New challenge for EU: how to set big hole in budget after Brexit

7 years ago - Published in Finance, Fundamental Analysis

The European Union faces a 20-billion-euro hole in its annual budget due to Britain’s withdrawal and rising costs in issues such as defense, EU Budget Commissioner Guenther Oettinger said Wednesday.

Oettinger warned that the U.K.’s departure, expected in 2019, will blow a hole of €9 billion to €12 billion in the EU’s roughly €150 billion annual budget.

“We won’t have the UK with us any more, but they were net payers despite the Thatcher rebate, so we will have a gap of 10 to 11 billion euros a year,” Oettinger told a press conference as he unveiled the commission’s proposals for the budget.

Oettinger wrote separately in a blog on the proposals that “at the same time we need to finance new tasks such as defense, internal security… The total gap could therefore be up to twice as much.”

The EU’s budget is set forth in a multi-annual financial framework, with the most recent totaling about €1 trillion over the years 2014 to 2020.  The annual budget, of between €140 billion to €150 billion a year, has represented roughly 1 percent of the EU’s collective GDP, with 80 percent financed directly by EU countries.

The German commissioner said that the EU could, after Britain leaves, save money by eliminating all rebates enjoyed by a number of other countries.

But it would have to take further measures, he said. “I am ambitious and realistic,” he said. “The Brexit gap will be financed by a mix of cuts, shifting expenditure, saving, and some new sources of money.”

The reflection paper does not specify how the EU should fill the budget hole that will be left by Brexit. But Oettinger did not rule out trying to end national rebates to EU contributions. At the moment, besides the U.K., countries such as the Netherlands and Denmark also pay in less than they should, according to the EU’s formula for assessing budget contributions.

As part of Brexit negotiations that began this month, the EU 27 are demanding that Britain pay an exit bill of up to 100 billion euros to honor commitments made while it was a member.