EU Budget

The Brexit Cost Dilemma

60068687 Merkel Juncker Reuters
This can go, this can go... Source: Reuters

It’s becoming a rather common refrain at this point. Michel Barnier, the EU’s chief negotiator with Britain on the terms of its departure, appeared before journalists Friday to announce a fresh delay in the talks: The sides now have two more weeks to agree on the bill that Britain should pay before leaving the 28-nation bloc.

This one (complex) question has overhadowed the rest of the talks entirely. Until Britain and the EU can agree on the terms of Brexit, neither side can really get down to the business of discussing exactly what the relationship should look like once Britain leaves. The possibility of no resolution has many German businesses preparing for the worst.

But beyond the EU’s future relationship with Britain, there’s another crucial question that was brought to light by a new study this week: How exactly should the European Union fill the financial hole that will be left by Britain’s departure?

Germany would have to pay about €3.8 billion more each year into the EU budget to keep it at the same level as now.

We’re talking about quite a lot of money. First is the ongoing dilemma over Britain’s so-called divorce bill. EU negotiators have said that Britain owes about €60 billion in commitments already made to various common projects. London has offered to pay about €23 billion of that, which prompted Mr. Barnier to call on London to go back to the drawing table and come back in two weeks with a better offer.

But beyond the divorce bill is a much bigger fiscal gap. According to a new study by the European Parliament, obtained by Germany’s Funke media group, Britain’s departure will leave a €10.2-billion hole in the European Union’s annual budget, which totals about €150 billion. Exactly how this hole should be filled is a question that matters for Germany, Europe’s largest economy, more than most.

Under current rules, the study finds that Germany would have to pay about €3.8 billion more each year into the EU budget to keep it at the same level as now. That would be an increase of about 16 percent from the roughly €14 billion it spends today. That’s about twice as much as other countries: France, the next biggest contributor, could get a €1.2 billion bill, bringing its total to around €7 billion.

The difference largely reflects the size of each economy – Germany has long been the biggest contributor, and Britain has been second – but that distinction might not matter much for German taypayers. Together with ongoing skepticism over the EU’s bailout of Greece, many Germans don’t have the stomach for more payments to Brussels. Instead, it’s sparked a revived debate about whether the European Union really needs so much money in the first place.

So should the EU budget be cut? The parliament study reportedly says this is an option being considered by Brussels. The EU’s budget commissioner, Günther Oettinger, has said the Germany’s EU bill shouldn’t go up more than €1 billion. That could put France and Germany, the traditional drivers of EU reform, at odds. French Finance Minister Bruno Le Maire told Handelsblatt this week that more common financing was needed, for example to back large-scale technology projects across the continent, whether formally through a euro-zone budget or through existing programs.

Many of Germany’s fiscal conservatives disagree. The pro-business Free Democrats, who are in talks to join Angela Merkel’s Christian Democrats in a coalition government, have stiffly opposed France’s bigger euro-zone budget proposal. Even Ms. Merkel’s Christian Democrats called for a smaller budget ahead of September 24 elections.

But there are drawbacks too. About one third of the EU’s budget is funneled back into structurally weak parts of the continent. That includes about €18 billion to Germany over the next four years, particularly to eastern German states that have already punished centrist political parties in September’s elections. Ms. Merkel may be cautious about suffering their wrath a second time.

[An earlier version that misreferenced the EU budget commissioner, Günther Oettinger, has been corrected.]

Christopher Cermak is an editor with Handelsblatt Global, currently based in Washington DC. To contact the author: cermak@handelsblatt.com

 

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