Brexit and the EU Budget (EUC Report)

Baroness Falkner of Margravine Excerpts

Thursday 6th April 2017 Lords Chamber

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[Baroness Falkner of Margravine]

That this House takes note of the Report from the European Union Committee Brexit and the EU budget (15th Report, HL Paper 125).

[Baroness Falkner of Margravine (LD)]

My Lords, I am delighted to introduce the EU Committee report, Brexit and the EU Budget. I thank all members of the committee, which, along with the other sub-committees, has worked at an extraordinary pace since the referendum to examine all the significant areas of policy that will be impacted by Brexit. I benefit in my chairmanship from an extraordinary level of expertise and talent in the membership of the committee—even by the standards of this House.

We will be losing one member in the next rotation, my noble friend—I was disconcerted because I thought he was behind me—Lord Shutt. It has been a real pleasure to work with him, and I know that he will bring the same level of wisdom and expertise to the next committee that he serves on. On behalf of the committee I express our sadness at losing him.

We are also very ably served by our clerk, John Turner, and our new policy analyst, Dr Holly Snaith, who both produced as good an example of work as any in this House. I know how important our reports are to the policy community in Brussels, and this one is no exception. I understand that it has been carefully examined across capitals.

I am also very grateful that we were able to secure a debate on this topic so soon. As noble Lords will be aware, the issue is highly contentious and, as the Tusk draft guidelines that were issued last Friday indicate, is going to feature as a significant factor in the early negotiations now that Article 50 has been triggered. The guidelines say:

“A single financial settlement should ensure that the Union and the United Kingdom both respect the obligations undertaken before the date of withdrawal. The settlement should cover all legal and budgetary commitments as well as liabilities, including contingent liabilities”.


So this debate is timely.

Our inquiry was undertaken in December and January, and we heard evidence from academics and legal experts. We also visited Brussels to hear from a range of MEPs and prominent think-tankers. We are enormously grateful to all those who contributed to the inquiry. The UK’s possible exit bill from the EU has received a significant amount of attention in the press and elsewhere. In the autumn of 2016, reports started to emerge in the Financial Times, for example, that the UK would face a bill of €20 billion. Shortly after, the FT reported the figure as €60 billion—an unprecedented level of inflation—and further speculation in Brussels suggested that this was the figure the EU actually had in mind. We wanted to investigate the factors behind these numbers and, if possible, determine what the United Kingdom might need to pay.

Noble Lords will be aware that the most newsworthy finding of our report was that, legally, the UK would not be obliged to pay anything at all. This has been seized upon by those who do not believe in honouring their obligations, but it is clear that they have not read our report in full. We considered this matter very carefully before coming to that conclusion, having received differing opinions from our legal witnesses. However, having looked closely at the matter with the assistance of the EU Committee’s then legal adviser, Mr Paul Hardy—to whom I personally extend our thanks, as he has since moved on from the House of Lords—we decided to put that advice into the report itself so that all could see the analysis behind our judgment. We concluded that the effect of Article 50 was that all EU law ceased to apply to the UK at the moment of departure unless the withdrawal agreement provided otherwise. This means that all legal obligations resulting from budgetary commitments made while the UK was still a member state would also cease to apply.

We heard evidence that Article 70 of the Vienna Convention on the Law of Treaties might provide a legal basis for an enforceable claim against the UK—and enforceability goes to the heart of the argument. The convention states:

“Unless the treaty otherwise provides or the parties otherwise agree, the termination of a treaty … Releases the parties from any obligation further to perform the treaty”,


but that it:

“Does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination”.


On that reading, this appears to mean that the United Kingdom would have a legal obligation to pay its dues—but the key words are:

“Unless the treaty otherwise provides”.


Article 50 of the Treaty on European Union provides a mechanism for a member state to leave the EU without an agreement and with the effect that all EU law ceases to apply to the member state. Article 50 is unqualified by any condition about ongoing liabilities, and from this we concluded that the UK’s budgetary liabilities would cease in the absence of any withdrawal agreement, as there is no institution to enforce obligations when EU treaties fall.

I am aware that other legal opinions are circulating in Europe—a fact alluded to by the Chancellor in his interview on the “Today” programme on 29 March. On 21 March, there were press reports of a leaked EU document suggesting that the matter would be taken to the International Court of Justice if the UK refused to pay. The EU may go down this route, although we concluded that international law is slow to litigate and hard to enforce. We also noted that Article 344 of the Treaty on the Functioning of the European Union prohibits EU member states from submitting the legal interpretation of the EU treaties to a court other than the Court of Justice of the European Union. I note that the European Council’s draft negotiating guidelines propose establishing an arbitration body to rule on the interpretation of the withdrawal agreement, taking into account the particular status of the CJEU. This would, of course, come into being only if a deal was struck.

We explored the legal position because we wanted to determine the lowest amount the UK might be required to pay as a means of sketching out the parameters of the forthcoming negotiations. I was rather surprised to find that the answer was zero, in terms of the legal position, but I want to be clear that the committee did not recommend that the UK should refuse to pay anything. This legal situation would apply only if it proved impossible to reach a deal, in the sense that the EU’s claim would be unenforceable. The committee hoped that a deal would be reached and acknowledged that this would be impossible without settlement of the budget issue.

Politically, if not legally, the UK has signed up to certain areas of EU expenditure which may persist for some years after Brexit. It will be a matter for negotiation how much any payment proves to be, but the political and moral obligations on the United Kingdom will have to be taken account as part of the process, not least because good will will be essential to achieving a workable withdrawal agreement and a co-operative future relationship.

The Prime Minister, in her letter triggering Article 50 and her Statement to the House of Commons, said that she would pursue a “deep and special partnership” between the United Kingdom and the EU, taking in both economic and security co-operation, and that:

“We will need to discuss how we determine a fair settlement of the UK’s rights and obligations as a departing member state, in accordance with the law and in the spirit of the United Kingdom’s continuing partnership with the EU”.


So far, we do not know what the Government consider to be a fair settlement, and no doubt that will emerge in the negotiations. Rumours that they have calculated a bill of £20 billion have recently been reported, but at this stage that is mere speculation.

The point is that this is a negotiation and the final bill could be calculated in any number of ways. We tried to explore some of the ways a bill could be constructed. It was possible to arrive at wildly differing figures depending on how one calculated the UK’s share of the EU budget, whether one included settlement of the so-called reste à liquider, or RAL, amounts, and whether one included payments in respect of accrued pension rights—which itself would differ depending on whether it was calculated according to the number of UK nationals working for the EU at the moment or in receipt of a pension, or by using a standard percentage. There is also the issue of EU assets and whether the UK is liable to receive a portion of their value.

One further factor in determining any bill would be whether the UK agrees to make contributions to the EU budget under the current multiannual financial framework until it comes to its natural close at the end of 2020. Doing this would reduce uncertainty in the rest of the EU over how it is to fund its spending plans for the 21 months following Brexit. Taking this position may help to secure a transitional arrangement—the implementation agreement, as the Government call it—and the cost, although running to billions, it is likely to be offset by commitments the Government have already made to guarantee EU-derived funding domestically following Brexit. So it would be substantially lower than the headline figure might suggest if that were the case. It is an option that requires serious thought.

Let me conclude with a final thought. This process on which we have embarked—disentangling ourselves from a relationship of nearly 45 years —will be watched around the world, not just in the EU. The measure of the UK’s reputation as a future partner in deals around the world will be dependent on how it behaves in ending this relationship. This country’s culture is synonymous with the concepts of fairness and honour. Having grown up in in a former colony, I was raised in the knowledge that an Englishman’s word is his bond. No amount of legal posturing could convince future partners who do deals with us that we would be reliable partners if we left the EU table without paying our due bill. I believe that the Government understand this and intend to fulfil their obligations through the difficult negotiations ahead. I wish them well. I beg to move.

--- Later in debate ---

[Baroness Falkner of Margravine]

My Lords, I start by thanking all noble Lords who have spoken in this debate. It has been extremely valuable and we will of course reflect on all the comments that have been made. I particularly thank the members of the committee who have spoken. As my noble friend Lord Shutt pointed out, a debate on the last day of term seems to be the fate of European Union Sub-Committee A, but as a committee we felt that we should take this date as offered, because this is one of the topics that will be addressed at an early stage and it is important to hear all sides of opinion in this House. What a debate it has been and what opinions we have heard. I will go through some of the substantive points and believe that I should address them as this is a debate.

I start with the noble Lord, Lord Davies of Stamford, whose presence on our committee we still miss, and I was delighted that he was able to find the time to speak. I need to address early on an issue which he raised and which it is of fundamental importance to get on the record. I refer to the rights of EU citizens who are working for EU institutions today. The noble Lord inferred that they would be fired at the end of the United Kingdom’s departure from the EU, and I thought it would be useful for the House to reassure them—in case they pick up Hansard—by reading Mr Juncker’s email to staff of 24 June, which particularly addresses this issue. He said:

“I know many of you are concerned about your future after this vote … you are Union officials. You left your national hats at the door when you joined this institution and that door is not closing on you now … our staff regulations will be read and applied in a European spirit”.


So not only do the United Kingdom Government stand by EU citizens, as I understand it, but the European Commission does, too, and that is an important clarification.

The noble Lord, Lord Davies, also led us through an exposé of the origins of jurisprudence which was worthy, if I may say so, of a university seminar. I tend to prefer the science of economics to the discipline of law, and I suggest that the established finding of behavioural economics, which borrows heavily from psychology, might apply here in terms of “confirmation bias”. Confirmation bias, as is defined,

“occurs when people filter out potentially useful facts and opinions that don’t coincide with their preconceived notions”.

The noble Lord, Lord Davies, also said that no one is suggesting that we will have liabilities after departure. We caveat our report by referring, as the noble Lord, Lord Tunnicliffe, said, not just to what will happen when we leave. After we leave there will be ongoing commitments, which is why the legal advice is significant. We know—and the report spells out—that there is a rule called n+3, whereby the expenditure continues for three further years after the end of the MFF period. I think it was the noble Lord, Lord Butler, who reminded the House of the comments of the German Finance Minister, Wolfgang Schäuble, who thinks that the liabilities could continue till 2030.Therefore, in that sense, this legal advice is absolutely pivotal.

My noble friend Lord Thomas of Gresford joined the noble Lord, Lord Davies of Stamford, on the overarching obligations of the Vienna Convention on the Law of Treaties. I refer noble Lords to page 60 of our report, which takes us back to the intentions of the drafters of the Vienna convention in 1966—the UN’s International Law Commission—which explained the thinking behind what it said in Article 70(1) of the convention. That article contains the words “unless the treaty” in question “otherwise provides”. The commission says:

“Clearly, any such conditions provided for in the treaty or agreed upon by the parties must prevail, and the opening words of paragraph 1 of the article”—


which are, “unless the treaty” in question “otherwise provides”—

“(which are also made applicable to paragraph 2) so provide”.

Therefore, the Vienna convention rules itself out where there are other provisions in treaties.

The committee cannot be faulted for the fact that the treaty in question might not have provisions in it about how to go about an orderly withdrawal, the obligations and liabilities and so on. I suggest that the House, which has debated Article 50, might perhaps think about how it was so carelessly drafted as to leave out these important caveats. I understand from my conversations in Brussels that there is much gnashing of teeth among Commission lawyers about the manner in which Article 50 was drafted.

Let me turn to another point made by my noble friend Lord Thomas of Gresford. He gave the example of an EU project in Wales where the money might, on the whim of someone, be used for a purpose other than that for which it was provided. I agree that that would palpably be illegal. However, I also agree that the receipt of this funding would take place while the EU treaties are extant. Once we have left the European Union, the treaties do not apply. Therefore, neither does the justiciability of the CJEU, unless a withdrawal agreement decided to accept that as a condition.

I turn now to the noble Lord, Lord Hannay of Chiswick. I agree completely with his advice on the manner of negotiations and how one’s perceptions can be confounded as one goes deeper into the negotiation. However, he disagreed specifically with paragraph 135, and said that the committee should not have accepted the legal opinion. Perhaps he thought that we had taken only a single legal opinion into account. We did not. All the lawyers we spoke to knew the EU institutions well. We tested each opinion given by a lawyer and, as time went on and we had a subsequent opinion, we wrote back to the original lawyers asking them to give their opinion again in the light of what we had heard.

I am being encouraged to move on, and I will—I am coming to my final comment.

We exercised our collective judgment and came to our views based on how we saw the evidence. However, the noble Lord, Lord Hannay, suggested that I was somehow tiptoeing around some of these issues. Let me give him some advice: when confronted with counterintuitive situations, I find it better to tiptoe around new evidence rather than dismiss it through confirmation bias.

In conclusion, there is only one way to test whether our judgments in this report have been right or wrong, and that is through a court of law. We have heard from the Minister and from all sides of the House that we will not be going there; that we want an orderly exit and a deep and lasting relationship with our nearest partners, and that is what we should all be seeking to achieve, not least the Government, who speak in our name. I hope the report will be seen as perhaps an important milestone in making us all much more competent in dealing with the pitfalls that lie before us. I hope it will be taken in the best spirit of EU Select Committee reports, which perform such a valuable service to the House and beyond.

Motion agreed.