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The €60 billion question. The EU exit charge and what it means

March 5th, 2017

Picture: The front page of yesterday’s Times newspaper.

Alastair Meeks, who accurately predicted the outcome of the Article 50 case, looks at the looming Brexit divorce settlement.

One of the many points that will be up for discussion as part of Britain leaving the EU is what Britain will pay as part of the divorce settlement, if anything.  Michel Barnier, the EU’s negotiator, is reportedly making a demand for €60 billion his opening gambit.  The UK government, backed up by a House of Lords committee, asserts that it does not need to pay a penny.  Who is right?  And what does this dispute mean?

It is customary in articles such as this to start with an explanation of the argument.  Customary, but entirely wrong, because the looming argument is secondary to the negotiation it will form part of.  Britain is about to start the process of negotiating its exit from the EU.  The two sides are seeking to reach an agreed set of terms that each regards as advantageous as possible.  Those terms may well ultimately bear relatively little resemblance to the pre-existing obligations on both sides, depending on each side’s negotiating priorities and their relative strengths.

The pre-existing position is relevant only because it helps define the position if no agreement is reached and in helping to construct rationales for the arguments that each side wishes to put forward.  The law is only relevant if no agreement is reached.  In those circumstances, the matter would be litigated and an answer would eventually be obtained, but all that would be incidental to the disorderly Brexit that would then be taking place.

So to understand this dispute we can put the intricacies of the law to one side for now.  Let’s concentrate on the more important aspect.  What are the two parties trying to achieve through this argument?

For this we do need a bit of context.  The EU has, as part of its usual activities incurred present liabilities that will fall due in the future.  A good example of this is in my own area of expertise, its future pension commitments.  One of the questions to be settled is what Britain will need to contribute to these costs.

The EU’s starting figure of €60 billion is making a statement.  The FT looked at the possible extent of the liabilities in October 2016 and came up with a figure of €20 billion as a plausible upper estimate.  Newspapers are not known for their understatement of potential problems in reports.  The estimate of €60 billion looks like a typical builder’s “double the first number you think of and add a drink on top” estimate.  The number is no doubt intended as a statement to be heard by the UK government.  The statement is clear: you can expect a very hard time in negotiations, we think our negotiating hand is very strong, we think time is on our side and we are not too concerned if no deal is reached.

The British government’s response might be understood in kind, though slightly more muted.  The British government is not saying that it will not pay a penny, merely that it is not obliged to.

I have to say, however, that the British government’s response so far looks poor on at least three different levels. 

1) The nuance in that response was completely lost in the newspaper headlines.

If Britain does end up paying a substantial sum, which has to be the overwhelming probability if any deal is to be reached, those headlines will be recalled by the public but the implied qualification will not.  The response only works with the public if no deal is to be reached.

2) The government appears to be attempting to play poker using strategies more appropriate to bridge.  By entering into legal arguments about the amount to be paid, it opens up a discussion that the EU negotiators will relish getting into about legal niceties on a point that it very much suits them to discuss.

There are various possible strategies that the British government could follow.  For example, it could describe such a gambit as one that indicated that the EU were negotiating in bad faith, seeking the removal of the negotiators who put forward such a manifestly outrageous demand. Or it could link such a discussion to a related discussion on far more congenial territory (such as ownership of shared EU assets).  In short, it should be bringing in new dimensions into a negotiation that it suits the other negotiating party to treat as one dimensional.

3) The British government’s response looks both morally and legally weak.  If Britain has been part of an organisation that has entered into long term commitments, seeking to wash its hands of any responsibility to pay for them after the fact is not a lofty position to take.

The legal argument is scarcely better.  It apparently turns on the phrasing of Article 50 of the EU Treaty, which reads at the relevant point: “The Treaties [of the EU] shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification.”

The argument floated in the newspapers is that Article 70 of the Vienna Convention means that brings all Britain’s liabilities to an end.  That article provides that:

“Unless the treaty otherwise provides or the parties otherwise agree, the termination of a treaty under its provisions or in accordance with the present Convention:

(a) Releases the parties from any obligation further to perform the treaty”.

But this ignores two points.  First, Article 31 of the Vienna Convention provides:

“A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.”

So the exit provisions in Article 50 need to be given appropriate meaning for handling the withdrawal from a complex multinational treaty of one of its members.  It is implausible that exiting members would be intended to leave without paying up their share of pre-existing commitments.  Its words should be read accordingly.  It is more natural in that context to read Britain’s release from any obligation further to perform the treaty as being restricted to obligations after that date rather than to wipe the slate completely clean.

And secondly, Article 70 does not finish with the words quoted in the newspapers.  It goes on to provide:

“[Unless the treaty otherwise provides or the parties otherwise agree, the termination of a treaty…] (b) Does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination.”

This would also seem to give Britain responsibility for its share of future EU liabilities already incurred at a time that Britain was a party to them.

As I said at the outset, the legal argument really isn’t very relevant, unless negotiations break down completely.  But while it’s bad enough playing bridge at a poker table, it’s worse still doing so and then fumbling your cards.

Alastair Meeks