Examination of Witnesses
Jorge Núñez Ferrer and Zsolt Darvas.
Q34 The Chairman: Good morning, Jorge Núñez Ferrer and Zsolt Darvas, from CEPS and Bruegel respectively. Welcome to the EU Financial Affairs Committee evidence session on Brexit and the EU budget. I have to go through some administrative things before we begin. Thank you for agreeing to give evidence to us today for our inquiry into Brexit and the EU budget. As you know, this session is on the record and we will take a verbatim transcript of proceedings, which will be published in due course. You will of course have the opportunity to correct any minor errors or misunderstandings. I should also say at this point that we of course understand that you are speaking in a personal capacity and not on behalf of your institutions per se, although you represent your institutions. Is that correct?
Zsolt Darvas: Yes.
The Chairman: Thank you. I should have asked earlier whether you would like to make any opening statements, or should we just go straight into the questions?
Jorge Núñez Ferrer: I am fine. I would like to thank you for inviting us to the Committee. It is a privilege. We will try to answer, to the best of our capacity, these very difficult questions, I have to say.
The Chairman: We are trying to find our way through them. This is a critical issue.
Jorge Núñez Ferrer: I am, too, every day.
Zsolt Darvas: If I may make a few introductory remarks, the questions that we will discuss today are really complex. There is no clear legal guidance in the various treaties and legislations, but I believe that a deal will be reached. A political deal can be agreed between the United Kingdom and the remaining 27 members of the European Union. I have a hope that this deal will be based on common sense and that the common interest will be respected and reflected in this deal.
Lord Butler of Brockwell: Could I just ask what your evidence is for your hope?
Zsolt Darvas: There are two reasons, one related to the EU and one related to the United Kingdom. Concerning the EU, during the recent crisis years, especially the euro crisis, there were major disagreements between European Union member states, including member states of the Eurozone. When Europe was at the brink, a deal was always reached; it was after long, long discussions, but a deal was always reached. Sometimes these deals were significantly delayed, but they always saved Europe and the Eurozone from collapse.
Secondly, I recall Prime Minister Theresa May’s speech last week, which I think was very reassuring. For example, she said very clearly that the UK has a strong interest in the success of the European Union, which was a very clear and strong message compared, for example, to what we hear from President Donald Trump of the United States. I believe that between people on both sides of the channel, at the end of the day, after very tough negotiations, a reasonable deal will be agreed.
Q35 The Chairman: It is all relative, is it not? Bringing up Mr Trump and others, it looks more reasonable. I wonder whether I could take you to how you see the main negotiating aims from both sides and where you think there might be possibilities for compromise on the EU budget. Would you like to start off, Dr Ferrer?
Jorge Núñez Ferrer: Yes. While I am hopeful, I have always thought of the United Kingdom as a very pragmatic negotiator. I just hope that pragmatism remains the ultimate method of negotiation. Of course, if you allow me to be a little worried, for political reasons one seems to be fighting a battle where there is no battle. We are not fighting a battle.
The Chairman: Which side is fighting a battle?
Jorge Núñez Ferrer: At the moment, the biggest battle seems to be based on the UK side. Due to the press pressure on politicians, it is as if there is a battle to be fought. The latest statement from Boris Johnson[1] was not very helpful, but I have to say that some people on this side react in a similar way. I have always held the opinion that membership of the European Union, as with membership of anything, has to be based on being convinced about it; I never like memberships because they have to be. I am an incredible European, but I always considered that this was not the way to go and I still believe it. I just think that there can be a mutually favourable agreement. I hope so. There are ways to have a good position at the end and there has to be political will on both sides to reach it.
There are points of compromise and there will be difficult issues. I am worried about political battles being fought, as we have seen in the past, for much more minor things. The budget is very, very visible. We have questions here. I can go into issues such as the “reste à liquider”[2], the famous French term. I do not know if you want to go ahead or if we should wait for the question, because this is complicated. There are ways to reach agreements on this, but the sensitivity of these issues will be very high and I am worried about it and about the battle of words. One has to find a compromise, and politicians may push us into a corner.
The Chairman: If you could disaggregate the budget a little, where do you think the main areas of contention will be within the budget envelope—MFF, annual, liabilities, the exit bill? Which do you think it will be?
Jorge Núñez Ferrer: The liability issue will be the biggest problem, and the liability results will be affected by the continuation of Horizon 2020, the complete exit of every programme or participating in some things and not in others. That is it. Although the liability itself is a large element of the budget and the costs, it is not tremendous compared to the costs and damages of any kind of punitive response, which may last much longer: in the first year you may lose this, or in five years it could be tripled. This is my only concern: the short term versus the long term, and the need to maintain a movement by politicians who have to show themselves to be strong. The liability will be one of the sticking points, because for member states it is about their own contributions and their own internal quarrels. We do not want dispute inside the EU that put European stability at risk.
For me, Brexit is very painful, because I have always been extremely attached to the UK. I have studied there and my son lives there, so it is quite personal. There are many ways in or out, so this is not the issue. I do not see it at all clearly at the moment, and the negotiation time is very, very short. It is possible, but I am worried that the negotiation time will go so fast.
The Chairman: We will come to time constraints.
Zsolt Darvas: A key priority for the EU is trying to preserve the integrity of the current multiannual financial framework as far as possible. It could also be in the interests of the UK to agree to that, supposing that the UK leaves the European Union somewhere in 2019, so one and a half years before the end of the framework. From member states, especially countries that are receiving huge net payments from the EU, I hear voices that really want to push for keeping the current multiannual financial framework, as it was agreed. There are also some commitments for future years, and how to settle those will be a further issue: how to settle pension liabilities and how to divide European Union assets. One of the key priorities for which a reasonable compromise needs to be reached is to agree to continue the current multiannual financial framework.
The Chairman: We are going to explore that in slightly more detail. If the United Kingdom is not legally bound to pay after its exit, when it ceases to be a member of the EU, do you believe that there is any will on the part of the remaining 27 to stick to the lines of the MFF and to make it up through additional contributions?
Zsolt Darvas: I think that unlikely. Countries that are net payers to the EU, including Germany, the Netherlands and Denmark, already have major complaints and problems with how EU money is spent. I do not think that the parliaments and governments of these countries would be in a position to say, “Look, we should pay even more because the UK has left”. In that case, if no agreement is reached or the agreement excludes UK payment after its EU exit, the budget will be scaled back. This is my expectation.
The Chairman: Is that also your expectation, Dr Ferrer?
Jorge Núñez Ferrer: Yes. My concern is that 2020 will be the most contentious year, because it is the year when something will be missing or not missing. It is manageable, but the actual budget will probably have to be restructured, if that makes sense. I wrote a paper saying that it is not the catastrophe that some people see coming, but it is not easy.
The Chairman: Would the EU not wish to use the exit bill, as we call it, for a final payment by the UK, a one‑off payment, to cover liabilities? Could it not use that to cover the hole in the MFF until the next MFF comes in?
Jorge Núñez Ferrer: The UK covering its liabilities will already do quite a lot to ease the path. It is not a total solution, because one of the issues will be that, over years, to reduce the budget you have to reduce commitments, not payments. Nobody wants to listen to that, so the commitments are always kept and payments reduced. In the end, the commitments are due leading to “reste à liquider” difficulties. If we want to avoid a real shock, we have to look at all the commitments that are around, especially for 2020, from the moment the UK comes out. This would be a problem, but it is not your problem, honestly. Yes, it will help not to have extra to pay. That is certainly true.
Lord Haskins: Do you take this as the biggest issue facing the negotiators, and, if it is, will it be top of the agenda? It seems to me, at any rate, that it is the one issue on which the 27 are all reasonably of one mind. Therefore, is this going to be the starting point to the negotiation?
Jorge Núñez Ferrer: I do not really have an opinion about that. For the moment, I would like to see a strategy from both sides.
Lord Haskins: I am sure.
Jorge Núñez Ferrer: There are many, many issues relating to the exit that are extremely serious. If one looks at the budget, it is very serious from the point of view of the Ministers of Finance. Foreign Affairs Ministers I speak to have other concerns. It is very interesting; speaking to the Minister of Foreign Affairs and the Minister of Finance in Germany is like speaking to two different positions.
The Chairman: They are from two different parties.
Jorge Núñez Ferrer: On top of that, it just makes it a little more complicated. The budget is very visible and will be very contentious. Given the size of it compared to the UK GDP, if one thinks about stability and so on, the cost is obviously relative, but there are other important aspects: the customs union, what to do with borders, what to do with immigration, who is responsible for migrant flows, who is responsible for the different policies, who is responsible for foreign policy issues that are contentious[3]; here are so many. The single market access and banking access are very significant. They will not be on the front page very often. The budget will be on the front page, but it is not the worst of the items. I am not sure if it is going to be at the top of the agenda. It may be the last thing to be done, because the budget has to be agreed and they may leave it to the end, instead of putting it at the beginning.
Q36 Lord Shutt of Greetland: The future trading relationships and so on are surely of great interest to the UK. The UK will be thinking, “Where are things going to be in the future?” even if there are one or two costs in the interregnum. Is there an understanding that that is rather important?
Zsolt Darvas: Europeans will approach negotiations with the UK by having a strategy. I believe that the Commission, Michel Barnier’s team, will prepare a draft outline, which will be discussed with the Heads of State or Government. This will cover a range of issues.
The Chairman: When do you expect this?
Zsolt Darvas: I am sure they are working hard on that. The United Kingdom first has to trigger Article 50, and after that negotiations can start. The strategy will probably not be completely public, because negotiations are by definition negotiations, so they have to agree and reach compromises, but there will be the broad package that will be offered from the side of the EU in line with or in response to what the UK wishes to achieve in respect of the European Union. Prime Minister Theresa May set a number of key guidelines in her speech last week, so some issues like EEA membership can be excluded. Some things we can exclude already.
First, the UK will have to specify what kind of trade relationship, what kind of security and defence co‑operation, what kind of research and university co‑operation, what kind of free trade agreement, what kind of co‑operation in financial stability, things like that, it would like to reach with the European Union. What kinds of controls on immigration does the UK plan to impose? When the UK has set its key priorities in response to that, the other 27 European leaders will be able to design a comprehensive strategy for how to respond, including the various issues on which compromises can be reached. The budget will just be one of the many issues.
I agree with you that the budget is very visible, but in my view it is by far the least important. Much more important is what kind of trade relationship will be reached, whether financial service providers based in the United Kingdom will have any kind of equivalence regimes or even passports to offer services in the EU, and what will happen to immigration. What kinds of restrictions will you have? These are far more important issues than the budget, but clearly the budget is also important and will be part of the deal.
Q37 Baroness Liddell of Coatdyke: I know that you are both economists and it is a bit unfair to land you with a debate that we have been experiencing as a consequence of conflicting advice from lawyers. The question is whether the United Kingdom is legally obliged to contribute to the MFF after 2014-20. Would it be in Britain’s best interests to contribute? As we have taken evidence, that has emerged as the area where there is the clearest difference of opinion. Now, both of you are steeped in how the EU functions. Do you have a view on that legal necessity to contribute?
Zsolt Darvas: Indeed. I am an economist. I have to say that I followed some of the previous hearings and I found María-Luisa Sánchez-Barrueco’s point especially useful. As I said, I am an economist. I read all of what she said and I think she has a clear point: Article 50 says that all EU laws cease to apply to exiting member states. That has a kind of supremacy over all other agreements, so in a strict legal sense I can agree with her view that there will be no formal legal obligation on the side of the United Kingdom to continue to contribute to the budget.
She also said, and I very much share this view, that is it in the best interest of the United Kingdom to have good co‑operation with the remaining 27 members of the European Union, not least because geography remains. Even if the United Kingdom leaves the EU, it will be very close. Whatever relationship is agreed, continental Europe, Ireland and the United Kingdom will always be very important partners with each other in trade, finance and the movement of people. Establishing a friendly relationship, after a friendly divorce, is very much in the interests of the United Kingdom.
Jorge Núñez Ferrer: I did not read her analysis, but I went through many position papers. I know they say that only while you are a member there is a commitment, and therefore it is gone when you leave, but it is the same with the assets. What is a member’s responsibility after it leaves, if it cancels the legal obligations? Is the UK a shareholder? No, it is not a shareholder. Is the EU an international organisation? If so, this completely changes the asset ownership. This applies to the assets. Does it have a share or not? These things are not clear from everything I have looked at. I see the numbers, but I do not find specific clarity on this.
On the other hand, when a member state joins the EU, to be fair, it joins and it has to contribute to commitments also from when it was not a member. Of course, it signs up to be responsible, it is really an accession position.
My main concern is from the point of view of the UK’s interest: is it in the interest of the UK to make such a visible conflict so that member states have trouble with their own political situation? Is it good that the UK has an unstable neighbour after the negotiations? This is my greatest question. The responsibility is on both sides, because if something is not well here it does not help you either. That is my real concern: it is the mutual interest in stability. I feel that we are moving into very unstable times.
Q38 Duke of Wellington: We as a Committee are particularly interested in the budgetary part of this very, very complex negotiation, of course, and your views as to whether it is the most important or least important part. Unfortunately, in the end, financial settlement probably becomes the most important element in any divorce, however good the arrangements are about custody of the children and all that sort of thing. We are here to consider only the budgetary point really, and there are two parts to that.
As Zsolt Darvas has said, there is the multiannual financial framework, which is a seven‑year agreement. You answered the question as to whether we are in fact committed, beyond the moment of exit, to the remnant of that programme until its completion, but then there is the question of the annual budget. I think it was you who said very clearly that there are two parts to the annual budget: there is the agreed budget for the succeeding year, and there are the commitments in a separate column. I declare that I was formerly a Member of the European Parliament and I remember exactly what you say: that people would agree the commitments more easily than they would agree the payment due in the following year. Of course, as a result, a huge amount of commitments are entered into without quite the rigour of scrutiny that is applied to the actual payments in the following year.
We as a Committee come back to the question that we are getting conflicting advice about. To what extent, having participated, as members of the Council and British Members of the European Parliament, in the process of establishing the annual budget and its contained commitments, do we then have an ongoing commitment to fund our share of the commitments? It is just not black and white yet, as far as I can see. I would like to know your view.
Jorge Núñez Ferrer: I went to a lawyer for this and I got a very complex answer, which practically is just that “we will have to think about that”. People will say that the annual budget is agreed in the Council with unanimity. A member may claim that “We were forced”[4], but the point is that the budget is agreed by member states in the environments they are voting in, so one can see that to some extent obliges a country to reach an agreement. However, it is not written in black and white anywhere what the consequence for the commitment is when a country leaves the commitment. In the end, everything that is not written is negotiable. This is how I see it. Someone might come to me saying, “Our problem is that they are leaving too early”, because the Treaty allowed leaving and the UK actually started it; and nobody had actually prepared documents to decide what that[5] meant.
Duke of Wellington: Your compatriot, Dr Sánchez-Barrueco, told us last week that in her opinion the minute we leave, any possible implied commitment that we have made financially dissolves. That is her view.
Jorge Núñez Ferrer: I leave it to lawyers. I am not a lawyer. I am a political economist thinking about the stability of the pound, the euro or whatever. There are all these strange negotiations. I have been in the Commission, working in a cabinet, sitting in councils, and I have seen miracles happening that were absolutely impossible just a few months earlier for eminent legal experts. Luckily, there always seems to be a way to wiggle out of problems. Yes, she is right, but then the unanimity agreement in the Council is also right.
The Chairman: I wonder whether, Dr Ferrer, I might just be clear about whether what you just said is a fact. You said that the annual budget is agreed by unanimity. Our understanding was that the annual budget is agreed by QMV but the MFF is agreed by unanimity.
Jorge Núñez Ferrer: I have caused some confusion, sorry. It is the annual budget
The Chairman: Is that correct? Is it QMV for the budget and unanimity for the MFF? Thank you.
Jorge Núñez Ferrer: I was carried away by emotions, I apologise, thought it was unanimity.[6]
Duke of Wellington: There is a supplementary to this question, which is this. In the event that there should be disagreement, which legal jurisdiction do you believe it would be resolved by?
Jorge Núñez Ferrer: The unpleasant answer is that whether you are a member of the European Court of Justice will make a difference. If not, there are international arbitration solutions. It does not look good.
Zsolt Darvas: I subscribe to Dr Sánchez-Barrueco’s view that, as the UK will have left the EU, the European Court of Justice will no longer have the authority to make decisions concerning the UK. Then international law comes into play, where enforcement and settlement are very slow and very difficult.
Referring to your earlier question, even though it is a difficult question legally, there is a possibility that no deal will be agreed and the UK will depart without an agreement. Then the lawyers can start their work on both sides of the channel. I regard this mostly as a theoretical possibility.
As I said, there is a political dimension to it and there will be a very strong political interest from the United Kingdom to behave as a responsible partner. Indeed, as the UK made a commitment in the seven‑year multiannual financial framework and then, in the meantime, decided to leave one and a half years early, common sense would suggest to me that the UK should continue to contribute its own net share—not the gross, as some sources have implied, but at least the net share—the UK would have paid anyway to the current multiannual financial framework.
Jorge Núñez Ferrer: It also goes the other way. The EU has programmes to pay for the UK, which are committed and are running, in Wales and elsewhere, which would stop. In net, it benefits the Treasury, I think.
Lord Desai: Have countries always paid what they were committed to, or have they haggled and quarrelled? We quarrelled about the rebate. We more or less threw a big tantrum about the rebate. Have other people always paid up like good boys and girls?
Jorge Núñez Ferrer: All countries have paid out, but when one reads the annual budget corrections and movements, and the debates in the annual budget, frankly, one can see that paying willingly has not been the rule but rather the exception. It was fine until the financial crisis hit. Before, the annual budgets were boring. I never had to deal with them. Then the financial crisis hit and every three months a quarrel appeared on my desk, which was really surprising for me. Yes, member states are not particularly keen on paying.
There are a lot of reasons why member states do ultimately pay. When you look at the financial flows, the dimensions of the interaction between the Netherlands, Germany and France are even bigger than for the UK and the rest. There is much greater pressure, and there are historical reasons for that. At the end, all say, “Okay, we agreed on the multiannual financial framework, so let us be done with it”, but it is not on very happy terms. There are also a lot of fights with the Commission on the calculations of the annual payment requirements. Member States always say they are too high, the Commission reduces them, but in the end everybody has to pay more because the commitments are too high. The Commission normally even underestimates them, so they are always the wrong figures[7].
Q39 Lord Haskins: Dr Darvas, at the beginning you said that the budget is important but the ongoing relationship is much more important. Both of you identified a confusing legal position, to say the least, about the budget. Tactically, on both sides, we must not make too much of this legal uncertainty. That has to be settled. If that is still hanging over the other negotiations, people are going to hold back. I come to the conclusion that this matter must be settled in a political business-like way, and not left in the hands of the lawyers, to enable the other issues to be dealt with. Until this is behind you, what is going to happen in the main negotiation is always going to be in the back of people’s minds.
Zsolt Darvas: I very much agree with this view.
Jorge Núñez Ferrer: They will see it coming.
Lord Butler of Brockwell: I disagree with that view. Is the legal position not reasonably clear? It was as stated by our previous witness, whom you quoted. There is no legal obligation. However, it may well be in the political interest to overlook the legalities and to reach a sensible political statement. Does that not mean that nothing will be settled or agreed until it is all agreed and final?
Zsolt Darvas: Political agreement between all 27 countries and the UK can be made that they regard the current multiannual financial framework as a joint commitment and express their views to continue with it.
The Chairman: Would it be helpful if that happened early on?
Zsolt Darvas: Maybe they can make conditional overarching deals on immigration, trade and financial services, but I would expect political declarations to be made between all the current 28 Heads of State or Government.
The Chairman: From your perspective, what would be the optimal time for this political declaration?
Zsolt Darvas: I am not a negotiator, so I cannot really advise on tactics. I can advise on the big picture, where I see that a comprehensive agreement has to be reached. If the UK unilaterally offers some concessions or some positive declarations to the EU, that can help to secure a similar positive view from the other side.
Lord Callanan: Why would we agree that unilaterally? It is a negotiating card that we would trade in exchange for other things, I would guess, in the negotiations.
Q40 Lord Butler of Brockwell: Could I take a particular area of expenditure: pensions? We are advised that the relationship on pensions is that it is an obligation not of the member states but of the EU and its employees. This is done on a pay‑as‑you‑go basis from the annual budget, but the payments are guaranteed by the members. The question is whether the UK, after leaving, has any obligation as a result of the guarantee. It seems to me that these are annual payments guaranteed by the existing members, not by former members, and that the nationality of the employee is irrelevant. It seems to me, perhaps more than as a matter of law, that this is no longer the business of the UK once we have left and that there is no liability in respect of pensions.
Zsolt Darvas: In my view, it relates to the more general question of whether Article 50 will terminate all kinds of UK liabilities. As I said, I share this view, but on this particular issue common sense suggests that since there are a number of UK employees and UK citizens in European institutions, and many of them are already pensioners, there is an interest on the part of the UK not just to leave this liability to the rest of the 27 but to calculate what is a fair share of the UK’s contribution to the pension liability and to pay that.
Lord Butler of Brockwell: Is that a good-will gesture?
Zsolt Darvas: A good-will gesture is one thing, but these people are UK citizens. If the UK walked away, the rest of the 27 would pay the pensions of these UK citizens. Some of them may seek Belgian citizenship or whatever, but I think the rest of the 27 will still pay for these UK citizens. Again, common sense suggests that as the UK was part of the EU for more than 45 years and many UK citizens work for European institutions, it is more an obligation for the United Kingdom to take care of its own citizens who worked in the EU, on the basis that the UK was a member of the European Union.
Lord Butler of Brockwell: How would that contribution be calculated?
Zsolt Darvas: It is very difficult[8]. Again, I followed what Professor Iain Begg said to you earlier. You can look at the current share of pensioners, the current share of UK employees and the general UK share in terms of contribution to the EU budget. In my view, the fair option would be to try to calculate how this liability related to UK citizens working in EU institutions, either if they have already resigned or become pensioners or if they will become pensioners in the coming years. Economists will be able to calculate that, and I would regard that as a fair contribution on the part of the United Kingdom.
Lord Butler of Brockwell: Would you expect that to be a one‑off actuarial capital payment or an ongoing contribution to the annual budget in respect of those UK nationals?
Zsolt Darvas: In economic terms, the two options are equivalent. I think that political discussions will determine the most suitable option.
Jorge Núñez Ferrer: The question of whether it is a one‑off payment depends to a certain extent on the outcome of the final agreement, in the sense of what the UK will be participating in afterwards. If there is a contribution to be part of Horizon 2020 and suchlike, they might say, “We will handle this pension issue on an annual basis”, which reduces the immediate payment. In the end, it will also be clearer, because it will be based on real numbers; it will not be over or underestimated. That will depend on how well other issues are agreed and if Horizon and others are settled, so I suppose there is some flexibility on that, based on the actual participation in current programmes. If there is absolutely no participation, there will have to be a settlement. In the worst case, the agreement will be, “handle it yourselves”, which will lead to litigation, or there will be a one‑off payment that is calculated on the basis of different factors.
Lord Desai: I want to follow on from that. As you said, there are important issues, but the budget is the headline. It is equivalent to either capitalisation or treating it as a flow. Capitalisation of the liabilities would cause immense problems in terms of PR. If someone said that £60 billion had to be paid, all hell would break loose. The Government might be compelled to walk away. They might say, “It is nothing like that; it is a flow of X hundred thousand pounds”. There is also a technical problem there, although I agree that it is equivalent. What is equivalent for economists is very emotional for the rest of the world.
Zsolt Darvas: I agree. For general communication with the public, it would probably be easier to tell them, “There are some UK citizens and pensioners in the EU. We pay for that. We have university co‑operation, Horizon, Erasmus and so on. We pay for that”. It would be easier to communicate to UK citizens, instead of a big bill of several dozen billion British pounds.
Jorge Núñez Ferrer: There is one consideration in what you say. It may also be linked to the treatment of pensions and rights for other citizens. There are many British pensioners in Spain. It is part of their treatment too. Even if they have made the mistake of working for the institutions, they are still UK citizens. They are also UK pensioners. There may be an issue that is linked to their treatment generally.
Lord Butler of Brockwell: If I may make one comment on that, in political terms it matters how big this liability is. Of course, an important part of the political argument of those who wanted to leave the EU was that we pay large sums of money to the EU, which we will stop paying. If these annual payments added up to something very substantial, for example on the scale of Norway’s, that would be politically very difficult in the UK.
Q41 Lord Shutt of Greetland: Liabilities are one thing. Can we turn to assets? In most divorce settlements, it is useful to put the assets to one side and see how to share them out between the parties. There are plenty of assets; there are assets in this town and the Brits have been paying in for 40‑odd years. What do you believe? Who owns these assets? What part does the UK own and how can its share be calculated? Is anything set out in the treaties on any of this?
Zsolt Darvas: This is just a number: the consolidated annual accounts of the EU for 2015 indicated that the assets of the European Union amount to €154 billion. Now, the EU is an international organisation and has a legal personality, so I believe that the assets are owned by the EU. Referring back to Dr Sánchez-Barrueco’s view, in strict legal terms, after Article 50 is concluded, there will be no liability and no claim from the side of the UK. Again, I expect a political agreement. Since the UK paid in for more than 40 years and the UK was a net payer to the European Union budget, I expect that some of these assets will be appropriated. The big question is how to do that.
The Chairman: It is how we apportion it.
Zsolt Darvas: Yes, I apologise, I wished to say “to be apportioned”, not “to be appropriated”. The big question is what the guiding principle should be. It is also made complicated by the fact that countries joined at different times. There were six founding members and there are currently 28, so different countries joined and started to pay at different times. Moreover, there is the big complication that some countries have always been, or for the most time were, net contributors, while others are net recipients. For example, Greece has received 2% or 3% of GDP in net payments from the EU each year. When these asset discussions take place, both the net and gross total contributions will be calculated at present value terms, because the value you paid 20 years ago is a different value from the one you pay today.
I think that both the gross and net contributions will be considered and, based on those, the hypothetical share of the UK within these European Union asset holdings will be calculated somehow. Even though, as I said, there is no legal requirement for the EU to pass some of these assets to the UK, I think they will be part of the final settlement, because common sense would suggest that. If the UK continued to pay for UK pensioners in the EU and the multiannual budget, it would expect to receive some of the assets that it has contributed to.
Lord Shutt of Greetland: In these circumstances, you would expect that if the UK is paying 12% of the budget, 12% of €154 billion will be €18 billion or so. Is that the sort of figure that you have in mind?
Zsolt Darvas: Broadly, yes, but I would also consider what the net contribution was. Again, Greece has not paid anything back to the EU, while the UK, Germany and Netherlands have paid the largest share of GDP and in terms of nominal amounts. It is difficult for me to say that Greece would have the same claim.
Lord Shutt of Greetland: It could be a higher figure than €18 billion.
Zsolt Darvas: Yes[9].
Jorge Núñez Ferrer: I agree that it is an issue. These are assets and liabilities, and the liabilities are bigger than the assets. Both will be settled politically.
Duke of Wellington: The figure of €154 billion strikes me as very large, and I am just interested to know what it is made up of.
Zsolt Darvas: I have a nice chart.
Lord Desai: Is it too large or too small?
Duke of Wellington: I am surprised at the size of it.
Zsolt Darvas: Some 37% is in various kinds of loans, and 6% is in assets available for sale. There are also large cash equivalents, at 40%. Some 26% is in pre‑financing, which means that part of the budget has been paid in but has not been used so far. There are also some smaller items but, altogether, property, plant and equipment are only 6%. The buildings of the European Commission, Parliament and so on take a very small share.
Duke of Wellington: Thank you. That was the point I was trying to establish.
Zsolt Darvas: I do not think the EIB is included here.
The Chairman: There is a 17% shareholding of the EIB. I wonder if it would be possible for you to send that to us, so we could have a more detailed look at it, please. I also wonder whether I might ask you if you could stay on for a little, beyond 10 o’clock, because we are only getting into our stride and we still have some time. We theoretically only have nine minutes left. Thank you very much.
Q42 Lord Desai: We have already been talking about this question, which is about other payments such as research and infrastructure. You mentioned Horizon 2020. Do you think those will continue? Will there be arrangements whereby Britain continues to contribute to research programmes or academic programmes? Would that be part of the settlement?
Zsolt Darvas: I think so. There is a very strong interest from the UK and the EU to co‑operate on those issues, so I expect that they will reach agreement on that.
Jorge Núñez Ferrer: I agree.
Lord Butler of Brockwell: There is a distinction here between commitments already made and agreements to grant research programmes, and research co‑operation in the future, which is not agreed. I imagine that for the first ones, the ones that are already committed and not paid, the answer is the same as the one we discussed earlier: the reste à liquider. Future arrangements could just be agreed between the partners, as a matter of mutual co‑operation between friends.
Jorge Núñez Ferrer: If one looks at the case of Norway, the important thing there is not only to be involved. This is why a harder or less hard Brexit matters. The UK’s participation in Horizon 2020 has been very good. From the point of view of net balance, in terms of the share of contribution, looking at the budget for research in isolation, the UK is a net beneficiary, like Sweden. Norway benefits greatly from participation. It is important also to be able to lead the projects, to be at the top and have a lot of influence. Losing that would be very unfortunate for anybody.
The Chairman: Is that from the UK perspective or the EU perspective?
Jorge Núñez Ferrer: From the UK’s. It would be bad for the EU, but the difference is that if the UK is out and becomes a country like some other third countries, it would be possible for it to do research but the lead and the drive has to come from an institution in the EU. That would be very unpleasant for all the top research institutions in the UK. The idea is to be able to lead, to fully participate, which is possible, as Norway shows. This would be very interesting, at least for the scientific community, and it would also be a way to calm down this enormous acrimony that I see between the research institutions and the Government, which floods my Twitter account. It would be good to find an agreement on that, calming everybody down, because it is important. It is make or break for some institutions and research centres.
The Horizon 2020 project has been very important for financing a lot of the hard expenditures. Many universities have a strong dependency on this programme for their expenditures on machinery. Science budgets are huge for advanced countries, these are paid by Horizon 2020. They depend on it very much, and they also lead a lot of these projects, so it is really worthwhile. That is my point.
Q43 Lord Haskins: I have two questions. We are told that the United Kingdom will be out by March 2019. That means that a budget will be created for 2019‑20, which will be 12% short, and that the negotiation will take place during 2018, i.e. next year, in the middle of the negotiation to get out, which will not create a huge amount of good will in countries that will suffer from the 12% reduction. I think we have been told that there might be a case, even if we came out in 2019, for continuing to make our contribution until 2020, because of the MFF and the timing of that. The second question is this: how will the EU restructure the budget, having lost 12% of its income?
The Chairman: You were involved with the high‑level group, were you not?
Jorge Núñez Ferrer: Yes, I led the background report for the high‑level group, which did everything except say what resources to use, because this was the smallest of the problems in the end. There was also very little Brexit part to that—practically nothing. It was more about the principles. This is going to be an extremely difficult year, and I hope to survive the next two years, because we have the negotiations on MFF in parallel with Brexit negotiations. It is going to be extremely difficult and very unpleasant, and it will create a lot of tension between the 27. How the reduction will be handled is a question of political will. We will also see how the economy is going, to what extent relationships go on with the other side of the Atlantic, and how much member states are ready to say, “Okay, we will sit tight and get this sorted”.
It is true that the budget will need a certain redirection. One item that comes back to the table as one of the questions is the resources issue. Will member states now decide that - for a certain percentage - it makes sense to use some mixture of carbon taxation and maybe something else so that the actual transfers from the treasury are not so big, and then shift pressure away a little, rather than having these large GNI-based transfers? Debates are more emotional than practical, but there are ways to handle this. It may become interesting for Germany and others to take a bit away. If half or one-third of the budget is paid in another way, it does not make the budget more or less large, but it changes the number.
Lord Haskins: It is presentation.
Jorge Núñez Ferrer: Yes, there is a large difference between looking for VAT transfers in the public accounts in the different member states and looking at the actual GNI transfers. We should not forget that member states have to increase contributions to the EU budget in conjunction with an increasing number of problems with the borders. The EU has to create some order in the house concerning the external budgets and the satellites that are appearing: refugee funds, Africa Trust Fund, and all these funds that are appearing everywhere. One of the ideas is to bring coherence to the budgets, and I have been asked to help in working on that. It will not help if member states focus and cut only what is in the little box of structural funds and agriculture.
The other possibility is to make agriculture co‑financed. That will probably be on the table. It could be on the table because France is no longer a net beneficiary of the CAP. That would be a very easy solution, but financing will then have to find another logic.
This was one of the main parts of the report, which said, “Why do we not, as with the structural funds, base support on the fiscal capacity of financing this policy, which is a European policy and is in the interest of certain countries? Like the structural funds, we can base it on solidarity, and then some countries will get more money and some less”. That would be a solution to unblock the budget, because we do not need a smaller budget in the EU if we want to handle shocks, unless we reduce structural funds and agriculture. I do not see that (reducing CAP and structural funds) being done in one go. The bill will come in one go, but I do not see support for farmers being cut by 30% in one year. The financial mechanism can change first, but not the actual expenditure. That is my opinion.
Zsolt Darvas: Let me add a few thoughts on that. Brexit is a great opportunity to reform the European Union budget for the future. In many of the net payer countries, there is a very strong view that the EU budget is extremely inefficient. Both the common agricultural policy and the structural and cohesion funds are spent in an inefficient way. We conducted a study in which we looked at more than 50 research articles and papers and tried to assess the impact of EU cohesion and structural spending on Greece, Portugal and new member states. There is no clear evidence that it led to much improvement of productivity and growth in these countries. The evidence on the effectiveness of EU spending is weak, but there is widespread recognition, at least from the net payers’ side, that the budget is extremely inefficient. Brexit is a great opportunity to make deep reforms there.
I will also refer to a public event that we had recently with Mr Jens Spahn, German State Secretary[10]. He said very clearly that the EU budget currently focuses on the challenges of the past while we now have different challenges, such as migration, defence, security issues. He called for big reforms to the EU budget. Cutting by 12% is one issue, but a more important issue in parallel with the cut is reorganising expenditures. I agree with you that it cannot be done overnight, but there is a desire across a number of strong member states to look at that issue. Again, since the negotiations for the next multiannual financial framework will probably be contaminated with Brexit negotiations and EU budget contributions from the UK, it will be very difficult to do many things at the same time, but I would like just to emphasise that this is a great opportunity to reform the European Union budget.
Lord Haskins: Would it not be possible, referring to the first question, for the UK to end membership but to continue an obligation to the budget for a further 12 months? Would that help significantly?
Zsolt Darvas: Reforming the EU budget is a long‑term issue.
Lord Haskins: You would not do it until next year.
Zsolt Darvas: How to secure the rest of 2019 and 2020 is an important issue, but even more important is what comes in the next seven‑year framework and after that.
Jorge Núñez Ferrer: For me, it is important that this multiannual financial framework finishes as unaffected as possible, for the simple reason of being able to focus on having a transition that makes sense. I would just say to the UK, “Please help me”, because I will have a very difficult time as a researcher. If the UK does not participate in the last year, my work will become really unpleasant. It is already complex enough; there are so many issues.
In the last year, it would be good to finish this multiannual financial framework without too many shocks, because annual adjustments are so much more difficult. It is true that the EU faces the need to change a lot of things. I am not so sure that it can be a cheaper budget, but the real question is to ask is whether it can be a relevant budget. The budget has lost relevance now, but it was stuck, and it was stuck in advance of these discussions.
Q44 Lord Shutt of Greetland: On the one hand, we hear about those countries being worried about the loss of funds and so on. Then we hear that perhaps the UK could be involved in certain programmes, such as programmes concerning universities. How is the UK assured, in such circumstances, bearing in mind the contamination of the lost funds overall, that there will be a fair share of these pooled funds for universities?
Jorge Núñez Ferrer: The UK has benefited. In looking at the share of the UK’s contribution, if one takes the share of research there is more money coming in than money paid. If there was only a research budget, the UK would get more money, because 95% of the funds are accumulated in 13 countries. What matters is where the big machines are, not where researchers are located (such for social sciences), often quite cheap personnel in central and eastern Europe. The real installations, the big parks with radars and so on, the physics facilities, are in the more advanced countries. The UK is amongst the best in that.
If one looks at Norway and the way they do it, which is written in some documents I found, the contribution is not direct to the budget. It pays in, but the agreement is much more controlled. Under the agreement, Norway is financing parts of Horizon 2020, but its relationship is a bit more controlled from their side.
The Chairman: It is also paying into cohesion and structural funds.
Jorge Núñez Ferrer: It pays, but again not directly. The money does not just go into the structural funds that the EU manages; it is more a question of participating. It has a fund that it uses to fund structural operations together, so there are ways to do it.
Lord Shutt of Greetland: Do you think that it will be a discrete fund and not be influenced and polluted by problems elsewhere?
Jorge Núñez Ferrer: It is not transferrable to other operations. It is not that one pays and then some of the money goes into agriculture, because it is really a purpose‑built fund. You can see with other countries such as Norway that there are special arrangements, and the money is used for that programme and not mixed with the rest of the budget.
Zsolt Darvas: I also looked for data on the contributions of Norway, Switzerland, Iceland and Liechtenstein. It is very difficult to obtain, so I contacted the EU budget, and three weeks later they sent me a very nice table showing exactly how much these four countries contribute to the EU, how much they receive as expenditure from the EU, and therefore the net transfers with the EU. Then I compared these net transfers to some existing member states and I found that, euros per capita, Norway paid even more than the United Kingdom. Norway paid €115 per capita while the United Kingdom paid €79 as an average over the past seven years. The UK paid a little more than Norway as GDP, but what is key is that Norway and the United Kingdom have paid more or less the same amount, whether per capita or as GDP.
Now, Norway has a different relationship, because Norway is a member of the European Economic Area and certainly some of its payments are related to that. We have learned that the UK does not wish to be part of that arrangement, so in the future I would expect lower payments from the UK than Norway’s current payments, but I still imagine that European Union countries would demand a significant contribution from the United Kingdom.
Q45 The Chairman: Thank you. We are familiar with those tables and that argument. Very briefly, because I am conscious of time, could I just ask you to add anything else to the list of interests that the UK might have in maintaining single market access, if you have any other comments? Are there other areas where the UK might be able, to put it very crudely, to buy in access through contributions that it might make to things of particular concern or interest?
Zsolt Darvas: There are a lot of European and global value chains between the continent and the UK. If somehow the smooth flow of intermediate goods and services is hindered or barriers are created, that would cause great harm. There would be a great interest from the UK to preserve as much access to the single market as possible.
The Chairman: Could I be more direct and lead the question a little? Looking at an attempt to get equivalence in financial services, do you see that as an area where we would not accept the jurisdiction of the Court, so in order to have equivalent and common standards the UK might come to a deal on access to financial services, passporting, et cetera? Is that your area of competence? If it is not, we can move on.
Jorge Núñez Ferrer: I had a meeting with banks, not general financial services. Banks are very worried. They see the situation as very grave. They do not think it is going to be easy. We have a financial analysist in CEPS, listening to them all the time. From a political point of view, if one takes hard decisions for the UK, one of the points is that the main interest for Frankfurt, Paris and others is to get a bigger share of the cake. Financial services are going to be a very, very difficult issue, and it is not looking good from the point of view of the UK, although I am not an expert on that.
Zsolt Darvas: Several European Union leaders from the 27 express that the four freedoms are indivisible. It depends how we interpret that, because the UK still wishes to have freedom of goods, at least. If the UK wishes to impose controls on immigration by European Union residents, that will have a price. The price will be that agreement on financial services will not be as comprehensive as many financial firms in the City wish to have. Therefore, I expect that a number of activities will migrate from the City of London and other UK‑based financial centres to the EU 27.
Q46 Lord Skidelsky: I want to ask a question about the European Investment Bank. Presumably when the UK leaves the Union, it will no longer be a shareholder in that bank. If that is the case, it will presumably have to sell its shares. Are the shares quoted? Do they have a public value? That is the first question.
The second question arises from something you said earlier, which is that you thought that our leaving, Brexit, may give an opportunity to revise the budget and make it more efficient. Is the EIB efficient? Does it do what it was set up to do? Will the UK leaving it shake up its view of what it does? I would like your views on that as well as on the first technical question as to what happens to the UK’s shares when it leaves and therefore what happens to the programmes that it gets from the EIB.
Zsolt Darvas: In my view, separating EIB‑related issues from the general EU budget will be easy, because the EIB is a separate legal entity. It has shareholders, including the UK as one of the four largest shareholders. Settling EIB issues, or at least the negotiations for that, will be easier than other current and future financial commitments. The treaty clearly says that shareholders must be member states. That can be changed. Every treaty can be changed, so if the UK expresses its interest to continue to be a shareholder of EIB, there would be a political discussion between the member states.
Lord Skidelsky: It would be possible.
Zsolt Darvas: If they changed the treaty, yes. Certainly changing the treaty is possible. If the UK withdraws, many new treaties will have to be ratified. Adding to that would not be that difficult. My answer is that it would be possible if there was a political deal from the 27 and a political interest from the UK.
The more general issue of whether the EIB is working well and whether it is up to the job it was tasked to do is not one that we could assess in a one or two‑minute response. I just have the number that, in the last three years, the EIB invested £16 billion in the United Kingdom, which is a relatively large amount of money. I also did some research on assessing how the EIB invests and I found that it has a reasonable strategy. It invests more in larger countries. It invests more in countries with lower GDP per capita, so where more improvements and convergence are needed. It invests in countries where the unemployment rate is high, so where the economic situation is direr. It never discloses the principles of how it allocates an investment across countries, because there will always be discussions, but I did some simple economic guesstimates and I found that these three key principles are followed by the EIB in practice, which sounds reasonable to me.
On the other hand, I also hear many voices saying that the EIB is a very cautious investor. It cares a lot about its AAA credit rating and quite frequently invests in projects that could be funded by the private sector, because they are not so risky. If you look at the big picture, the allocation of EIB funds across countries is reasonable, but one may always ask whether the EIB is undertaking sufficient risk and focusing on projects that otherwise would not happen.
Jorge Núñez Ferrer: This is a question that I have to answer this afternoon, so I have prepared for this question for two committees in the Parliament and here. Many people criticise the EIB. I am, in fact, worried that the EIB has a political mandate to reach €315 billion. That puts on pressure on collecting projects.
The EIB is an investment bank, which I also wish to remind Members of the Parliament. It was not designed to be a development bank. If one wants it to be a development bank, it needs a defined structure or a particular body inside that deals with such projects, as it deals with external funding to third‑world countries, where there is a different system to ensure that the EIB’s AAA rating is protected. With EFSI, the EIB is doing what it was asked to do, which is to inject money into the economy through a guarantee system.
Banks tell me that the EIB, although it may have some flaws in relation to also financing good projects that they would finance, has one characteristic that they appreciate, which is the fact that it has a large body of engineers in the project selection department, which bankers do not tend to hire. When it rubber‑stamps a project, all the other investors say, “Ah, this has been assessed”, and they join. The EIB facilitates investors to enter projects. That is what the bankers say. Is this sufficient value added or not? If one says that the important thing is to mobilise funding quickly, this could indeed be additional. Should it be like this in the long term when the economy improves? No, the EIB cannot stay there doing the same.
The Chairman: Briefly, what is your view of the UK’s position vis-à-vis the EIB and its shareholding?
Jorge Núñez Ferrer: I have not found that the UK has such a big problem with the EIB, because the EIB has been quite good at financing projects nationally. Formally, the rules say that the EIB is for member states only, so I thought that we are in big trouble here. But why not change this? It is a separate entity to some extent. Could we open the door to a more regional model? We could to some extent, also allowing Iceland or Norway to join would be good for the EIB. Why not?
Lord Skidelsky: Do you think it would be in the UK’s interest to remain a member of the EIB?
Jorge Núñez Ferrer: Yes, I think it would.
Zsolt Darvas: I would also say yes.
The Chairman: Thank you very much. We have really imposed on you in terms of time, so we bring this session to an end. Thank you, Jorge Núñez Ferrer and Zsolt Darvas, for seeing us today and giving us your evidence. It was most illuminating. Thank you very much.
