James Arnell is a partner at Charterhouse. He writes in a personal capacity.
Watching the recent exchanges around the “bill for Brexit” claimed by some of our EU interlocutors, and the Government’s woolly response (“we don’t recognise the number”, “we will respect our obligations”, and so on, at least until Boris Johnson’s “go whistle” this week), were you reminded of the great Daniel Kahneman’s famous experiments into human psychology, and the central importance of “anchoring” in human decision-making?
He observed that people’s reasoning was strongly influenced by their expectations. If expectations were anchored at a certain level, this could override people’s critical reasoning skills, and lead them to make very poor decisions.
Could it be that our expectations are being deliberately “anchored” around the recent €100 billion “demand” from the EU, so that we meekly accept later concessions by our government? Are we being manipulated so that we accept, in due course, a smaller (but still very large) Brexit bill as a “good deal”?
How else to explain the lack of a robust and forensic rebuttal of the EU’s claims by our highly-qualified civil servants and expertly-advised ministers?
If they had wanted to, they could have told us all some very simple facts.
They could have pointed out that a bill of €100 billion is two thirds of £150 billion, the cumulative total net contributions of the UK since joining the EU 43 years ago. Jean-Claude Juncker apparently stated that the EU was not simply a golf club you could choose to leave at will. Clearly not: to leave his club, you have to pay the equivalent of nearly 30 years of membership.
They could have referred us all to the EU’s own accounts. Admittedly, these rarely receive an unqualified audit opinion, but they offer the best view we can get of the EU’s arcane finances. And they are available online in all their glory. They show that the EU’s net liabilities (all that they owe minus all that they are owed) were €8.6 billion, excluding the amounts owed for pensions for EU officials. Given that our share of the EU is around 11 per cent, we would “owe” €946 million on this basis. Plus, if we are generous and accept the extraordinary largesse the EU shows towards its civil servants, we would need to offer UK members of the EU bureaucracy the choice of coming back to the UK, with their pension entitlements met by the UK government.
Even if we assume that the EU would protest that we cannot take just the net liabilities, that we should settle our share of the gross liabilities, the bill would be a maximum of €17.6 billion, plus those gold-plated pensions. At the very least, we might have hoped that our negotiators would anchor our expectations there, confident that the eventual bill would be a lot less than that, because, when you dig in, it becomes clear that there are a lot of assets which are already there in cash, or could be sold for cash by the time we exit and should therefore be offset against our bill.
In fact, if we sought the same share (11 per cent) of the assets, the accounts show that the EU could easily pay us €6.35 billion in cash on exit, another €5.5 billion over time and, as far as our share of buildings and other similar assets are concerned, they could pay us rent on our share of c.€75 million per annum for (say) 10 years. Add it all up, and take it off our share of the liabilities, and we should expect a cash Brexit bill of no more than €5.3 billion (plus those pensions, of which our share might be valued at €7 billion).
And one last thing. The EU budget currently pre-finances programmes out to 2020. We leave in 2019. A year of pre-financing is assumed to come back to us in calculations behind the €5.3 billion, but some of our continuing net contributions up to 2019 will be for pre-financing of programmes which go out further beyond the point at which we leave. So, we should be arguing for a reduction in our net contribution in the lead-up to exit (or a further reduction in our Brexit bill) to reflect the fact that we will not benefit from programme spending beyond 2019.
Our negotiators are, one would hope, ready to silence the inevitable howls of protest from the EU. Brussels will no doubt claim that it is “unreasonable” of us to burden our European friends with the financial responsibility for filling the “hole” we create in the EU’s finances as we leave. If our civil servants have done their research, they will know that the EU’s other nation states splurge 48.1 per cent of GDP on public spending. That is $6.8 trillion. $6,800 billion. Per year. Making up our net contribution to the EU would cost them $10.9 billion more, an increase of 0.16 per cent of their annual spending, moving the share of GDP closer to 48.2 per cent.
The truth is that they would barely notice.
So if our shiny new Government ever tries to convince you that a Brexit bill of more than, say, €5 billion, is a good deal, then remember the lessons learned by Daniel Kahneman. Don’t be a victim of anchoring. Try to remember that a deal with a bill of more than €5 billion, unless there are lots of goodies in return, is very probably a bad deal.