‘Let’s not give British money to those EU buggers. Let’s keep it for ourselves.’ Re-examining where the money that Britain pays out to the EU goes.

Damian Spiteri Ph.D.

1)   Britain gives billions of pounds to the EU. Why does it give money to the EU?

In order to answer this question, allow me to start off by explaining what the EU is. Some people wrongly believe that it some form of super-state. In the previous article, I have showed that, contrary to popular misconceptions, Britain has greater sovereignty in the EU than out of the EU. I have showed that the EU does not dictate matters. I have also showed that the EU is an ‘open’ federation of states. It is a completely different type of federation to the models used in the US which are closed federations. The key distinction is that member-states retain competence for foreign policy, and hence retain international legal personality. Britain can sign an agreement on education with France. However, Mexico cannot sign an agreement with Texas. Mexico would have to sign it with the US. In the EU, all member-states remain full countries with all the power of countries, in all matters of competence, but only in areas that are NOT federalized.

I think that to understand the functions of the EU, we need to understand some of its history, which I will narrate as briefly as I can, only bringing out relevant points to counter further the idea that membership in the EU is necessarily associated with lack of autonomy, and to thereby understand how what the EU spends on its membership to the EU is an investment, and not, as wrongly concluded by Brexiters, an expense.

The first steps to what we now call the EU came into being with the 1952 treaty (the EU started out as the ECSC) which federalised coal and steel. This is because they were the raw materials used in producing armaments and one of the ECSC’s main aims was that of promoting peace in Europe. Then two other treaties, both coming into being in 1957, one federalised a common market (the EEC) and the other federalised atomic energy (the Euratom Treaty). As a result of the Euratom Treaty, the EU also has some special provisions relating to federal powers over nuclear energy. For instance, there is a well-established regulatory and cooperative framework that governs the civil nuclear industry in member-states of the EU, including the UK, and the wider use of radioactive substances in non-nuclear sectors.

When they first started out, ECSC, EEC and Euratom were three separate federal systems. Each had its own institutions. These three federal structures were merged in the 1970s. Eventually they merged into the European communities, plural; and subsequent to this, developed into the single European Union. Since technological progress in warfare implied that there was no further need for coal and steel to be federalised, the ECSC ceased to function in 2007.

These days we have one federal entity which is governed by one single Constitution, split into two texts, namely: There is the treaty on the European Union (TEU), and the treaty on the functioning of the European Union (TFEU). The TEU sets out general principles of the EU's purpose, the governance of its central institutions (such as the Commission, Parliament, and Council), as well as the rules on external, foreign and security policy. The TFEU forms the detailed basis of European Union law, by setting out the scope of the EU's authority to legislate and the principles of law in those areas where EU law operates. Another treaty, the Western European Union Treaty which was signed by the United Kingdom, France, Belgium, Luxembourg and the Netherlands in 1948 that was an intergovernmental defence alliance, expired in 2011, when the Western European Union officially ceased to exist. The substance of the Western European Union was absorbed in the other EU treaties.

Countries that are in the EU are in the EU for one reason only; and this is because it pays them to be in the EU. The treaties we have mentioned, as Judge Forrester tells us, have brought 28 separate countries together to deliver to their own citizens and each other’s citizens access to healthcare, freedom of speech, education, a pension, a minimum wage and freedom of speech. The implications of this (for Britain as an EU country and for all other member states in the EU) are that people have the RIGHT to go abroad to seek a job, to accept a job, to open a business, to hire staff, to engage in trade, to offer services, to go to hospital for treatment, to receive local treatment(not better and not worse than local nationals), to be spared discrimination based on foreign-ness, to bring along the family once one is economically active, to have children educated, and, in due course, to receive a pension on favourable administrative terms. The main economic engine of the EU is the single market, which enables most goods, people, money and services to move freely within the EU.

All countries that are in the EU are there because in forming part of that market, they are conscious that they form part of a huge market; and, in other words are there because it pays them to be there. The real benefit comes from what we call dead weight gains from EU legislation that remove non-tariff trade barriers. Allow me to explain to you what these dead weight gains are.

Let's take an example of two countries, country A and country B.

Country A can produce 100 shoes or 10 meals with its workforce and resources. It has 10 people. So, it produces ten meals.

Country B can produce 10 pairs of shoes or 100 meals with its workforce and resources. It has 10 people. So, it produces 10 meals and 9 pairs of shoes.

The total production of those two economies in autarchy (self-sufficiency, no trade) is 20 meals and 9 pairs of shoes.

But we see the countries have different comparative advantages. One is good at making shoes, the other at making meals. So, if they are to aim for a win-win strategy in how they operate, they would share.

If they trade, country A can make shoes and export them, country B can make meals. And capital gets allocated according to comparative efficiency. So now we have country A making 100 shoes and country B making 100 meals. There are enough shoes to go around. There are also more meals for the taking.

The dead weight gain from trade results from comparative advantages. Normally, the bigger your market is, the bigger your dead weight gains will be, provided you have a level playing field; implying that everyone follows the same rules; and there are the checks and balances in place to ensure that these rules are followed.

The EU is a huge market, so if it loses one customer, it can find another - nearly as good (or sometimes possibly better). There is nearly no marginal loss, and member-states can thereby work together to counter the losses they would experience individually.

To answer the question why Britain pays billions of pounds to the EU, the answer is simple. It is that it cannot afford to do otherwise if it is to prosper in the way that it has prospered when part of the EU.

2)   You have mentioned that due to the overwhelming size of the EU, it is unlikely to suffer the type of marginal loss that would be experienced by a country on its own. This worries me. How will Britain cope outside the EU once Brexit steps in.

Britain will cope come what may. Humbly, I would say that your question needed to read how can Britain cope optimally? Well a simple answer is that it absolutely cannot. Post-Brexit, the rich might get richer, unless the British government introduces new taxes which serve as a disincentive to their expanding further; and the poor are likely to get poorer – there will be less money in the economy to go around, and as any basic economics text-book would say in most societies where the economy experiences a slump, even if it is a transient one; it is normal that they take the full brunt first.

I am speaking with this level of certainty about Britain’s potential for an economic slump, since, as I am sure you will agree, if the EU loses one customer, it will find many more to replace that customer. The UK, in contrast, will not be losing one customer, it will be losing a substantial market. If I were to explain this using basic economics’ concepts, the opportunity costs of the losses borne by the UK and the EU are completely different. It's like I (as the EU) sold a mobile-phone for €20 but lose my customer, but I'm in an auction attended by 50,000 people; subsequently, I find another who will buy it for €19.98. You (as Britain) sold a mobile-phone for €20 but you lost your customer and cannot find another anywhere, except one who will buy it for €5. That effect is a function of the market size you are left with. It is the crude way in which markets operate.

Kindly allow me to explain myself further. EU member states impose common tariffs on imports from non-EU countries. Yet, they can trade freely with each other without border checks. This means that they automatically benefit (as a whole) from trade deals that the EU strikes with other states. So, England and Italy would pay a lower price if they had to buy products from one another, than had they to buy the same products from outside the EU. They are also confident that the products they are buying are of a certain standard since standards are likely to be prescribed by the EU. In a nut-shell, England and Italy, in the case of this example, would inevitably opt to buy from one another than from abroad since they are reassured about quality and are paying less. Just as the above ‘auction example’ shows, if Britain leaves the EU, it is then placing itself in a direct competition with a bloc; when, in the real world, it is effectively powerless to do so.

If I am to summarize what I am saying, Britain cannot cope optimally, on its own, outside the EU for essentially three reasons. (1) If it does not adhere to the common rule book of the EU, as far as standards are concerned, it will lose out. Through Brexit, it will be obliging itself to become a vassal of the EU – particularly since it has lost its voice in any decision-making process of the EU since it has left and thereby is unable to alter the standards set. (2) While it may make measures to increase its market size, the reality of the situation is that on its own, Britain is very limited. Britain would benefit more from remaining in the EU and thereby enjoying a by far larger market size than it could ever possibly do on its own. (3) By opting out of the EU, Britain will not be able to enjoy dead-weight gains in the manner explained previously.

3)   Ms. May had told us that with Brexit, we will take back full control of our money which we will be able to spend on our priorities such as the NHS.. Don’t you think that if we were to manage our funds, we would do a better job at helping ourselves, than any good souls in Brussels can?

Well thankyou for remembering that there are good souls in Brussels. Some people give me the impression that they have forgotten that there are honest, hardworking and dedicated people in Brussels; just as there are in Britain and anywhere else in the world. For the reasons I have already mentioned in my previous points, when Ms. May’s government says that ‘it will take back full control of our money which we will be able to spend on our priorities’, we need to consider that there is likely to be by far less money to go around when Britain leaves the EU than when it was in the EU since its market-size will be smaller and it will not enjoy the dead-weight gains that EU members enjoy and that leave it thereby competing with a bloc. Added to all of this, as I have explained previously, is that there will be new trade barriers erected once Britain leaves the EU, and this can weaken Britain economically. To pour oil on already troubled waters, foreign companies might also pull out, if Britain has no access to the European market.

To answer your question therefore, about whether you as British can do a better job with your money than anybody in Brussels can, you must remember that only a very small proportion of your money goes to the EU, and that thereby you do effectively retain control of your money. Particularly on non-federal issues, Britain sets its own priorities, and the NHS is a non-federal issue. (Although this is pure speculation, it is likely that Ms. May could have mentioned the NHS specifically since in the Brexit campaign, people were promised that Brexit would deliver an extra ￡350 Million ($460 Million) a week for the National Health Service (NHS). This is clearly an outright lie (one of many, unfortunately), and to overcome its negative effects, Ms. May could have wanted to reassure her electorate that the NHS was, all the same, a priority to her government). Essentially, there is nothing to prevent Ms. May from investing in the NHS whether Britain is in the EU or out of the EU.

4)   Mrs. May also said that we will leave EU regional funding programmes – with the UK deciding how we spend this money in the future. What do you make of this?

I believe that leaving the EU regional funding programs does not benefit the UK in any way; simply put, its less money coming in. According to a report by www.parliament.uk, ‘the UK has said that it wishes to continue to participate in some EU programmes, but the exact form that this will take (and domestic replacements for funding) will be a subject of further negotiations and policy-making.’ Most EU funding is, in fact, administered in partnership with national and regional authorities in Member States, though a share of it is directly administered by the European Commission.

5)   The case you are making seems to be that Britain stands to gain far more economically by remaining in the EU, rather than by leaving. However, I have read about billions and billions of pounds being paid as budget contributions to the EU. Billions, not millions. I repeat Billions. Is that not a lot of money?

When we speak about money, we speak about money relatively. A cheap house would cost distinctly more than a cheap car which would cost distinctly more than a can of beer. There is a range of what we would consider cheap or expensive, or perhaps reasonable for each of the items mentioned. Billions of pounds are one thing to an individual and one thing to a government. The billions of pounds expense needs to be seen relative to other amounts that the government is paying out, since in relative terms, the billions of pounds may be as relatively insignificant to it, as would buying a can of beer to an individual. Even if this metaphor is perhaps not the most ideal metaphor to be found, it does familiarize us with the idea that the money paid to the EU are extremely small in comparative terms. The UK pays 0.3% of VAT receipts, plus a fixed sum calculated based on its GDP as a percentage of the EU's GDP minus the rebate, plus customs tariff collections into the EU.

You have told me that I am presenting an argument that Britain stands to gain far more economically by remaining in the EU rather than by leaving. You are perfectly correct in your understanding and I stick by this reasoning. This is mainly because the argument on budget contributions fails to consider that the net budget contribution is a few billion, but dead-weight gains from internal market membership are a few trillion. Therefore, contrary to all the hype about all the billions that Britain pays to the EU, dead-weight economic gains from regulatory convergence (internal market membership) give the UK exponentially more, by multiple times, than all UK budget contributions put together. And on top of that, as an EU member state, on the income side, the money that Britain pays out to the EU is distributed back to the UK as funds, from CAP to the LIFE program (environment) to COSME (for SMEs). Simply put, the UK gets a lot of its contribution back as EU funds.

I would also like to refer to another factor that merits attention if we are exploring together, namely how the amount of money paid to the EU, which as we have said is a small amount, fluctuates. Budget contributions are recalculated and fixed by law every 7 years and for 7 years, according to GDP ratios. This is called the 7 year "MFF" or multi-annual financial framework. (We are now – in 2018 - in year 6 of the current MFF, meaning current contributions are based on seven-year old GDP ratios, when the UK was much richer, and eastern Europe was much poorer, in comparative terms, compared to today). This decrease in the UK’s wealth infers that its budget contribution is about to drop massively. Contrasting with this, the budget contributions of all the new member states are about to shoot up. (The relatively new member-states will go from being a net budget recipient to becoming a budget contributor for the next seven-year period).

To repeat myself for clarity and emphasis: budget contributions by Britain are minute (and not even comparable) when compared to economic dead-weight gains from internal market membership.

6)   What are your final comments?

Brexit does not make any economic sense whatsoever. No matter which way you look, no matter which way you turn, Britain enjoys many advantages as an EU country; and with Brexit, it will lose the whole lot. if you cut off the UK from market access (which is what Brexit will do), you have massive dead weight losses. The closer the union that EU member-states co-create as part of the EU, the more intense these losses are likely to become, since Britain will become more of an outsider as its relative distance from the EU increases.  

We must always keep in mind that the EU is the EU and that Britain is Britain. The focus of the EU will be on its own European citizens, not on non-EU countries; even though this does not mean that on some levels Britain and the EU can inter-cooperate. The more Britain distances itself from the EU, or tries to, the more likely it is that economic realities will force it to maintain very high levels of regulatory convergence, implying that it will simply be repackaging EU standards as its own. The bottom line of what I am saying is that as part of the EU, the UK has larger market access - which enables it to enjoy greater economic growth and financial rewards.

The way ahead for Britain, should it push ahead with Brexit is to emphasize regulatory convergence, especially when considering that its main trade is in services. I, however, do not want to give Britain false hopes that this will be possible unless it imports all EU laws and subjects itself to the jurisprudence of the Court of Justice of the EU (CJEU). If the CJEU is not directly involved, any such interpretation would present choices to the UK judges who would have to see how best to interpret the judgments of the CJEU, but yet if they differ in their interpretations from those of the CJEU, they would build a wall that separates them from the EU, thereby lessening the possibility that there will be common standards across the board. Whether Brexiters like it or not, the only way to create a huge market is to have one huge area subject to common rule making (single institutions), and a common court. Britain’s place is in the EU.

Damian Spiteri Ph.D. is a specialist on education and has published a book entitled Multiculturalism, Higher Education, and Intercultural Communication (Palgrave Macmillan). https://www.palgrave.com/gp/book/9781137513663 He is currently working on other books in the education field.

(The author would like to thank Dr. Ken Mifsud Bonnici, a lawyer who works at the European Commission) for taking the time to read through earlier versions of this paper, to suggest revisions, and, above all, for his kind permission to insert excerpts from his feedback directly into the above text. The author also wants to thank Eric Formosa for the illustration).