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Does the EU Commission want a deal? – John Forsyth

EU Commission
Written by John Forsyth

The EU Commission has interests which are significantly different from those of the member states as a body, and very different from those of certain key member states.

Debate in Britain, both within and between parties, has focused on the negotiating objectives which we should adopt. This has led to a neglect of the analysis of the European position, which is at least as complex as the British debate. Technically the EU Commission has the role of negotiating the terms of Brexit but the member states through the Council also have a role. Historically on major issues, in particular those involving money, the influence of member states, and, critically, of major contributors, has often proved decisive. But the balance of power between the Commission and the Council has fluctuated a great deal. At the moment the Commission is riding high as was demonstrated by Juncker’s success in manoeuvring Selmayr into the position of head of the Commission’s permanent staff, effectively bypassing the Council and Parliament.

This is important because the Commission has interests which are significantly different from those of the member states as a body, and very different from those of certain key member states. Finance is the most important of these, and it is significant that the Commission gave absolute priority to coming to a financial agreement before opening trade negotiations. Following that agreement in January, Juncker put the cost of Brexit to the Commission budget at Euro 13bn per annum and made it clear that this should be met by increased contributions from the member states as it was unthinkable that the Commission’s budget should be cut: this presages very difficult intra-EU negotiations and it must be questionable whether Juncker’s no-cut position will prove sustainable.

However in the absence of a trade deal Brexit will lead to trade on WTO terms. This would lead to losses all round through the distortion of trade but the converse is that there will be an increase of government revenues.  This will be asymmetric both because of the UK deficit with Europe and because of the composition of trade.  Civitas’s estimate (October 2016) is that UK exports to Europe will pay £5.2bn of tariffs while EU exports to Britain will pay £13bn. This asymmetry has been much commented on and should, on the face of it, make Europe want to come to a deal. There is, however, a greater asymmetry as the tariffs paid by European exporters would go to the UK Treasury while the tariffs paid by UK exporters would go to the Commission (minus a 20% collection fee), so that they would make a very large contribution to the Commission’s budget shortfall.

The Commission has three main sources of revenue: its traditional own resources (TOR), which are tariffs and amount to 14% of revenue; a share of VAT, which is determined by a complex formula and amounts to 11 % of revenue; and a share of Gross National Income, which is renegotiated for each six year period. This currently stands at 0.7%. The GNI share is the main source of revenue generally accounting for over 67% of income but is subject to tough bargaining. Britain is not the only country to have negotiated a budget rebate: since 2002 Denmark, The Netherlands, Sweden, Austria and Germany have all benefitted from compensation mechanisms. This means that all the countries whose net contributions are significant relative to GNI have also negotiated reductions in their contributions: this is why the net contributors are able to pressure the Commission during Budget negotiations and why the Commission is so determined to increase its own resources and eliminate compensation mechanisms.  (Since the Lisbon Agreement a committee has met regularly to work out how to make the Commission both more financially independent and more accountable).

This determination is increased by the fact that the Commission is not able to borrow, which has led the Commission to attach great importance to the tariff revenues it receives. Hence, “no deal” is not without its attractions as it would substantially raise its TOR. It is worth noting that the EU was never a first mover in trade liberalisation, and since the WTO Fifth Ministerial in Cancun in 2002 was effectively wrecked by the Commission (for a good account consult the Guardian website (‘bilateralism has replaced multilateralism (the Doha Round is still stalled’). In bilateral negotiations the US has had a record of success (although Trump would seem to have brought that to an end) but the EU has not: most of their negotiations have been abandoned and even successes like Canada have led to total exasperation on the part of their negotiating partners. Cynical observers of trade negotiations have noted that the Commission depends, as do many developing countries, so much on tariff revenues that they are very reluctant to negotiate reductions.

All this would suggest that the UK needs to direct its diplomatic efforts not primarily on the Commission, with its obsession with punishing the UK, not least to discourage other potential leavers — a problem not likely to go away (no one has accused Selmayr of anglophilia).  Rather, the UK should concentrate on those EU members and interest groups who will be most harmed by a failure to strike a deal. These can be identified quite easily by looking at the prospective tariff costs facing EU members: the Civitas figures, although a static analysis, are helpful in this respect. Of the costs faced by EU exporters to the UK, 84% are concentrated in seven member countries. Germany accounts for 26%, The Netherlands12%, France 11%, Belgium 10%, Ireland 10%, Spain 8% and Italy 7%. It will be noted that Ireland’s potential cost is the greatest relative to the size of its economy so that it is playing a dangerous game by creating problems for a deal.

These figures take no account of the UK being able to source non EU food supplies on a quota free basis which poses further significant potential financial costs on some EU members. The key country in all this is Germany not least because of its dominant position in the automotive sector, which carries high WTO tariff rates. Its political problems have weakened its position allowing the Commission to play a much more assertive role and it remains to be seen how the new grand coalition will work. It is perhaps significant that the most positive response to the position which May has set out has come from France and was couched in terms of mutual national interest.

John Forsyth  Centre For International Studies, University of Cambridge

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John Forsyth