How Will the EU Fill the Hole in its Budget after Brexit?

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This Article was first published on Reaction.

Brexit negotiations have finally begun and, contrary to reports in the UK, in some respects the EU has been rather divided. Spanish MEP Antonio López-Istúriz White contradicted European Commission President, Jean-Claude Juncker’s stance recently, on Prime Minister, Theresa May’s EU citizens’ rights offer, saying it was “appreciated”. Juncker said May’s offer was “not sufficient”. Another Spanish MEP, Esteban Pons, has said he will fight to take the UK back into the European Union once we leave.

Splits at the senior level have also opened up over whether the UK could choose to turn back and reverse the Brexit process. EU leaders such as Emmanuel Macron, Donald Tusk and Leo Varadkar have made it clear they would be open to this idea – however much this might undermine democracy. Not that the EU has ever minded overturning referendum results. Other leaders like Belgium’s Prime Minister, Charles Michel and Chancellor Angela Merkel have been much clearer the process is now irreversible.

Politicians always have an eye on the not-so-distant future, and on money. One problem for the EU is the prospect of filling the funding gap which will be created when the UK leaves. Indeed, the EU Budget Commissioner, Gunther Oettinger, warned earlier this month of this very shortfall.

The black hole which will be created has been estimated by the Jacques Delors Institute to be between €5 (£4.4) and €17 (£14.95) billion– with the most likely outcome being a €10 (£8.79) billion reduction in EU revenue. This is a sizeable hole in the EU budget. It represents – if we take the 2016 EU budget – 6.9% of the total revenue.

Of course, it would be much easier to simply try and tempt the UK into staying, rather than face the difficult decisions of extra contributions or higher taxes for member states. Which may be what those encouraging the UK to stay in the EU have an eye on. However, Article 50 has been triggered, and we have no intention of going back on it.

Brexit and the impending negotiations on how to fill the monetary black hole threaten to inflame tensions still there from the eurozone debt crisis. The creation of a common currency which included member states with varying levels of wealth, has always meant a euro exchange rate which is undervalued for countries such as Germany and France, and overvalued for poorer countries such as Greece and Slovakia. This has buoyed the economies of richer countries and restricted those of poorer ones – because of the competitive advantage this gives to the richer nations exporting their goods.

One of the staple ways countries come out of major recessions and economic crises is via the large increase in export competitiveness, caused by the resulting currency depreciation. This cannot happen effectively in the eurozone. Even in the midst of the sovereign debt crisis, when the euro did indeed depreciate in value, in relative terms the Euro remained far too strong for a country like Greece to regain its competitiveness. Thus, Greece sank into an almost 6-year recession. Its debt is now standing at 177% of GDP – although finally stable at this level.

In contrast, Iceland is the archetypical example of how having your own currency protects an economy against the woes of a country like Greece. Iceland’s banks completely failed and they were not bailed out. Iceland had to accept loans from the IMF and its Scandinavian neighbours totalling $4.6 (£3.55) billion to protect domestic deposits and cushion the economy’s free fall. It had two technical recessions, one lasting 6 months in 2008, and one lasting just over a year from the middle of 2009 to towards the end of 2010. Combined recessions not totalling more than 2 years in length. It has since returned to solid growth. It’s debt to GDP ballooned to 95.1% in 2011 – it has since been reduced to 54% in 2016. This remarkable feat – dubbed the Icelandic Miracle – can largely be put down to the ability of its currency to actually reflect the competitiveness of its economy.

It wouldn’t be correct to assert the sole plight of Greece, and other struggling eurozone economies, has been the lack of its own currency. Indeed, the disparities of wealth were well in place before the euro came into existence – but it’s made the situation worse. The financial and sovereign debt crisis exposed the euro as keeping the richer eurozone countries rich and the poorer countries poor.

One way this has always been mitigated has been the transfer of EU funds from the rich contributor nations to the poorer receiver nations. In 2014 €41.4 (£36.41) billion of EU funds went to “the development of poorer nations”. The gap Brexit will leave in the EU finances is going to put pressure on all areas of the EU budget.

Poorer eurozone Member States, which have already seen the oppressive effect the euro has had on their economies, could well be asked to take a cut to their EU funding. We all know the political furore welfare cuts can cause. To add to this, member states which are already bankrolling the EU – mainly Germany – will be asked to pay even more. The Delors Institute estimates Germany’s contributions will rise the most in absolute terms by €3.5 (£3.08) billion. These populations are already weary from, as they see it, having to bailout other EU countries – Greece, Spain, Ireland, Portugal and Cyprus. Will they want to cough up more cash? Once we get Britain out, the EU will be facing some tough negotiations of its own.

Jack Tagholm–Child is a Research Executive at Cross Party Grassroots Campaign Get Britain Out

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