Dealing with the Brexit Divorce Bill

Walking away from the EU without paying a divorce bill  or only a small one  would have major consequences for the remaining member states, because they would be forced to make up the shortfall for EU projects until 2021. That would leave the UK short of goodwill, writes Michiel Scheffer, a regional minister in the Netherlands, and would probably sour the prospects of future trade deals.

One of the most contentious elements of Brexit is what has been branded the ‘divorce bill’. It is sometimes regarded as a punishment, but it can also be seen as the consequence of the EU’s budgeting. Unlike Member States, the EU has a multi-annual financial framework (MFF) with programmes of the same duration – from 2014-2021.

Discussing the implications of this in July at the Lords select committee on the EU, the EU’s chief Brexit negotiator Michel Barnier said:

“There are thousands of town halls, municipalities, businesses and universities that have undertaken projects on the basis of those undertakings and commitments. If we are to cut 15 per cent or whatever – that is the UK share – there will be an explosion everywhere across the board… There are literally thousands of programmes all over Europe – under the CAP, Erasmus, universities – that have been committed to and to which we have said we are going to pay this much money or that much money. And if the British share of that commitment were to go missing, thousands of programmes would have to be interrupted. That is why I am saying that that is the main risk of failure that we run.”

I am one of those town hall politicians. As regional minister of the Dutch province of Gelderland (our capital is Arnhem – the ‘bridge too far’ in 1944), I share responsibilities for a regional operational programme for innovation and energy transition (part of the European Regional Development Fund), a cross-border programme, Interreg Germany-Netherlands (also part of ERDF) and a rural development programme (part of the Common Agricultural Policy). We are also involved in Interreg B and C projects and Horizon 2020, as well as a regional strategy to maximise the use of EU funds by universities and SMEs. Our target is to obtain a total of €2bn in project funding  for the 2014-2021 period.

hp sauce

What does Brexit and the divorce bill mean for us? Firstly, the Netherlands is a trading nation, so a substantial part of our industrial output is exported to the UK. The best-known product we supply to the UK is Heinz HP sauce, which is made near Arnhem. We also export carpets, machinery, flowers and fruit to the UK. Brexit will certainly cause disruption, but it may lead to opportunities: it is too soon to say. We regret Brexit, because it will distract the EU from tackling issues such as climate change. But we have a reputation for commercial astuteness and our products are much in demand.

Now to the divorce bill. As good housekeepers, our strategy is to allocate funds swiftly and efficiently to the best possible projects, and to ensure they have meaningful results in terms of innovation and social impact. In practical terms, this means that by the end of 2017 90% of our funds are linked to projects lasting on average three years. This means that at the moment of Brexit in March 2019, a substantial amount still has to be paid out to projects and their partners – to pay for real costs such as wages and equipment. For our programmes, this may amount to several hundred million euros – and that is only for a province with two million inhabitants and an annual budget of €1bn.

So what will happen if the divorce bill isn’t settled? European projects are funded from several sources: the EU, national funds, regional funds and cash and payments in kind from project partners. In the worst case scenario, the EU loses 15% of its budget. The MFF’s rule is that if EU revenues decline, the size of the MFF declines accordingly. The EU cannot foot the bill. The first fallback is that member states cover the difference. The second is that regions cover it. If neither of those happens, the funds will be cut. Our programmes would lose between €50m-100m.

I will not speculate about how the shortfall will be made up, since that is a political process that has yet to happen. Each programme has its own funding rules and political dynamics. One solution, however, should be excluded on principle. Cutting university and business funding would be politically unacceptable because it would mean those who benefit from EU membership would bear the cost of Brexit. Some may say that savings can be made by better management and control of funds, but Dutch management is already excellent: 98% of project funding is well-attributed, managed and controlled. The result, therefore, is that national and regional budgets will be called on to make up the shortfall.

Michel Barnier is right. National, regional and local governments will be forced to cover the cover the cost if Britain defaults on its divorce bill. We will have less money to fund better social services, education, infrastructure and speed up the transition to renewable energy. The political price will be hefty because local and regional politicians influence their national governments and their stance towards post-Brexit relations between the EU and the UK. A favourable divorce settlement for the UK – or none at all – may come at a high price for the UK in the long run.

(published on LSE Brexit Blog, August 2017)