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Financing the EU after Brexit

The EU can have business as usual with the UK when it comes to the EU budget

“Following Brexit, business as usual is not an option,” EU President Donald Tusk declared ahead of the recent Bratislava summit but it seems that until Brexit happens, business as usual is indeed an option in the budgetary field.

Certainly, the most tangible consequences of Britain’s departure will be felt on the Member States’ contributions to, and payments from, the common budget. As Commission Vice-President Kristalina Georgieva said, “in these difficult times a focused and effective EU budget is not a luxury but a necessity”. Its proposal for 2017 increases commitments from €155bn to €157.7bn while reducing payments by €9bn “due to the slow take-up of the cohesion programmes for 2014-2020”. By focusing on what it determines to be “the two main policy priorities for Europe” – supporting the economy’s recovery and addressing security and humanitarian challenges – Berlaymont makes clear that “the UK remains a member of the EU with all rights and obligations” and “the results of the UK referendum have no impact on Draft EU Budget 2017”.

But while the EU and the UK are making statements about the anticipated divorce, another question arises: what will Brussels do to fill a potential budget hole? Trade is the most obvious channel through which Brexit could hit the rest of the Union, with manufacturing and air transport being the sectors more vulnerable to a possible demand shock. In services, most of the remaining countries are running deficits with the UK, mainly in the financial sector.

To minimize losses, the EU may focus its negotiation strategy on the spheres where it is running a surplus and free trade for all goods. Moreover, limiting Britain’s access to the internal market in financial services can eventually benefit some Member States, particularly those considered for potential relocation of firms currently based in the UK. Some may even try to take in direct investments from non-EU countries that would have chosen Britain if it had meant an entrance point to the single market.

Besides, without British advocacy of free trade, the influence of more interventionist European countries can become greater, resulting in a slowdown on initiatives such as the Capital Markets Union. Negotiations for the 2020-2026 budgetary framework will also be difficult given that the cake might become smaller. Assuming no change in overall EU expenditure, there will be a need to ascertain how the remaining 27 would compensate the loss. Under the principle of solidarity, net contributors would agree to give a little more while net recipients would agree to receive a little less. But given the rise of Euroscepticism within the payers, it remains unclear whether they would agree to make additional contributions. Another solution would be to expand the sources of revenue that go directly into the common budget, such as sugar and customs duties and a share of VAT revenues.

If, as President Jean-Claude Juncker claimed, ‘out is out’ and the negotiations do not lead to a special relationship, Britain will leave the single market and tariffs will be imposed on the products exported to the EU. But the revenue side will remain rather similar in both pre-Brexit and post-Brexit scenarios. It will only change the way in which the UK contributes to the EU budget, shifting from government transfers to tariffs on exports. On the other hand, if the UK manages to keep a premium access card to the internal market, the budgetary impact will be manageable, as it will have to negotiate some contributions to the club. The UK may want to keep contributing to some selected EU policies, such as Horizon 2020, of which it is indeed a leading beneficiary.

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