At a summit in Bratislava this week, the EU wants to set the course for its future without Britain. One important issue is likely to be ignored by European leaders: The fact that Brexit is going to be expensive for Europe, especially for Germany.
There are times when politics mirrors real life. Nobody knows that better than European Commission President Jean-Claude Juncker, a man who makes no secret of the fact that he has a wealth of experience, both privately and professionally.
That’s why he has a very concrete idea for how the Europeans should act as Britain departs the European Union. “When your girlfriend leaves you, you shouldn’t gaze after her forever,” he recently quipped to a group of people close to him. “At some point, it’s time to start looking around at other girls.”
The Commission chief’s analogy, however, overlooks an important point: A relationship is easier to dissolve if the couple hasn’t been married. When a decades-long marriage ends, though, the split can get very complicated indeed — and sometimes it is extremely expensive for one of those involved.
That also applies to the 40-plus year liaison between Britain and the EU. On June 23, a majority of British voted to end their membership in the European Union, a decision that was of global significance. The shockwaves that the British vote unleashed through European capitals and Brussels have anything but subsided.
Life Goes On?
When the leaders of the remaining 27 EU members states meet on Friday in the Slovakian capital city of Bratislava to discuss the consequences, the British will no longer be at the table. German Chancellor Angela Merkel is hoping that the meeting will send a message of a new beginning — in defense and security policy and on job creation measures, particularly for Southern Europe. Life goes on, even without the British: That is the message the summit is to send.
Nevertheless, the coming years will be defined more by the impending divorce than by vague summit memoranda. With Britain’s exit, the EU will lose more than just economic and political strength — it will also see billions of euros disappear from its budget. For Germany, in particular, the economic consequences could be significant.
“Don’t ask me to tell you what will be the end of the road,” Michel Barnier said last week defensively, adding that the process hasn’t even started yet. The former French foreign minister and current EU commissioner is in charge of negotiating with Britain on behalf of the remaining member states and he enjoys the trust of German Chancellor Angela Merkel.
Last Wednesday, Barnier spoke publicly for the first time since his appointment as a guest of the Brussels-based think tank Bruegel. The event took place in an upscale automobile museum, with a Triumph Spitfire on display near an Audi Quattro from the 1980s. But if Barnier has his way, this may soon be all that remains of Britain in Brussels’ European quarter. “I am waiting to begin. I will be ready tomorrow to negotiate, frankly speaking.”
It’s going to be a difficult challenge — that much is a given. Of particular sensitivity will be the question as to whether EU citizens will still have the unrestricted right to live and work in Britain, a key component of the EU internal market. And of course, there is a lot of money at stake.
10 Billion Euros or Worse
Commissioned by the European Commission and the General Secretariat of the European Council, the first calculations on how expensive Brexit might be for the 27 remaining member states have now been completed. According to one paper, net revenues that flow into the EU from Britain each year range from 14 to 21 billion euros. If you subtract the money Britain gets back from Brussels, the EU budget would shrink by up to 10 billion euros per year.
But it could be even worse. The rebate to Britain’s EU contributions negotiated by Margaret Thatcher has led to more than 110 billion euros in savings for the British over the years. Given that other net payers, including Germany, did not want to be made responsible for the additional costs this created, they were also given a rebate. In addition to Germany, the Netherlands, Sweden, Austria and Denmark also currently enjoy a reduction in what they must pay into the budget. After Brexit, this spat could intensify, especially given that France, which is also a net payer, doesn’t get any rebate at all.
A paper by the Center for European Policy (CEP), set to be presented in Berlin this week, delivers numbers of a similar magnitude. The comprehensive study on redistribution in the EU shows that the remaining EU member states, above all Germany, are facing significant additional burdens.
From 2008 to 2015, the United Kingdom’s contribution to the EU rose each year, to the point that it ultimately became the third biggest net payer into the EU’s budget, the paper notes, with the average yearly amount paid by Britain pegged at 6.5 billion euros during this period. The only countries that pay more for European unity are Germany and France.
In 2015, the study found, Britain was in second place: The British paid 12.7 billion euros more than they got back from the EU. By comparison, Germany paid 15.6 billion. The paper also determined that the British paid more into the EU per capita than Germany did that year. “After this country’s withdrawal from the EU, this net amount will have to be redistributed among the other member states,” writes CEP report author Matthias Kullas. “The other major net payers — especially Germany, France and Italy — will be facing significant additional costs.”
Brexit could also lead to painful shortfalls for the European Investment Bank (EIB), Kullas calculated. If the British were to withdraw their share capital in the development bank, it would result in a shortfall worth billions. The EIB would be forced to make fewer loans — loans that are vital for infrastructure projects across the Continent.
According to Kullas, the British have thus far borne the greatest burden at the bank. Their share of total capital is 16 percent, but they only benefit from 8.8 percent of the loans. No other country has a larger imbalance.
A High Price for Germany
German Finance Minister Wolfgang Schäuble of Chancellor Merkel’s Christian Democratic Union (CDU) already had his experts calculate what Brexit would mean for Germany’s federal budget. His officials warned in an internal recommendation that Britain’s departure from the EU would mean the “loss of the second biggest net payer.” Following Brexit, Germany’s share of the overall economic strength of the EU would rise from today’s 21 percent to 25 percent. The consequence would be the “increase of the German share of financing of the EU budget by about 4.5 billion euros a year in 2019 and 2020,” the officials wrote.
The assumptions were based on the current financial framework and did not include “any conceivable compensation.” As an example, the paper cites possible future contributions made by Britain if it continues to have access to the EU internal market. The examples here being Switzerland and Norway which, despite not being EU member states, contribute to the EU’s budget. The fees are essentially the price of admission to one of the world’s largest free trade zones.
As a member of the internal market, Norway is required to pay about half what it would be required to contribute as a full-fledged EU member state. If Britain were to select this model, it would mean a smaller shortfall for the overall EU budget.
The German Finance Ministry paper also provides another example: a so-called “Lowering of the Ceiling program.” Schäuble’s ministry believes it possible that the EU would undertake significant fiscal belt-tightening once Britain stopped paying into the EU budget.
For some time now, experts at the Berlin Finance Ministry have been mulling over possible “new priorities” for EU expenditures. “How will the EU budget be shaped in the future?” asked the title of one recent internal conference, to which Schäuble’s ministry also invited officials within the European Commission and other members states to attend in Berlin in mid-July.
In order to reduce the shortfall, other member states are likewise looking at ways to reduce EU spending. The main area under review by the fiscal experts is agricultural aid which, at around 55 billion euros each year, is one of the largest line items on the budget. The direct payments received by every European farmer for each hectare of land they own without any stipulations, for example, has come under criticism.
Thus far, no one in Berlin or Brussels is certain what measures will be used to protect the EU from the challenges created by the departure of a member state. It could be cost savings, continued contributions from the British or an additional levy for the remaining member states.
Denial in Brussels
As long as Britain hasn’t taken the legal step of declaring its intent to leave by triggering Article 50, senior EU officials are essentially ignoring the issue. At a closed Commission meeting in the upscale Belgian resort city of Knokke in late August, none of the top EU officials present brought up the topic of Brexit. Last Wednesday, though, at least one commissioner dared to broach the subject, with Günther Oettinger of Germany admonishing his colleagues that they need to finally start considering the effects Britain’s exit might have on the EU budget. His words fell on deaf ears.
“I consider it to be very possible that the Brits will know exactly what they want at the start of negotiations, but that Europe still won’t be able to speak with a single voice,” European Parliament President Martin Schulz recently warned. The difficulties begin with the fact that it isn’t yet clear what kind of future relationship the British will seek with the EU. That, though, will determine the price of future ties. It’s clear that the government will not get the comprehensive access to the European internal market it is hoping for without paying a price. “If there is participation in several areas of policy, then the amount a country is expected to deliver also increases,” says Jens Geier of the center-left Social Democrats (SPD), who is deputy chair of the European Parliament’s Budget Committee.
One example are programs aimed at promoting scientific research, like Horizon 2020. Given the participation of such elite British universities like Oxford and Cambridge, both the Europeans and the British have a strong interest in continued cooperation. But if the British want to tap the subsidies available through these programs, they will also have to continue paying into them.
In addition, expensive EU programs like regional subsidies are pegged to the internal market. If London wants to continue its participation, it will also have to pay its share. “The British could get into the strange situation in which they pay into the regional policies but don’t get anything back again,” says Geier.
Particularly puzzling for the EU is the fact that it is soon scheduled to revise its budget, the so-called Multiannual Financial Framework, with the Commission slated to announce its suggestions in the next few weeks. One of the main issues will be whether member states are prepared to provide additional money to Brussels in light of the new challenges created by the refugee crisis.
Sticking to Principles
If the British continue to delay their departure from the EU, a complicated situation will arise. The member states will be forced to negotiate the bloc’s finances at the same time they begin Brexit negotiations. But how will Brussels be able to determine its budget without knowing how much the British government will be paying into it?
In this sense, current talks between Brussels and Switzerland over a new framework agreement could provide a model for negotiations with the British. One of the main sticking points in the talks is the so-called free movement of persons, with Brussels refusing to accept any limitations. The message to the British is clear: This divorce may get expensive, but the EU doesn’t intend to abandon its principles.