Boris was wrong – EU costs us £980M per week, not £350M

Boris was wrong – EU costs us £980M per week, not £350M

by Bob Lyddon
article from Thursday 16, November, 2017

NEW RESEARCH by myself and fellow city finance expert Gordon Kerr, published by Global Britain [The Brexit Papers #8; The true cost of EU Membership], puts the weekly cost of continued EU membership close to a billion a week, not the £350 million claimed by Boris Johnson in his Vote Leave campaign. In addition there is a one trillion exposure to other EU liabilities that the UK has to escape from. The paper has a great deal of detail to support the costings so to make it digestible here's a summary:

  • A consensus is building around the shape and timing of Brexit – a consensus around the need to stay in for longer, pay more and maintain a trading relationship that is detrimental to our country's wellbeing across so many levels.
  • This stab-in-the-back on UK voters will see not only the membership fees of £9 billion p.a. being paid until 2020, but no reduction before or after that in two other major areas of cash costs: £12 billion p.a. from tax manipulations by multinational companies that are only possible because of EU membership and £30 billion p.a. from EU economic migration.
  • The latter figure is the shortfall between the tax and national insurance the 3.6 million EU migrants and their jobs deliver, and the £10,500 p.a. average cost of public services.
  • Taking these direct and indirect charges on the public finances the total, cash costs of EU membership are nearer to £980 million-a-week than the £350-million-a-week that has become common currency (even though the lower figure has been disputed).
  • If that was not bad enough, remaining exposed to the EU budget and EU institutions until the end of 2020 exposes the UK to further liabilities of up to £1 trillion.
  • Legally the UK is exposed to paying the entire cash portion of the EU Budget of about €650 billion, since the liability is a joint-and-several one.
  • Secondly, there is the “Commitments Appropriation” portion of the EU Budget, where we are at risk of repaying numerous debts incurred by the EU in bailing out Portugal and Ireland in 2010, and in making loans to dozens of countries and projects inside and outside the EU, with an amount at risk that can escalate to €444 billion by the end of 2020.
  • Thirdly, the UK could have to pay out an extra €35.7 billion to the European Investment Bank (“EIB”) and €1.4 billion to the European Central Bank (“ECB) on top of the capital we have already paid in of €3.6 billion, meaning €40.7 billion at risk in all.
  • Whilst Remoaners have tried to make out that the Eurozone economy is buoyant and that we are missing out on something by leaving, it's 'buoyancy' is for two reasons only:
    • The ECB keeping its version of Quantitative Easing going at enormous levels: it now amounts to over 19 per cent of annual Eurozone GDP;
    • The EIB going on a lend-and-spend spree, contributing 0.46 per cent of Eurozone GDP on its own.
  • The true picture is very different when this support has been stripped out, with a rising risk of financial default, whether it be by Spain, by Catalonia, or by a periphery country like Cyprus, Greece, Malta, Portugal or Ireland.
  • The main worry, though, is Italy. Not only is it receiving huge amounts direct from the ECB and EIB, but its banks own €360 billion of Non-performing Loans (“NPLs”): over 20 per cent of all the loans made by Italy’s banks and twice their capital.
  • Recoveries on the loans are small and very slow in coming through, inhibited by a byzantine legal process, so the current initiative is to hide them, via schemes known as “market-based bank recapitalisations”.
  • These transactions mirror the very worst excesses of “financial engineering” leading up to the 2008 crisis:
    • The status quo ante is that an Italian bank holds NPLs that it has written down to 30-40 per cent of their face value (i.e. not far enough) and is holding capital against them of 50 per cent of their written-down value (when it should be holding 100 per cent of the figure of 30-40 per cent of face value);
    • The bank then sells off the NPLs for 20-30 per cent of face value to a “special purpose company”, and takes a one-off write-down of 10 per cent of face value;
    • The special purpose company then issues a bond secured on the same loans, for the same value as the bank just sold it the loans for;
    • The bond is given to the bank as consideration for selling the NPLs that back the bond.
  • The trick is that the Republic of Italy guarantees the payments on the bond to the bank and suddenly the bond achieves a public credit rating, can be used as collateral for loans from the ECB, and requires the bank to hold no capital at all against it.
  • The capital the bank was having to hold – 50 per cent of the original 30-40 per cent of face value, meaning in reality only 15-20 per cent of the full face value – is completely released, and forever.
  • “Recapitalisation” is achieved by alchemy – NPLs, overvalued before and after, are transubstantiated into sovereign risk bonds.
  • Should the loans continue to perform pitifully, as past experience would portend, the special purpose company, the bank and then the Republic of Italy all go down in due course. Who picks up the losses then? Not Italy.
  • It will be politically unacceptable for Italian consumers to take the loss, so the losses will be crystallised into the institutions where the UK is at risk – the EU, ECB and EIB – which socialises the losses across all the EU’s taxpayers.
  • The arrangement is a house of cards, liable to collapse at any moment with huge claims on the UK: this is exactly the outcome that the UK voters rejected in June 2016.
  • We should not be trying to smooth our transition out of this, because what we are leaving is highly detrimental in cash terms, and because we could be faced with huge extra payments for as long as we remain a member.

Bob Lyddon is an experienced management consultant both privately and with PwC where he managed several Euro implementation programmes. Prior to that, he had a diverse 17-year career in international banking, encompassing Transaction Banking, syndicated loans and derivatives. 

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