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22 February 2016

Treated at first as a joke, the EU is determined to squeeze the UK purse to the limit.  

Originally mooted at between €45 and €60bn, the EU is now believed to be determined to extract the higher amount. Many of the EU’s array of dubious projects in research, infrastructure, the environment etc. will be outstanding come Britain’s departure from the EU. But it defies belief for a 28th of the cost of a couple of new bridges in the Balkans and the odd beekeeping school to add up to double the UK’s defence spending in 2016. Adding the pensions of the likes of Lords Mandelson and Kinnock helps beef up the estimates, but not significantly.

The European Commission, and particularly France is making no secret of its intention for Britain to retrieve a bad deal from the Article 50 negotiations. Hence reports from the EU’s chief Brexit negotiator, Frenchman Michel Barnier’s camp that only the divorce proceedings – in other words, wrangling over the ridiculous bill – will occupy the first nine months of talks between Brussels and London. Only after their conclusion can negotiators turn to the more important matter of a replacement trade deal. The Commission is deliberately shrinking the window of opportunity.

The Commission and France. It is no coincidence that France favours the same agenda as Mr Barnier. The two have raced ahead with a strategy that promises to be deeply damaging to the continental economy, the rest are now catching up to limit the lunacy.

German sensibility

Angela Merkel’s Chancellery is known to be worried that stupefying size of the Brexit bill proposed by the Commission will lead to a cataclysmic backlash from the British public, derailing the Article 50 negotiation and the prospect of a trade agreement along with it. And publicly, Angela Merkel has little time for the plan to devote the first half of the precious negotiating period exclusively to arguing over the made up bill and tying off other niggly issues. The priority is a follow-up trade deal.

“The UK has to clearly outline how it sees its future with the European Union. These have to be parallel processes. You can’t completely cut off the bonds and then after a long, winding negotiating process come up with how one sees the future relationship. So a good negotiating process is in all of our interests” said Mrs Merkel recently.

Germany is not alone. Ireland, Belgium, Denmark, Spain and many other countries with close trade ties or large surpluses with the UK are eager for a comprehensive trade deal. Eastern Europe has no intention of provoking the UK’s ire amidst what it sees as a growing threat from Russia – the UK has arms and military equipment supply agreements with many of the former Warsaw pact nations.

Nevertheless, Germany and the rest of the EU are clearly worried that it does not have enough bargaining chips at its disposal. Theresa May’s decision to pursue hard Brexit has been met with bewilderment across the European political establishment, and with it, one might expect, a fear that Britain will be willing to walk away from the negotiations. Calls from Berlin to allow the negotiations to be productive solidify that suspicion.

Furthermore, Germany, the only EU Member state to pay more into the EU than Britain, is anxious not to take on the burden of the £10bn black hole in the EU budget that Brexit will cause. News that the EU is looking for the UK to continue paying membership fees all the way up to 2023, two years after having left, is not just fighting talk.

Creative accounting

The Commission has been vague in explaining how it came up with the figure of €60bn. Broadly speaking, the bill consists of an exaggerated share of the EU’s €600bn in liabilities without deducting for much of the EU’s assets. What is not in doubt is that the final figure is the product of a political strategy, not straightforward accounting.

The Pensions of EU officials account for €63.8 billion of the EU’s liabilities. Inexplicably, there is no pension fund to draw from. The EU simply allocates a certain amount of its annual budget to former staff’s pensions. Britain’s share of this amount is likely to have been inflated by calculating it in relation to the country’s size relative to other EU countries, even though the UK has been historically underrepresented in the EU civil service. In other words, if we do end up paying up, it won’t be for UK pensions.

The biggest class of liabilities are the debts that have piled up as a consequence of ‘commitments’ to different projects exceeding budgets year on year. The culprit is the EU’s French forked-accounting system, which separates payments from appropriations. The system provides no incentive for available budget allocations to be squared with appropriations. Add that to the Commission’s well-known disregard for taxpayers’ money and spending commitments spiral out of control. Outstanding payments currently total  €241bn. The books have not been balanced since 2000. Somehow, the UK is partly liable for this criminally irresponsible expenditure (See Chart 1.).

On top of this debt is €172.4bn worth of outstanding payments for hundreds of projects scheduled over the next seven years. Britain is expected to pay for them in advance of leaving.

Unsurprisingly, there is no clarity on what Britain is legally obliged to pay for. At the heart of all of the confusion is the idiocy of an institution as vast and powerful as the European Commission that is able to make so many far-reaching decisions on Britain’s behalf. The EU will fight tooth and nail to argue that the UK is liable for a share of any action undertaken by the Commission, no matter how foolish. The mess not only highlights the amount of sovereignty transferred from London to Brussels, but the danger in putting it in the hands of an unaccountable institution like the European Commission. Democratic nation states function because they are not only accountable but also because they are independent, craven to no higher authority than the odd treaty.