Brexit and the EU Budget (EUC Report)

Lord Thomas of Gresford Excerpts

Thursday 6th April 2017 Lords Chamber

[Lord Thomas of Gresford (LD)]

My Lords, it is such a pleasure to follow the noble Lord, Lord Davies of Stamford, because I agree with every word that he has spoken.

I commend the European Union Committee for its hard work in producing the report. However, it is unfortunate that it has been seized upon by the Brexiteers, who have affirmed that the United Kingdom could flounce out of the negotiations without a deal and avoid any obligations or commitments which had been incurred. “We don’t have to pay a penny”, trumpeted the Daily Mail.

I have read the evidence given to the committee by the three legal experts, who were not agreed. Because they were not agreed, the opinion of the legal adviser, Mr Harvey, was sought. No one is an expert in this field, because Article 50 has never before been tested. I find his opinion tortuous and I cannot agree with his view on the effect on our liabilities to the EU should no deal be forthcoming. His view is reflected in paragraph 133 of the report in these terms:

“The rule in Article 70(1)(b) of the Vienna Convention only applies to withdrawal from a treaty which does not have its own withdrawal procedures”.


Then it says in brackets,

“(‘unless the treaty otherwise provides’).”

The report continues:

“Manifestly, the TEU does, in the form of Article 50. Article 50 therefore takes precedence over Article 70(1)(b) of the Vienna Convention”.


I quite fail to understand what that paragraph means.

Paragraph 2 of Article 70 states,

“a State … withdraws from a multilateral treaty, paragraph 1 applies in the relations between that State and each of the other parties to the treaty”.

Paragraph 1 deals with the rights, obligations and legal situation of the parties prior to the termination. That is what it is about. It says that,

“Unless the treaty otherwise provides”,


those rights and liabilities are not affected. It is very simple and plain language. As the noble Lord has pointed out, Article 50 does not otherwise provide—it is quite silent on the existing rights and obligations at the date of withdrawal from the treaty. It follows that any other state that is a party to the treaty can enforce those rights and obligations in law. That is the legal side.

On the practical side, we are about to have placed before us the great repeal Bill, which is to take the whole of the acquis communautaire into domestic law—to make EU law domestic law. If the United Kingdom were sued for a money sum, would we actually raise a defence that these obligations arose only under EU law, which we have just taken and made part of our own domestic law? Would we deny the jurisdiction of our own High Court of Justice? If we did that, would we then refuse arbitration where, by agreement, any questions of international law could be determined? Would we force another state to raise an issue in the International Court of Justice and spend years locked in conflict with Europe, simply ignoring the rights of other states in Europe that would obviously be affected by our position?

The view that our rights and obligations would come to an end the moment we fall out of the EU would have strange results. For example, money has already been allocated to Wales from the European structural funds to improve the port facilities at Holyhead. Let us assume that the money is paid upfront. The First Minister of Wales might consider, “Should we spend this money on Holyhead, or wouldn’t it be rather nicer to spend it on a marina in Cardiff Bay? We might attract Sir Philip Green and yachts of that sort and improve the character of the place where we work. We have no obligations to the EU: they have given us the money; we do not have to pay it back, and can use it as we like. They cannot sue us”. That would be nonsense, would it not?

Assets are another important issue. I happen to have been a member of the Reform Club for some 45 years, which is about one-quarter of the time that that distinguished club has been in existence—I stayed there last night, as it happens. If I were to cease to be a member tomorrow, I would not go to the secretary or the trustees and say, “Look, I have paid my subscription for 45 years and think I am entitled to a share of the value of this club. I demand my part of it”. That would be nonsense. But at the same time, I would not expect to have to contribute to the liabilities for the pensions of the staff. We did not form the European Union; we became a party to it. We came late to the feast, although many of us were campaigning to become members long before 1972. We were members of a club, and we cannot say that we are entitled to a portion of its facilities wherever they may happen to be.

This country has entered into commitments. The multiannual financial framework for 2014-20 was negotiated and agreed in 2013. There was a problem at that time because the European Parliament was concerned that countries were not paying their dues. There were shortfalls which jeopardised projects such as the Erasmus programme and the Social Fund, which ran out of funds in 2013, and it was said that those countries had to pay up during that year. Since we negotiated and became a party to that multiannual financial framework, the annual budgets of the EU have been calculated on the basis that the agreed funding in the MFF was available to carry out those programmes commenced before 2020 within the budget.

We are currently in the period of the 2017 budget, which committed members of the EU to contribute €157 billion, out of which payments of €134 billion would be made. I take it—I ask the question directly of the Minister—that, notwithstanding Brexit, the United Kingdom is engaged in the discussions and negotiations for the 2018 budget within the MFF. I assume further that we will still be a party to the discussions on what the MFF 2019 and 2020 budgets will be. We must continue to participate.

I am concerned from a Welsh point of view, obviously, because Wales is a net recipient of EU funding. It receives funds from the European Agricultural Guarantee Fund, the European Regional Development Fund and the European Social Fund. Indeed, some 60 projects have already been approved, with liabilities that organisations have taken on and put into their programmes which will extend way beyond 2020. Surely those liabilities will have to be met from funds from this country. It is true that the Treasury has issued a guarantee that these matters will be paid up until 2020, but what happens after then when the programmes run on?

The problems that the report highlights and makes it necessary to discuss are complex and difficult. However, we must properly address them and not get involved in the suggestion that we can just walk away from Europe, hold our noses and not have anything more to do with it.

[Lord Butler of Brockwell (CB)]

My Lords, the members of the sub-committee which produced this report have perhaps been blowing their own trumpets. However, in this case we are justified in doing so because, under the skilful chairmanship of the noble Baroness, Lady Falkner, this report is a good example of the service which your Lordships’ House can perform for Parliament and the country as a whole.

As the exposition of the noble Baroness, Lady Falkner, made clear, the report covers two principal aspects. First, it describes and seeks to quantify the elements of the EU’s budgeting arrangements which may contribute to a claim on the UK for a payment or payments from the UK after we leave the EU. Secondly, it seeks to establish the legal position of the UK’s liability for such payments. Those legal aspects were discussed in the contributions of the noble Lords, Lord Davies of Stamford and Lord Thomas of Gresford, and I am not going to dwell on them.

It is fair to say that it surprised Members of the Committee —it certainly surprised me—to hear the legal advice that, in the absence of an agreement, the EU will have no means of enforcing any financial liability against the United Kingdom. I note that if the advice is correct, however, the phrase “a divorce settlement” is misleading. In a divorce a court determines the liabilities of the parties and has the means to enforce that determination. In this case the legal advice is that in the absence of an agreement to the contrary, the jurisdiction of the ECJ ends on our departure. Again, I do not want to dwell on the legal aspects. I have used the phrase, as have others, “in the absence of an agreement”, and I emphasise it. Of course we want an agreement. We have much to gain by getting one and a great deal to lose by not doing so. It is important to note, as the noble Lord, Lord De Mauley, said, that in the aspect of finance it is the EU which will lose in the absence of an agreement. Since the UK’s gross contribution is currently one-eighth of the EU’s annual budget, there is much at stake here, so no wonder it wants to make progress on this issue before discussing the other aspects of our future relationship.

Both sides should want a reasonable agreement on this issue. What should a reasonable agreement look like from the UK’s point of view? The Government have said, I believe rightly, that the UK would,

“continue to honour our international commitments and follow international law”.

The Chancellor of the Exchequer has said something similar about meeting our obligations. Monsieur Barnier is quoted today as emphasising the importance of an agreement to the EU, although he has quoted an exit payment approaching a figure of £60 billion. The report seeks to identify and discuss the main elements, and like the noble Lord, Lord Thomas of Gresford, I should like to take them in turn.

First, as the noble Lord, Lord Thomas, pointed out, the UK will be leaving the EU some 19 months before the end of the current multiannual financial framework. That framework sets a ceiling on the EU’s expenditure. It is not a commitment to expenditure. The UK was a party to it but it does not commit us to spending up to the ceiling which we agreed in that negotiation. If the UK’s gross budget contribution of 12.5% ends in March 2019 it will leave a big hole in the EU’s spending plans, and if instead of ending its contribution on departure the United Kingdom were to continue its budget contribution until the end of the current period of the framework, the committee calculates that that might cost the UK some £15 billion. But as I have pointed out, the MFF sets a ceiling; it is not a commitment to spend, and here I differ from the noble Lord, Lord Thomas.

The commitment to spend is set by the annual budget—

[Lord Thomas of Gresford]

My Lords, with respect, I suggested not that we were committed to pay under the multiannual financial framework, but that we are committed to spend on the budgets which rely on the MFF in order to come to a conclusion of what can be spent.

[Lord Butler of Brockwell]

I accept that but the point is, as the noble Lord has said, that the budgets for the periods after we leave have not yet been set so we are not committed to them. The annual budget for 2019 and 2020 has not been set, so I regard any claim on the UK in respect of those years as weak. As paragraph 46 of the report points out, this view seems to be shared by the German Finance Minister, Wolfgang Schäuble, who has said that it will be necessary to negotiate a new MFF on the assumption that the UK contribution ceases in 2019—when we depart from the EU. Continuation of the UK’s payment under a multilateral financial framework that continues after we have left is not in fairness a strong claim on the UK.

The second element of a possible EU claim is the commitments made in budgets to which the UK has been a party, which will remain to be paid after March 2019—the so-called reste à liquider, or remainder to be liquidated. Like others, I regard this claim as stronger. There is probably no legal obligation to make these payments after the UK has left the EU, but it may be argued that there is a moral obligation since the commitments were entered upon and budgeted for while the UK was a member.

The EU estimate of the commitments that will be outstanding at the end of 2020 is £254 billion. We do not have an estimate for the outstanding commitments at the end of March 2019, but since commitments contracted for but not paid tend to diminish as the MFF wears on, the figure at the end of March 2019 for outstanding commitments may be higher. However, as has been pointed out, some of these may never materialise. Moreover, some commitments are to the UK itself. These should be netted off, after which the UK share of commitments to other partners is unlikely to amount to more than £10 billion. If the UK were to agree to meet these it would be sensible to do so not in a lump sum but over the next few years as the commitments materialise.

It is right to add that the respected Brussels think tank the Bruegel Institute produces a much larger figure for commitment outstanding, including a large element under the heading, “significant legal commitments”. These are commitments pledged in legal terms but not yet budgeted for. Since they are expected to be budgeted only over a long period, they are not included in the EU’s balance sheet nor in the reste à liquider. In this case it seems difficult to argue that the UK has any liability for these unbudgeted items after leaving the EU.

Thirdly, there is the possibility of a claim based on pension liabilities for past or present employees of the EU or its institutions. Here I agree with the noble Lord, Lord Thomas of Gresford, that this is a weak basis for a claim. UK nationals constitute some 4% of EU staff at present and have never been more than 8%. The Commission currently estimates its actuarial liability for future pensions at €63.8 billion. However, pensions are paid out of each year’s budget. Employees make a one-third contribution to them. Like the noble Lord’s, my view is that, on leaving the EU, the UK has no greater liability to contribute to the annual pension bill that someone leaving a club would have to contribute to the pensions of past and present employees. The nationality of these employees is immaterial. Even if the UK were to make an exit contribution based on the proportion of UK nationals employed, and if the EU’s calculation of a total actuarial ability of €63.8 billion is right—the Bruegel Institute puts it much lower than that—it would not amount to more than a handful of billion euros.