There is much outrage, among both Leave and Remain voters, at the size of the ‘divorce bill’ ministers have reportedly agreed to pay the EU. Figures of €60-65bn (£53-58bn) – more than one and a half times’ the UK’s annual defence budget – are being presented as fact. I share much of this outrage. The sheer range of numbers floated – not least the notorious €100bn figure reportedly demanded by Brussels – show that the cash-strapped EU is simply chancing its arm. The amount the UK will pay clearly has little to do with our provable liabilities. It is all about how much Brussels thinks it can extract.
The strict legal position is that the UK owes zilch. Article 50 of the Lisbon Treaty contains says nothing about any leaving bill. A House of Lords Committee in March judged that the government would be on strong legal ground if it chose to make no divorce payment whatsoever. And if this divorce payment is designed to ‘buy’ a free trade agreement with the EU, you could argue the net payment should be in Britain’s favour, given that we buy more of the EU’s exports than they do of ours.
Having said all that, the reality is that UK voters decided to leave and we want to depart on good terms. That’s why I’ve consistently argued that the government should be prepared to discuss payment. It seems reasonable that Britain, having signed up to the EU’s current seven-year budget process, which ends in 2021, should contribute to the end – even if it is not legally obliged to do so. As it happens, this budget coincides with our scheduled departure date, plus a two-year transition period – which is handy. It is also right that the UK contributes to the pension obligations of our former EU employees.
But I have also long believed – and still do – that the actual sum we pay should be finalised only at the end of the Article 50 period, with the total reflecting the degree of goodwill and cooperation shown by the EU between now and March 2019. What the government is trying to do, of course, is move the Article 50 negotiations onto the real meat of our future trading relations with the EU – where we sell around 40 per cent of our exports (down from 60 per cent back in 2000, but still mightily important). Having put serious money on the table, the UK is showing it wants constructive and co-operative relations as we discuss the terms of a free trade agreement (FTA) and beyond.
This cash offer, though, should come with very strict and publicly stated conditions. Firstly, the money should be paid only in annual instalments. On top of that, such payments should only begin once a UK-EU FTA has been agreed and ratified by the parliaments of all EU members, and the European Parliament. Up until now, Juncker and Michel Barnier, the EU’s chief negotiator, have had every incentive to stall and frustrate the Article 50 negotiations. They have been happy to watch the UK government take a hammering from much of the Britain media class, many of whom have been gleeful – ‘Told you so! Told you so!’ – at the ‘lack of progress’ and remain determined to stop Brexit.
Now that there is real money in play, the UK must link the timing of its annual ‘exit bill’ instalments, to the delivery of a FTA that offers better conditions than trading with the EU on the basis of World Trade Organisation rules. Britain is currently the EU’s second-largest contributor; Brussels is in desperate need of cash. Last year, two weeks after the Brexit vote, Standard & Poor’s downgraded the bloc’s credit score from AAA to AA. The ratings agency has since said the EU would ‘come under pressure in an adverse scenario’ without a UK exit payment of at least €60 billion.
Such a scenario remains eminently possible – not least as the EU is replete with national political crises and the single currency remains a deeply precarious construct. With UK money at stake, the eurocrats, hungry for cash, would be incentivised to make the progress on trade talks which exporters both in Britain and across the continent are anyway desperate to see. Governments across the EU, worried about filling the financial gap left by Britain but grateful for some reprieve, will push for progress too.
The UK must make it absolutely clear, then, that unless and until there is an FTA, there will be no British money. As such, it becomes even more important, that we make full preparation to trade with the EU under WTO rules. Happily, that is not the ‘disaster’ that some remainers constantly claim. Trading with the EU on the basis of WTO rules is ‘perfectly manageable’ for the UK – as the Director General of the WTO himself told me last week. ‘Around half of the UK’s existing trade is already on WTO terms – with the US, China and several large emerging nations where the EU doesn’t have trade agreements,’ said Roberto Azevedo, when I talked to him for the Telegraph. ‘It is not the end of the world if the UK trades under WTO rules with the EU’.
The government must be firm, then. We are not paying to talk about an FTA with the EU. We are prepared to pay, though, in instalments, for the delivery of a FTA with the EU. Once such a deal is in operation, that’s when the payments will start. And every year an FTA isn’t in operation, after 2019 or a transition period ending in 2021 as agreed, that year’s instalment will become void. Many UK voters are rightly disgusted at the size of this ‘divorce bill’ – upset not just at the UK government, but also at the EU. The fact that the European Commission has been determined to secure money for its own bureaucracy, before dealing with issues affecting the lives and livelihoods of real people across the continent – such as trade and citizens’ rights – speaks volumes about the kind of out-of-touch, craven organisation it has become.
I hope much of the British media, having instinctively and unquestioningly viewed the EU as ‘reasonable’ during these negotiations, and UK ministers as ‘insane’ will at least pause for thought. Surely the commitment of endless billions of UK taxpayers’ money – all those schools and hospitals foregone – should be linked to the explicit delivery of an FTA? That would do the most to secure growth and jobs. Isn’t that what everyone wants? Everyone, anyway, who isn’t hell-bent on overturning the referendum.
It would also be to everyone’s advantage if economically illiterate columnists and broadcasters stopped referring to trading under WTO rules as ‘crashing out’ of the EU, ‘the gun to the head option’ or, that other favourite, ‘going over the cliff edge’. I hear these phrases on the radio all the time. ‘There is no cliff edge,’ a WTO source told me. ‘The language being used in the UK debate has become crazy’.
The option of trading under WTO rules, if we need to, is absolutely vital if the UK is to avoid being totally exploited during these negotiations. It is, meanwhile, an axiomatic fact that much of our trade is currently on that basis – as is EU trade with the US, China, Brazil, India and all the other major economies with which the EU has failed to cut an FTA, despite 60 years of trying.
The UK can trade with the EU under WTO rules with no problem – as long as we make adequate preparations to do so. Some sectors will incur quite high tariffs – but our EU trade deficit translates into a surplus of tariff revenue, which the government can use to compensate such sectors, helping them adjust, as the UK further expands its trade with the 85 per cent of the world economy beyond the EU.
Having accepted we must pay a ghastly divorce bill, it is now vital that incentives on both sides are brought into alignment. That’s why the UK government must insist it pays this exit bill gradually, in annual instalments, and only once the EU FTA that everyone wants has been signed, sealed and delivered – with instalments being forfeited every year such a trade deal is delayed beyond 2019 and any agreed transition period. Then, and only then, will the vast amount of cash be a price worth paying.
Liam Halligan is co-author of ‘Clean Brexit: How to make a success of leaving the EU’