-market transition, for instance, could entail budget payments. And every year of transition will reduce the Brexit bill significantly.

Net it off
The EU27’s opening position is to reject any UK claim on the EU’s assets. That is unlikely to hold. The EU reckons the UK asset share is €1.7bn, but there are higher estimates. There are other receipts too. British entities receive EU funding (that reduces the gross €88bn bill to a net figure of €60bn). Britain is also likely to make a claim on a share of the European Investment Bank’s reserves, worth up to €10bn to the UK.

Hide it
Cosmetic tricks could mask money flows. So bills for Eurocrat pensions, for instance, could be hidden in other budget lines. Farm payments in the UK would not go via Brussels and the Brexit bill. And some structural funds promises beyond 2019 could be managed bilaterally with eastern European countries — in other words, outside the EU budget and the exit bill. Some parts of the bill can also be hidden in guarantees — uncosted until there is a final tally, years from now.

Slice it up
Some liabilities within the gross €100bn stretch for decades. But the bulk comes due between 2019-2023. A politically savvy payment plan could eventually reduce annual dues to well below the UK’s average budget contribution of £7bn net — meaning Britain will be paying less to the EU after Brexit — while leaving the EU without a funding crunch. That again is made much easier if there is a two to three-year transition with UK contributions continuing post-Brexit.