The ‘Brexit bill’ is an expected payment by the United Kingdom to settle its financial commitments upon leaving the EU. Since the bill will be important in the Brexit negotiations, the matter is starting to be widely discussed. The European Commission has not yet made any official announcement about the Brexit bill. But in the meantime, journalists and academics alike are preparing various estimates based on already agreed commitments and EU assets which may offset these liabilities.
A must-read analysis was prepared by Alex Barker, the Brussels Bureau Chief of the Financial Times. Alex provides an excellent analysis (in our view the most comprehensive so far) of the various financial, legal and political aspects of the Brexit bill. However, Alex considered only €22.5 billion of EU assets. In this post we analyse the whole spectrum of EU assets. This is important, because the UK’s share of these assets may offset part of the various liabilities it is facing. Our key findings are the following:
- The European Union had €153.7 billion of assets at the end of 2015. As far as we know, the existing available ‘Brexit bill’ calculations have considered only a small subset of these assets.
- There are €41 billon assets which can be considered as a kind of EU ‘accumulated wealth’: cash (€21.7 billion), property (€8.7 billion), available-for-sale financial assets (€9.6 billion) and other assets (€1.0 billion). A share of this should probably be apportioned to the UK upon Brexit.
- The outstanding amount of loans granted by the EU was about €56 billion at the end of 2015. These loans do not constitute a ‘net wealth’ because they are fully matched by EU borrowing, and the interest rate charged by the EU is practically the same as the EU’s borrowing cost. However, if EU borrowing is considered as a liability which should be apportioned to the UK on Brexit, then EU loans should also be apportioned to the UK as an asset.
- The place of pre-financing (€45.2 billion) in the Brexit bill is ambiguous. Some of it may essentially “pre-cover” part of the UK’s liabilities for future expenditures agreed while it was still a member. However, it is still very difficult to say how much of an impact this will have on the final bill.
- The final main category of EU assets, receivables and recoverables (€10.3 billion), may not be considered as assets in the Brexit bill calculations, because they are practically composed of the budget contributions that member states failed to pay by the end of 2015.
Assets of the European Union
According to the 2015 Consolidated Annual Accounts of the European Union, the European Union, as a legal entity, had various assets amounting to €153.7 billion at the end of 2015. There are a number of other legal entities related to the EU, like the European Central Bank, the European Investment Bank, or the European Stability Mechanism: these separate legal entities are not considered here.
The 2004-15 development of the six main categories of EU assets are summarised in Figure 1.
1. Financial assets were about €5 billion in 2004-07, after which this asset category expanded primarily due to financial assistance loans. At the end of 2015, financial assets amounted to €67 billion, of which loans comprise €56 billion (plus €1 billion accrued interests) and available-for-sale financial assets for €9.6 billion. Loans from borrowed funds were granted to (see Table 1 for details):
In addition, a bridge loan amounting to EUR 7.16 billion was granted to Greece for a period of one month between 20 July and 20 August 2015. This loan was fully repaid.
- Non-euro EU countries (Hungary, Latvia and Romania) from the Balance of payments facility;
- Euro-area countries (Ireland and Portugal) from the European Financial Stabilisation Mechanism (EFSM);
- Non-EU countries (Armenia, Georgia, Jordan, Kyrgyz Republic, Lebanon, Moldova, Tunisia, Ukraine) from the Macro-financial assistance (MFA) facility ;
- There also a small Euratom facility and some loans related to the European Coal and Steel Community (ECSC), which is in liquidation since 2002.
There are also some small-amount loans granted from the budget (€0.4 billion), of which about €0.25 billion are in fact term deposits.
Available-for-sale financial assets include:
- €2.6 billion provisionally cashed fines related to competition cases, which are allocated to a specially created fund (BUFI Fund);
- €2.0 billion Guarantee Fund for external actions, which covers loans guaranteed by the EU, in particular European Investment Bank lending operations outside the EU, loans under macro-financial assistance (MFA) and Euratom loans outside the EU. It is intended to cover any defaulting loans guaranteed by the EU;
- €1.7 billion related to the liquidation of the European Coal and Steel Community;
- €0.2 billion shares in the European Bank for Reconstruction and Development;
- €3.1 billion instruments related to various facilities, such as Risk Sharing Finance Facility (RSFF), Horizon 2020, ETF Start up and Project Bond Initiative.
2. Pre-financing (€45 billion at end-2015) is a payment made by the EU, which provides a cash advance to cover future expenses in EU-funded projects. If the beneficiary does not spend it, they have the obligation to return the pre-financing advance to the EU. Pre-financing is thus considered an asset, because it is perhaps going to be returned if unused. As funding recipients submit their final costs, the value of pre-financing as an asset decreases. As new payments are allocated, the value increases.
EU budgets include funding commitments that were made with the UK’s agreement. It is presumed that the UK will remain liable for a share of these costs after leaving. However, in the case of pre-financed projects, commitments are already matched by payments and are therefore not outstanding (or RAL, from the French ‘reste à liquider’), meaning that the UK has already provided the required resources for its share of these commitments. Therefore, EU pre-financing would offset a small part of the UK’s share of future EU commitments.
3. Cash and cash equivalents (€22 billion at end-2015) is comprised mainly of accounts that the Commission keeps with the Treasuries and/or Central Banks of the Member States for the purposes of obtaining their budget contributions (€17.1 billion). To execute payments, the Commission also maintains accounts in commercial banks (€0.1 billion) where it transfers funds solely when the need for payment arises. About €1.9 billion is cash relating to fines and another €1.9 billion relates to institutions other than the Commission, agencies and bodies.
4. Receivables (€0.6 billion at end-2015) and recoverables (€9.7 billion at end-2015) refer to amounts of earned revenue that have not yet been paid. Receivables (a rather small value) emanate from exchange transactions, such as the receipt of payments for the services and goods the EU provided. Much more significant are recoverables, which are revenues owed due to non-exchange transactions. These are transactions like entitlements to tax and contribution revenue, in which the amount of revenue due is not directly linked to what the EU provides in exchange. As EU Accounting Rule 3 puts it, “there is no direct exchange relationship between paying the tax or the contribution and receiving EU services or transfers”.
5. Property, plant and equipment (€9 billion at end-2015) encompasses tangible assets such as land and buildings (€2.2 billion), finance leases (€1.7 billion), plant and equipment (€0.7 billion) and computer hardware (€0.1 billion). A further €3.8 billion is the value of assets under construction.
Other assets, less than €1 billion in 2004-15, include intangible assets, inventories and other investments.
To sum up, from the EU’s €154 billion assets there are €41 billon (mainly cash, property and certain financial assets) which can be considered as a kind of ‘accumulated wealth’. A share of this could be allocated to the UK upon Brexit. EU loans amounting to €56 billion do not constitute a ‘net wealth’ because these loans are fully matched by EU borrowing. However, if the corresponding EU loans are considered as a liability to be appropriated to the UK (as, for example, in Alex Barker’s calculations) then the loans should also be appropriated to the UK as an asset.
The case for considering the €45 billion pre-financing an asset that might offset UK liabilities is somewhat ambiguous. In any case, most of the pre-financing will probably not matter for the final settlement. Nor will the €10 billion of recoverables, which are mostly composed of budget contributions that member states had failed to pay by the end of 2015.
Nevertheless, we find that there are much greater EU assets in play than existing estimates of the Brexit bill have tended to presume.
Having considered the various assets, we are now working on an estimate of the total Brexit bill. We will publish these calculations soon.