13 November 2017

The EU’s hand is weaker than it claims

By Daniel Huggins

Who benefits most from the UK’s membership of the EU? Much has been written about the terrible impact on us of a “cliff-edge”, no-deal exit. But the political implications of it on both the EU institutions and individual member states is almost untouched by contrast.

Given that the UK is one of few sizeable net contributors to the European Budget, the EU is surely worrying about the fiscal black hole created by the UK’s no-deal departure. And this gives the UK a considerably strong hand in the current negotiations.

The most recent EU spending plan, the Multiannual Financial Framework, lasts until 2020 and assumes the UK’s continued membership contributions. If the UK decides to leave without a deal, a House of Lords report recently clarified, there is no legal obligation for the UK to pay a penny to the EU.

However, the British Government could elect to pursue a policy of “paying-in” to selected European projects. Following the Swiss example, the UK should be able to “pick-and-choose” which projects are within its national interest – such as Horizon 2020 (the EU’s research funding initiative) – and continue to fund and participate within this framework. Nor should a no-deal scenario preclude the UK’s continued and fruitful cooperation with the EU member states on competencies such as security and defence – an area in which the UK remains peerless in Europe. It’s an attractive scenario for the UK, but the EU would still be left with a considerable fiscal black hole to fill.

It’s this black hole which should be proving particularly interesting to the British negotiators. To make up for the loss of the British financial contribution, the EU must do one of the following, it could raise more funds from its remaining net contributors, reduce the size of its bloated bureaucracy or cut subsidies to its net recipients.

There isn’t a single remaining member state which could risk the ire of the growing eurosceptic movement across the continent by increasing the seemingly ever-inflating European budget. Even the tin-eared political class across the EU isn’t so politically inept as to hand yet more voters to eurosceptic parties – which is exactly what increasing their net contributions would do. As for cutting the bureaucratic budget of the EU, as anyone with any knowledge of the inner workings of the EU will already be aware, this is the least likely scenario of all, as this is the same organisation in which one-in-five workers take home more pay than Prime Minister Theresa May.

As for the third option of cutting subsidies to the net recipient nations – even the EUs leading bureaucrats know how this would end. To cut handouts would only fan the flames of those growing eurosceptic movements that are held in check only through these EU bribes. Without the money, the EU will instantly lose its main attraction across much of Central and Eastern Europe. And so, without a deal, the EU risks exactly what they are attempting to avoid through their punitive dealings with the UK – pushing more members to leave.

Meanwhile, the lack of a trade deal will have a detrimental impact on the member states, in the long-term, as the UK begins to look globally for its imports, and as the EU’s share of the global economy continues to decline.

While many a bureaucrat across Europe can’t wait to see the back of Britain, the idea of “being careful what you wish for” comes to mind, as the full implication a no-deal exit becomes clear.

The UK remains the EU’s single largest export market, with close to a £60 billion trade deficit. In addition, the remaining members’ economies have five million jobs associated with trade with Britain – including one million from the German car industry and close to half a million from French wine and cheese production. Will the EU – or its member states – be willing to risk this to keep a federalist political project alive?

For the UK, a no-deal exit presents opportunity. For the EU, however, it risks alienating the EU’s single largest export market and the remaining 27.  If the EU is unwilling to offer Britain an acceptable deal, they are paving the road to their own destruction.

Thus can the EU’s fanciful financial demands for tens of billions of pounds can be seen as the absurdity they are. The UK has nothing to fear from a no-deal scenario, and at a time Europe is facing a crisis of legitimacy, the most significant existential crisis it has ever faced, risking its trade surplus with Britain would be a monumental act of self-sabotage.

Since the UK can simply walk away from a bad deal, it sits in a far stronger position than is hysterically reported, and should get back in to the driving seat. With countries and banks across the continent still haunted by the thought of bankruptcy, with millions of European jobs and billions of pounds in terms of surplus exports at stake, the UK has the leverage and the EU is vulnerable. We can afford to walk away, the EU can’t. They should be courting us – not the other way around.

Daniel Huggins is research executive for Get Britain Out