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February 15, 2018

How will the EU finance itself after Brexit?

The European Commission has produced a very clear document setting out budgetary options for life after Brexit. It tells us how the future spending priorities will shift, and how they can be paid for. One does not need rocket science to conclude that an organisation with a fixed budget constraint, an increase in the number of spending areas, and facing the departure of a large net contributor, requires either a cut in spending or an increase in revenues, or both. A cut in EU spending is hardly likely given the declared ambition to strengthen the EU’s role in immigration control and foreign and security policy. So, where will the new money come from?

The document lays out a number of options for an increase in the EU’s own resources. Currently there are three sources: a share of customs revenues, a share of VAT revenues, and the bulk coming in the form of a transfer from member states of a small percentage of gross national income. The Commission is now looking into three new potential sources of funding. These are revenues shares from: 

  • emissions trading, with a possible revenue share of between €7bn and €105bn;
  • a common consolidated corporate tax base, which could raise €21bn-€140bn;
  • seigniorage (profits of the European system of central banks), with a possible revenue share of €10.5bn.

It is no surprise that these proposals are causing an outcry in the member states with a large net contribution. A common corporate tax base is going to be particularly tricky when UK corporate taxes are on a downward trajectory towards 17% before 2021, when the EU’s next multi-annual financial framework will take effect. We can’t say to which extent revenues from emissions trading or seignorage are realistic, and believe that the most likely source of additional funding will continue to be direct contributions from member states.

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February 15, 2018

On the customs union

;The vast majority of newspaper articles and political comments in the UK on the subject of Brexit are based on lack of knowledge of the content of Article 50, a complete misreading of the position of the European Union, and a lack of deep understanding of the consequences of the Fixed Term Parliaments Act in the UK. This is why we still have endless debates about nonsense concepts such as a meaningful vote or a second referendum. Theresa May wrote in her Article 50 letter that the UK would leave the customs union and the single market. The UK Parliament legislated accordingly with an overwhelming majority. The process is now under way on that basis. If there is deal and it is ratified, it will take effect. If it is not ratified, the UK will leave without a deal. Article 50 is silent on many issues, but crystal-clear on this point. 

This is how we read the story in the FT that the sea port in Dublin is already preparing for border controls after Brexit. New customs booths and freight inspection points will be ready for border checks on UK imports this year, just in case the talks for a Brexit transition deal falls through, so the FT. The working assumption is that the UK will exit both the EU customs union and the single market, and that Ireland needs to prepare for all possible outcomes including a hard Brexit. We think this is fair assumption to make.

It is possible, of course, that the prime minister will decide to change the Brexit mandate, but this would require collusion from the EU. And 10 Downing Street has now confirmed that she has no intention of doing so. We are therefore intrigued to see what would happen if the UK parliament were to vote in favour of a change in the mandate. It would raise some interesting constitutional debates in the UK. But since Article 50 is EU primary law, we think such a vote would have no consequences without further political shifts - like the resignation of the government, or a vote of no confidence in the government. The Fixed Term Parliaments Act makes it very difficult for the parliament to force an election even if it manages to pass a vote of no confidence. For those interested in this particular aspect, we recommend this 2015 article by Catherine Haddan of the Institute of Government. 

With all these legal obstacles to a successful Brexit revocation in place, it is sensible to expect that the UK will indeed leave the single market and the customs union after a transitional period. We think that this transition will have to last for more than the 20 months that are currently foreseen. It may require a second transitional phase - maybe a time-limited customs union agreement for, say, three years or so, which would then bring the total transition time to a more realistic five years. But when that transition is over, the UK would either leave the single market and the customs union, or decide to reapply for EU membership under Article 49. 

It is worth reading Nick Timothy if you want to understand what is likely to happen. With the exit from the single markets and the customs union, the UK and the EU will strike a simple trade deal to remove tariff barriers. Timothy says the EU has an interest in such a deal, since it has a large trade surplus. We agree. We think the most realistic deal is a simple trade deal - i.e. not a mixed agreement - to keep tariffs at zero. Timothy makes it clear that this is what the British government means by the nebulous term of a customs arrangement - some method to enforce a zero-tariff trade agreement across borders with minimal physical disruption (but, yes, there will have to be a physical border). But this is not a customs union, or even the partial customs union the EU has with Turkey. The UK would be a normal third country. 

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