EU has three options for filling its £8.5B Brexit funding hole

16 Jan 2017 | Viewpoint

The UK’s contributions to the Euro club looks set to stop in the next few years, creating a problem for the long-term planning of the EU budget. German MEP Hans-Olaf Henkel considers ways of addressing the practical headache

The UK’s future divorce from the EU will leave behind a budget black hole in Brussels.

Indeed, despite the ‘Margret Thatcher rebate’, which has kept down the UK’s net contributions, the country has for a long time been the No.2 or No.3 net patron to the EU budget. On average I estimate its net contribution to be worth about €8 billion a year (sometimes more, seldom less).

The shortfall will inevitably have to be financed by those countries which are net contributors already and not by those who receive, meaning Germany will finance the largest chunk. This option – an extra contribution from the big countries in the club – seems to me the most likely.

There is a second option: the introduction of a new financing source. The EU already has a few ways of raising money today, such as fines for cartel abuses and income from import duties, but there are other potential new sources of revenue:

  • A financial transaction tax (chances better after Brexit with the UK being the staunchest opponent of this policy).
  • Income from auctioning carbon emission certificates
  • A new carbon emissions tax
  • Bump up national VAT receipts

All of these options were mooted by Italian economist and ex-prime minister Mario Monti in a special report which looks at this topic in-depth. But given that these new revenue streams would have to be agreed by all 27 members, none are likely to materialise.

The eastern and southern Europe countries which are net recipients of EU funding will recognise that they would become part of the net financing, and therefore would rather leave the extra spending to Germany (Option one!).

The best solution

The third option involves simply reducing the EU budget by the amount of the UK net contribution.

No doubt, this nip and tuck would be the fairest and most logical option.

When I ran IBM Europe and a branch office lost a big customer, I had to reduce the size of the branch and lower expenses.

Let’s consider a small intellectual experiment though: imagine Germany, Austria and the Netherlands also left. Would Brussels still carry on believing – as it seems to do today – that this would have no long-term impact on its budget?

When my colleague Bernd Kölmel, also with the European Conservatives and Reformists group and our co-ordinator on the Parliament’s budget committee, suggested that the EU budget should be reduced in line with the disappearing UK contribution, virtually all other MEPs disagreed with him!

This I consider to be totally irresponsible and contradicting all economic logic.

It is outrageous to see that even the German government has made no attempt so far to forcefully demand the reduction of the EU budget in order to compensate for the loss of the UK net contribution.

By the way, the European Parliament should be spearheading a reaction to Brexit by reducing its own size and costs. But will it? I wouldn’t bet on it.

Cut R&D spending

Of course, any cut to the EU budget should also apply to the bloc’s R&D spending.

It is high time those countries which don't yet spend the requisite target of 3 per cent on research – which is most of the EU countries – start doing so, rather than collect even more to keep "European projects" alive.

My experience with all those EU-backed ICT projects – I was in the industry from the 1960's – shows that they have all failed anyway.

Remember how we wanted to catch up with the Japanese and Americans in the 80's and 90's? At that time we had IT companies like Nixdorf, ICL, Bull and Olivetti. Today, these companies are all gone, despite the billions spent on all sorts of EU programmes.

Hans-Olaf Henkel worked in IBM for three decades, eventually becoming head of the company’s operations in Europe, the Middle East and Africa. He has also served as President of the Federation of German Industries and President of the Leibniz Association. Today he is deputy chairman of the Parliament’s Industry, Research and Energy Committee.

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