The EU divorce bill

What is the ‘EU divorce bill’?

Brexit negotiations will involve three separate but inter-related deals: a ‘divorce’ settlement, a transitional arrangement, and a deal on the UK-EU’s long-term relationship.

Currently the UK makes annual contributions to the EU budget. Those will stop when we leave, although the Prime Minister has made clear the Government’s willingness to make “appropriate” payments to the EU for participation in “specific programmes”. What those payments might be and which EU programmes we want to participate in will be part of the discussions on a transitional arrangement and the UK-EU’s long-term relationship.

The divorce bill settlement is a separate issue from any continuing contributions. The European Commission expects the UK will pay an exit bill when it leaves the EU. In its recently published negotiating mandate, the Commission outlined that an “orderly withdrawal…requires settling the financial obligations” and that “the methodology for the financial settlement…has to be established in the first phase of the negotiations”. Therefore, the principles of the divorce bill must be settled before further negotiations can begin on the UK-EU future relationship.

Why do we face a divorce bill for leaving the EU?

The EU is an organisation with assets and liabilities. When the UK leaves, European negotiators are expected to argue that the UK pays off its share of the liabilities: this is referred to as the Brexit ‘divorce bill’ or exit bill. It will be reduced from any repayments to the UK. There have been no official estimates published of the size of the bill.

The Financial Times originally reported that the European Commission was seeking an exit bill of €60 billion, based on comments by Michel Barnier, the EU’s chief negotiator on Brexit. In February, the same author writing for the Centre for European Reform (CER) estimated that the bill could range from €25–€73 billion. Bruegel have given a similar range for the bill, at €25.4–€65.1 billion. Most recently, Alex Barker, writing again in the Financial Times, put the net bill at €55–€75 billion, based on a €91–€113 billion gross figure.

How did they work out the figures for this divorce bill?

Calculations are based on what we owe, and what we can offset. The quoted figures have a large range due to varying methodologies of calculating the bill. The lower band €25 billion represents minimal obligations to the EU and maximum UK receipts, while the top-end €75 billion comes from maximising the UK’s obligations and minimising its receipts. The gross figures of €100 billion includes some extra obligations and does not take any account of any receipts owed to the UK.

The UK’s obligations can be categorised under various headings:

1. Outstanding budget commitments

The EU budget operates through a multi-annual spending structure, which means projects are paid for over a period of several years. As a result, EU budget payments are back-loaded and many will be paid out post-Brexit. For example, a key element of EU spending allocations consists of cohesion fund payments, aimed at raising living standards in the 2004 Accession countries. According to the CER, only 25–30% of the biggest cohesion fund payments will actually have been spent by the time Britain is expected to leave the EU in April 2019.

The current EU budget period runs from 2014–2020, finishing a year after the UK’s exit date. The UK has indicated that it only expects to fund its budget commitments up until April 2019. However, the reported latest EU position appears to ask the UK to meet the full long-term budget until 2020, including Common Agricultural Policy farm payments and EU administration costs.

2. EU officials’ pensions

Like the UK civil service pension scheme, the Pension Scheme of European Officials (PESO) is an unfunded scheme and operates on a ‘pay-as-you-go basis’, with costs being covered by the annual EU budget as they arise. The EU may argue that the UK should make a payment now to cover future liabilities incurred while we were a member.

It may also argue that we should pay our share of the total cost of all European Commission staff pensions rather than simply meet the lower bill for UK nationals in the Commission – the difference coming from the under-representation of British officials. The sum could either be met out of future payments – or converted into a lump sum on departure of between €5–10 billion.    

3. Contingent liabilities

The EU incurred contingent liabilities while the UK was a member state. These liabilities effectively constitute payments that would be triggered in specific circumstances only, for example, Ukraine defaulting on its EU loan. When the 2015 EU accounts were drawn up, outstanding loans to Hungary, Ireland, Portugal and Ukraine collectively amounted to €49.5 billion. The EU’s latest approach asks the UK to make a lump-sum payment upfront to cover these liabilities, in case they materialise in the future. This increases the upfront divorce bill by €9–€12 billion. However, these upfront liability payments would be reimbursed over the coming years, enabling the UK to recover some of this money.

4. Other costs of withdrawal

The Commission’s negotiating mandate also includes the “specific costs related to the withdrawal process”. This would cover the relocation of the two London-based EU agencies after Brexit; the Europe Banking Authority and the European Medicines Agency.

Do we get anything in return?

The divorce bill could be offset partly by the UK’s share of EU assets, rebates and budget receipts. Some could be immediate deductions from the bill, while others could be longer-term payments over the next decade or more. Potential issues are:

  • budget receipts: money that the UK would have got from the EU budget
  • rebate credits: repayment of outstanding credits from earlier contributions
  • asset shares: this is likely to be most contentious, with arguments about whether the UK is entitled to shares of the value of buildings and a share of the capital of the European Investment Bank.

Could we walk away without paying a Brexit ‘divorce bill’?

The Lords’ EU Financial Affairs Committee reports that the “strictly legal position of the UK on this issue appears to be strong”. If negotiators fail to agree on a financial settlement, the case is likely to end up in the International Court of Justice in The Hague. The result of such a court case would be hard to predict.

Has the Government already made provision for any payment?

In its latest forecast issued at the time of the Budget, the Office for Budget Responsibility assumed that any savings on our annual contribution would be recycled into UK public expenditure. No explicit provision was made for any exit payment. 

So what is the Government’s position on paying the divorce bill?

In Theresa May’s Article 50 letter to EU President Donald Tusk, she simply said that both sides “will need to discuss how we determine a fair settlement of the UK’s rights and obligations as a departing member state, in accordance with the law and in the spirit of the United Kingdom’s continuing partnership with the EU.” This contrasts with the EU’s position of progressing with the withdrawal negotiations (including the divorce bill), before moving on to the future relationship arrangements.

The Government has been silent on any figure. However, speaking on ITV in May, the Secretary of State for Exiting the EU, David Davis, insisted that the UK “will not be paying €100 billion” [€100 billionn being the recently quoted gross figure, amounting to the higher end €75 billion net bill].

How will this end up being settled?

Any agreement will ultimately be political rather than legal. But the divorce bill is also seen as one of the areas which could get in the way of any deal being agreed.