Brexit and the EU Budget (EUC Report) - Motion to Take Note

– in the House of Lords at 11:49 am on 6th April 2017.

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Moved by Baroness Falkner of Margravine

That this House takes note of the Report from the European Union Committee Brexit and the EU budget (15th Report, HL Paper 125).

Photo of Baroness Falkner of Margravine Baroness Falkner of Margravine Chair, EU Financial Affairs Sub-Committee

My Lords, I am delighted to introduce the EU Committee report, Brexit and the EU Budget. I thank all members of the committee, which, along with the other sub-committees, has worked at an extraordinary pace since the referendum to examine all the significant areas of policy that will be impacted by Brexit. I benefit in my chairmanship from an extraordinary level of expertise and talent in the membership of the committee—even by the standards of this House.

We will be losing one member in the next rotation, my noble friend—I was disconcerted because I thought he was behind me—Lord Shutt. It has been a real pleasure to work with him, and I know that he will bring the same level of wisdom and expertise to the next committee that he serves on. On behalf of the committee I express our sadness at losing him.

We are also very ably served by our clerk, John Turner, and our new policy analyst, Dr Holly Snaith, who both produced as good an example of work as any in this House. I know how important our reports are to the policy community in Brussels, and this one is no exception. I understand that it has been carefully examined across capitals.

I am also very grateful that we were able to secure a debate on this topic so soon. As noble Lords will be aware, the issue is highly contentious and as the Tusk draft guidelines that were issued last Friday indicate, is going to feature as a significant factor in the early negotiations now that Article 50 has been triggered. The guidelines say:

“A single financial settlement should ensure that the Union and the United Kingdom both respect the obligations undertaken before the date of withdrawal. The settlement should cover all legal and budgetary commitments as well as liabilities, including contingent liabilities”.

So this debate is timely.

Our inquiry was undertaken in December and January, and we heard evidence from academics and legal experts. We also visited Brussels to hear from a range of MEPs and prominent think-tankers. We are enormously grateful to all those who contributed to the inquiry. The UK’s possible exit bill from the EU has received a significant amount of attention in the press and elsewhere. In the autumn of 2016, reports started to emerge in the Financial Times, for example, that the UK would face a bill of €20 billion. Shortly after, the FT reported the figure as €60 billion—an unprecedented level of inflation—and further speculation in Brussels suggested that this was the figure the EU actually had in mind. We wanted to investigate the factors behind these numbers and, if possible, determine what the United Kingdom might need to pay.

Noble Lords will be aware that the most newsworthy finding of our report was that, legally, the UK would not be obliged to pay anything at all. This has been seized upon by those who do not believe in honouring their obligations, but it is clear that they have not read our report in full. We considered this matter very carefully before coming to that conclusion, having received differing opinions from our legal witnesses. However, having looked closely at the matter with the assistance of the EU Committee’s then legal adviser, Mr Paul Hardy—to whom I personally extend our thanks, as he has since moved on from the House of Lords. We decided to put that advice into the report itself so that all could see the analysis behind our judgment. We concluded that the effect of Article 50 was that all EU law ceased to apply to the UK at the moment of departure unless the withdrawal agreement provided otherwise. This means that all legal obligations resulting from budgetary commitments made while the UK was still a member state would also cease to apply.

We heard evidence that Article 70 of the Vienna Convention on the Law of Treaties might provide a legal basis for an enforceable claim against the UK—and enforceability goes to the heart of the argument. The convention states:

“Unless the treaty otherwise provides or the parties otherwise agree, the termination of a treaty … Releases the parties from any obligation further to perform the treaty”,

but that it:

“Does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination”.

On that reading, this appears to mean that the United Kingdom would have a legal obligation to pay its dues—but the key words are:

“Unless the treaty otherwise provides”.

Article 50 of the Treaty on European Union provides a mechanism for a member state to leave the EU without an agreement and with the effect that all EU law ceases to apply to the member state. Article 50 is unqualified by any condition about ongoing liabilities, and from this we concluded that the UK’s budgetary liabilities would cease in the absence of any withdrawal agreement, as there is no institution to enforce obligations when EU treaties fall.

I am aware that other legal opinions are circulating in Europe—a fact alluded to by the Chancellor in his interview on the “Today” programme on 29 March. On 21 March, there were press reports of a leaked EU document suggesting that the matter would be taken to the International Court of Justice if the UK refused to pay. The EU may go down this route, although we concluded that international law is slow to litigate and hard to enforce. We also noted that Article 344 of the Treaty on the Functioning of the European Union prohibits EU member states from submitting the legal interpretation of the EU treaties to a court other than the Court of Justice of the European Union. I note that the European Council’s draft negotiating guidelines propose establishing an arbitration body to rule on the interpretation of the withdrawal agreement, taking into account the particular status of the CJEU. This would, of course, come into being only if a deal was struck.

We explored the legal position because we wanted to determine the lowest amount the UK might be required to pay as a means of sketching out the parameters of the forthcoming negotiations. I was rather surprised to find that the answer was zero, in terms of the legal position, but I want to be clear that the committee did not recommend that the UK should refuse to pay anything. This legal situation would apply only if it proved impossible to reach a deal, in the sense that the EU’s claim would be unenforceable. The committee hoped that a deal would be reached and acknowledged that this would be impossible without settlement of the budget issue.

Politically, if not legally, the UK has signed up to certain areas of EU expenditure which may persist for some years after Brexit. It will be a matter for negotiation how much any payment proves to be, but the political and moral obligations on the United Kingdom will have to be taken account as part of the process, not least because good will will be essential to achieving a workable withdrawal agreement and a co-operative future relationship.

The Prime Minister, in her letter triggering Article 50 and her Statement to the House of Commons, said that she would pursue a “deep and special partnership” between the United Kingdom and the EU, taking in both economic and security co-operation, and that:

“We will need to discuss how we determine a fair settlement of the UK’s rights and obligations as a departing member state, in accordance with the law and in the spirit of the United Kingdom’s continuing partnership with the EU”.

So far, we do not know what the Government consider to be a fair settlement, and no doubt that will emerge in the negotiations. Rumours that they have calculated a bill of £20 billion have recently been reported, but at this stage that is mere speculation.

The point is that this is a negotiation and the final bill could be calculated in any number of ways. We tried to explore some of the ways a bill could be constructed. It was possible to arrive at wildly differing figures depending on how one calculated the UK’s share of the EU budget, whether one included settlement of the so-called reste à liquider, or RAL, amounts, and whether one included payments in respect of accrued pension rights—which itself would differ depending on whether it was calculated according to the number of UK nationals working for the EU at the moment or in receipt of a pension, or by using a standard percentage. There is also the issue of EU assets and whether the UK is liable to receive a portion of their value.

One further factor in determining any bill would be whether the UK agrees to make contributions to the EU budget under the current multiannual financial framework until it comes to its natural close at the end of 2020. Doing this would reduce uncertainty in the rest of the EU over how it is to fund its spending plans for the 21 months following Brexit. Taking this position may help to secure a transitional arrangement—the implementation agreement, as the Government call it—and the cost, although running to billions, it is likely to be offset by commitments the Government have already made to guarantee EU-derived funding domestically following Brexit. So it would be substantially lower than the headline figure might suggest if that were the case. It is an option that requires serious thought.

Let me conclude with a final thought. This process on which we have embarked—disentangling ourselves from nearly 45 years of a relationship—will be watched around the world, not just in the EU. The measure of the UK’s reputation as a future partner in deals around the world will be dependent on how it behaves in ending this relationship. This country’s culture is synonymous with the concepts of fairness and honour. Having grown up in in a former colony, I was raised in the knowledge that an Englishman’s word is his bond. No amount of legal posturing could convince future partners who do deals with us that we would be reliable partners if we left the EU table without paying our due bill. I believe that the Government understand this and intend to fulfil their obligations through the difficult negotiations ahead. I wish them well. I beg to move.

Photo of Lord de Mauley Lord de Mauley Conservative 12:01 pm, 6th April 2017

My Lords, this is a report, of course to Parliament, and in particular to the House of Lords. If a Member of the Committee which prepared it is permitted to say this, it has been produced with considerable skill and care. If I may be forgiven for saying so, it appears to be a singularly significant cross-party House of Lords Select Committee report among many important cross-party House of Lords Select Committee reports. Indeed that fact was recognised by the press, which gave it more coverage than perhaps might ordinarily have been the case.

It is a report on a complex subject and does its best—quite a good best, I would argue, and I pay credit to our chairman, other Members and the clerks—to simplify that subject. However, it is in one sense unusual in that it has the potential to be really quite useful to those responsible for negotiating our departure from the European Union.

It contains legal advice that, in the event that no agreement has been reached between the United Kingdom and the European Union by the expiry of the two-year period specified under Article 50, the UK will be subject to no enforceable obligation to make any financial contribution at all to the European Union, and that while EU member states may seek to bring a case against us for payment of outstanding debts under principles of public international law, as the noble Baroness, Lady Falkner, said, international law is slow to litigate and hard to enforce, and it is doubtful that any international court or tribunal would have jurisdiction.

It does not say—again, as the noble Baroness said—that in any situation nothing should be paid, and indeed in my view, the Government may be well advised to pay something, if they can get an agreement to secure for the UK their key negotiating objectives. The good relationship the noble Baroness mentioned is important. The real significance of this is that it gives the EU considerable encouragement to reach an agreement, and to extend negotiations—although we must all hope that it will be possible to reach an agreement within the two years—if in due course it becomes apparent that no agreement is likely to be reached within that period, and if indeed it suits us.

I would argue that if this situation did not apply—that if no agreement has been reached by the expiry of the two-year period, the UK need pay nothing to the EU—there would be much less incentive on the EU to agree to anything. This is unlikely to be welcome news to Monsieur Barnier, who has suggested we might have to some €60 billion or even €70 billion.

The key question is how the Government should use this information. I am sure that they recognise the value of it as a negotiating chip—and, indeed, have taken their own legal advice. For me, a key question is going to be how much can be negotiated within the two-year period. It will be a tall order to complete negotiations within that period on a comprehensive free trade agreement, encompassing not only tariffs but, of vital importance, non-tariff barriers, including matters such as mutual recognition agreements and conformity assessment. Services, so important to our economy, also need to be addressed. To suggest that the exit terms must be settled before a trade agreement can be considered—this picks up on a point made by the noble Lord, Lord Hannay, in the PNQ earlier this morning, which of course I agree with—misses the point that what we are prepared to accept in exit terms may be affected by how good the trade deal is. So the information in our report may be helpful. I hope that Ministers, in carrying out this very difficult task, will make use of this in the most skilful way, and I wish them every success.

Photo of Lord Davies of Stamford Lord Davies of Stamford Labour 12:05 pm, 6th April 2017

My Lords, I am not a lawyer, any more than the Lord Chancellor is a lawyer, although I hope that I am not less of a lawyer than she is either—that would be rather a bad position to be in. But all citizens are deemed to know the law, and anybody who sits in a legislature has to have a clear sense of the foundations of the law. Until a few months ago, I was a member of the committee. I enjoyed the role very much; it was a great privilege to serve under the extremely able chairmanship of the noble Baroness. I regard all those who served with me on that committee as personal friends, and I hope they will not be unduly upset if I feel today that I must take issue with their conclusion. We all feel, as a matter of principle, that, if we have pressing views on an important subject that have not otherwise been expressed, it falls on us to stand up and make sure they are not ignored.

We are here in the very imprecise and uncertain realm of international law. So imprecise and uncertain is it that there has been a respectable view for a long time, which I might describe as an extreme positivist view, that there is no such thing as international law, for the simple reason that there is not in existence the essential prerequisite of a system of law: a sovereign body that legislates and is able to enforce its decisions in the area of its claimed jurisdiction. I think there would be general agreement that a form of positive law exists in the world which cannot be contested, in the form of individual contracts or treaties between states—conventional law. That applies only to the parties to those conventions, of course; in other words, only to those who have ratified the conventions. The concept of convention is well established, and I can see that the committee takes it very seriously. It concludes that the Vienna convention applies in this particular case, and I believe it when it says that 26 out of 28 members of the EU have ratified that convention. I suppose you could argue that the matter is anyway now one of customary international law, so it is a reasonable basis on which to proceed, and my argument will be on that basis.

Customary international law is of course a very vague area. The concept has been with us for a very long time, since at least Grotius in the 17th century. It is often quite unclear what customary international law is or, indeed, how it relates to conventional law. I take as an example the law of the sea convention, which fundamentally departed from traditional customary law when it was negotiated in the 1970s. Does it now represent customary law as well as conventional law, or are there two regimes in the world—one for the great majority states that have ratified the law of the sea convention and one for those that still have not done so? I do not know the answer to that question.

Finally, moving away from the positivists as far as you can to the idealist view of international law, there is natural law, which, as the House knows, has been in existence for even longer as a concept. I think that it goes back at least to the view of St Thomas of Aquinas that there is an element of divine rationality in all of us by which we are guided, and through which we know the difference between right and wrong. One can substitute for God, if one wants to secularise the process, by introducing some kind of formulaic mechanism such as the utilitarian calculus or perhaps the Kantian categorical imperative. However, we should not neglect in that natural law, because it was the basis of the indictments at Nuremberg after the war, which would not have been pursued on any basis of positive law because there was no basis to claim that those appalling crimes had been infractions of any positive law that existed at the relevant time and place. Therefore, we are in a very difficult area here.

As I said, the committee decided that the Vienna convention is the appropriate basis for looking at the international legal aspects of this matter. I agree with that. The committee report quotes the relevant article of the convention—Article 70:

“Unless the treaty otherwise provides or the parties otherwise agree, the termination of a treaty under its provisions or in accordance with the present Convention:

(a) Releases the parties from any obligation further to perform the treaty;

(b) Does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination”.

The important phrase here is:

“Unless the treaty otherwise provides”.

This is where I part company, I am afraid, with the committee, because it argues—as did the noble Baroness a moment ago—that because of Article 50 of the Treaty on European Union, which does indeed deal with the issue of member states leaving, under the Vienna convention paragraph (a) should apply, not paragraph (b):

“Releases the parties from any obligation further to perform the treaty”,

should apply, rather than,

“Does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination”.

I do not need to quote Article 50: we all know it practically by heart after the events of the last few weeks. However, it is clear to me, on my reading of the treaty, that Article 50 provides no guidance at all on whether or not outstanding obligations and liabilities should be dealt with in any kind of agreement. It provides no rules whatever—there may be substantive rules—for the withdrawal of a member. All it deals with is the timing. It says that the negotiation must take place within two years. Still less does the article provide an actual formula for calculating and distributing assets and liabilities or anything of that kind. Therefore, given that Article 50 in my view does not provide any substantive guidance on this matter at all, it seems to me, contrary to the committee’s conclusion, that paragraph (b) and not paragraph (a) applies here. Therefore, it is necessary for us to behave in what we imagine would be a common-sense way anyway once one leaves any kind of venture—namely, that obligations, liabilities and assets on both sides are looked at, evaluated and distributed on a fair basis, which, presumably, means on the basis of the proportionate contribution beforehand of resources to the organisation. That could easily be worked out.

I am afraid that I disagree also with another aspect of the committee’s report. Paragraph 133 states:

“The jurisdiction of the CJEU over the UK would also come to an end when the EU Treaties ceased to have effect. Outstanding payments could not, therefore, be enforced against the UK in the CJEU”.

There seems to be confusion here. It is quite obvious that it is correct that once we have left the Union, the CJEU no longer has any jurisdiction over us, and the CJEU can say nothing about any subsequent arguments we might have with other former fellow members of the EU. But until the day we leave, clearly the CJEU has such jurisdiction. I have never heard of a court anywhere in the world which, once it had accepted jurisdiction over a case because the acts and the decisions involved were taken at a time when the individuals concerned were under its jurisdiction, subsequently allowed one of those parties to the case retrospectively to remove themselves from its jurisdiction by simply subsequently leaving the organisation. It seems to me that the CJEU, once it has accepted jurisdiction for determining the liabilities attaching to us or any other member state up till the time of our departure, would continue to be able to declare that judgment. Only liabilities accumulated after our departure could not be subject to the jurisdiction of the CJEU, but no one is suggesting that we could accumulate any liabilities after our departure, so that question does not really arise.

The final confusion—or at least the point on which, frankly, I disagree with the committee—relates to the whole issue of enforcement. The committee says at paragraph 136 that,

“international law is slow to litigate and hard to enforce”.

I do not know what it means by “hard to enforce”. As I have already argued, it seems to me that international law is impossible to enforce—that is one of the salient points about international law. Somebody might say, “Well, you can enforce it through a Chapter 7 resolution of the Security Council”, but, apart from the difficulty of getting that, you obviously cannot use that mechanism against a permanent member state with a veto or a group of countries of which one is a permanent member state. Therefore, that does not really arise. Perhaps if the noble Lord, Lord Howard, were in his place, he would suggest that you could always enforce it by sending a gunboat to Brussels or something of that sort.

However, in all seriousness, international law cannot be enforced. I do not know whether the committee accepts that, perhaps taking the positivist view that that means there is no such thing as international law. I do not think so, because the whole argument in the report is based on the assumption that there is such a thing as international law. Whatever the committee might feel about that, I hope that the other explanation does not apply and that what it has in mind—I do not think it does—is that we could always say, “All right, we’ve lost the case, but come and get us. You’ll never get a penny out of us and we won’t acknowledge the judgment of the court”. I agree very much with the noble Baroness: it would be horrific if this country took that line, and I am sure that we would not. Therefore, I am very confused about what the committee means by saying that it is hard to enforce, and about the relevance of that comment in this case.

I very much agree with the committee’s pragmatic recommendation—if not its legal analysis—that we as a country should not say that we owe absolutely nothing as a result of our membership of the European Union. That would be completely non-credible. We are clearly liable for that portion of the Union’s liabilities accumulated with our taking part, by consent, in the relevant judgments until the day we leave. We are also, certainly morally, obliged in relation to the costs that will be incurred purely and solely because of our unilateral decision to leave—such as the need to pay redundancy payments to British subjects employed by the Union’s institutions.

However, whatever happens, we certainly should not do what has been suggested in certain quarters, although very much not by the noble Baroness today, which is simply to walk away from our obligations. I thought that one of her analogies was particularly poignant when she talked about walking away from the table. We can all imagine someone going out to dinner with a group of friends—perhaps 27 friends in this case—then getting up from the table and leaving without paying the bill. No honourable person would like to think of himself or herself behaving in that fashion, and I do not think that anyone in this country would like to think that we would do so. I am very glad that there is unanimity in this Chamber—certainly based on the speeches I have heard so far—that that should not be the way forward.

Photo of Lord Thomas of Gresford Lord Thomas of Gresford Liberal Democrat Shadow Attorney General 12:18 pm, 6th April 2017

My Lords, it is such a pleasure to follow the noble Lord, Lord Davies of Stamford, because I agree with every word that he has spoken.

I commend the European Union Committee for its hard work in producing the report. However, it is unfortunate that it has been seized upon by the Brexiteers, who have affirmed that the United Kingdom could flounce out of the negotiations without a deal and avoid any obligations or commitments which had been incurred. “We don’t have to pay a penny”, trumpeted the Daily Mail.

I have read the evidence given to the committee by the three legal experts, who were not agreed. Because they were not agreed, the opinion of the legal adviser, Mr Harvey, was sought. No one is an expert in this field, because Article 50 has never before been tested. I find his opinion tortuous and I cannot agree with his view on the effect on our liabilities to the EU should no deal be forthcoming. His view is reflected in paragraph 133 of the report in these terms:

“The rule in Article 70(1)(b) of the Vienna Convention only applies to withdrawal from a treaty which does not have its own withdrawal procedures”.

Then it says in brackets,

“(‘unless the treaty otherwise provides’).”

The report continues:

“Manifestly, the TEU does, in the form of Article 50. Article 50 therefore takes precedence over Article 70(1)(b) of the Vienna Convention”.

I quite fail to understand what that paragraph means.

Under paragraph 2 of Article 70, where,

“a State … withdraws from a multilateral treaty, paragraph 1 applies in the relations between that State and each of the other parties to the treaty”.

Paragraph 1 deals with the rights, obligations and legal situation of the parties prior to the termination. That is what it is about. It says that,

“Unless the treaty otherwise provides”,

those rights and liabilities are not affected. It is very simple and plain language. As the noble Lord has pointed out, Article 50 does not otherwise provide—it is quite silent on the existing rights and obligations at the date of withdrawal from the treaty. It follows that any other state that is a party to the treaty can enforce those rights and obligations in law. That is the legal side.

On the practical side, we are about to have placed before us the great repeal Bill, which is to take the whole of the acquis communautaire into domestic law—to make EU law domestic law. If the United Kingdom were sued for a money sum, would we actually raise a defence that these obligations arose only under EU law, which we have just taken and made part of our own domestic law? Would we deny the jurisdiction of our own High Court of Justice? If we did that, would we then refuse arbitration where, by agreement, any questions of international law could be determined? Would we force another state to raise an issue in the International Court of Justice and spend years locked in conflict with Europe, simply ignoring the rights of other states in Europe that would obviously be affected by our position?

The view that our rights and obligations would come to an end the moment we fall out of the EU would have strange results. For example, money has already been allocated to Wales from the European structural funds to improve the port facilities at Holyhead. Let us assume that the money is paid upfront. The First Minister of Wales might consider, “Should we spend this money on Holyhead, or wouldn’t it be rather nicer to spend it on a marina in Cardiff Bay? We might attract Sir Philip Green and yachts of that sort and improve the character of the place where we work. We have no obligations to the EU: they have given us the money; we do not have to pay it back, and can use it as we like. They cannot sue us”. That would be nonsense, would it not?

Assets are another important issue. I happen to have been a member of the Reform Club for some 45 years, which is about one-quarter of the time that that distinguished club has been in existence—I stayed there last night, as it happens. If I were to cease to be a member tomorrow, I would not go to the secretary or the trustees and say, “Look, I have paid my subscription for 45 years and think I am entitled to a share of the value of this club. I demand my part of it”. That would be nonsense. But at the same time, I would not expect to have to contribute to the liabilities for the pensions of the staff. We did not form the European Union; we became a party to it. We came late to the feast, although many of us were campaigning to become members long before 1972. We were members of a club, and we cannot say that we are entitled to a portion of its facilities wherever they may happen to be.

This country has entered into commitments. The multiannual financial framework for 2014-20 was negotiated and agreed in 2013. There was a problem at that time because the European Parliament was concerned that countries were not paying their dues. There were shortfalls which jeopardised projects such as the Erasmus programme and the Social Fund, which ran out of funds in 2013, and it was said that those countries had to pay up during that year. Since we negotiated and became a party to that multiannual financial framework, the annual budgets of the EU have been calculated on the basis that the agreed funding in the MFF was available to carry out those programmes commenced before 2020 within the budget.

We are currently in the period of the 2017 budget, which committed members of the EU to contribute €157 billion, out of which payments of €134 billion would be made. I take it—I ask the question directly of the Minister—that, notwithstanding Brexit, the United Kingdom is engaged in the discussions and negotiations for the 2018 budget within the MFF. I assume further that we will still be a party to the discussions on what the MFF 2019 and 2020 budgets will be. We must continue to participate.

I am concerned from a Welsh point of view, obviously, because Wales is a net recipient of EU funding. It receives funds from the European Agricultural Guarantee Fund, the European Regional Development Fund and the European Social Fund. Indeed, some 60 projects have already been approved, with liabilities that organisations have taken on and put into their programmes which will extend way beyond 2020. Surely those liabilities will have to be met from funds from this country. It is true that the Treasury has issued a guarantee that these matters will be paid up until 2020, but what happens after then when the programmes run on?

The problems that the report highlights and makes it necessary to discuss are complex and difficult. However, we must properly address them and not get involved in the suggestion that we can just walk away from Europe, hold our noses and not have anything more to do with it.

Photo of Lord Butler of Brockwell Lord Butler of Brockwell Crossbench 12:28 pm, 6th April 2017

My Lords, the members of the sub-committee which produced this report have perhaps been blowing their own trumpets. However, in this case we are justified in doing so because, under the skilful chairmanship of the noble Baroness, Lady Falkner, this report is a good example of the service which your Lordships’ House can perform for Parliament and the country as a whole.

As the exposition of the noble Baroness, Lady Falkner, made clear, the report covers two principal aspects. First, it describes and seeks to quantify the elements of the EU’s budgeting arrangements which may contribute to a claim on the UK for a payment or payments from the UK after we leave the EU. Secondly, it seeks to establish the legal position of the UK’s liability for such payments. Those legal aspects were discussed in the contributions of the noble Lords, Lord Davies of Stamford and Lord Thomas of Gresford, and I am not going to dwell on them.

It is fair to say that it surprised Members of the Committee —it certainly surprised me—to hear the legal advice that, in the absence of an agreement, the EU will have no means of enforcing any financial liability against the United Kingdom. I note that if the advice is correct, however, the phrase “a divorce settlement” is misleading. In a divorce a court determines the liabilities of the parties and has the means to enforce that determination. In this case the legal advice is that in the absence of an agreement to the contrary, the jurisdiction of the ECJ ends on our departure. Again, I do not want to dwell on the legal aspects. I have used the phrase, as have others, “in the absence of an agreement”, and I emphasise it. Of course we want an agreement. We have much to gain by getting one and a great deal to lose by not doing so. It is important to note, as the noble Lord, Lord De Mauley, said, that in the aspect of finance it is the EU which will lose in the absence of an agreement. Since the UK’s gross contribution is currently one-eighth of the EU’s annual budget, there is much at stake here, so no wonder it wants to make progress on this issue before discussing the other aspects of our future relationship.

Both sides should want a reasonable agreement on this issue. What should a reasonable agreement look like from the UK’s point of view? The Government have said, I believe rightly, that the UK would,

“continue to honour our international commitments and follow international law”.

The Chancellor of the Exchequer has said something similar about meeting our obligations. Monsieur Barnier is quoted today as emphasising the importance of an agreement to the EU, although he has quoted an exit payment approaching a figure of £60 billion. The report seeks to identify and discuss the main elements, and like the noble Lord, Lord Thomas of Gresford, I should like to take them in turn.

First, as the noble Lord, Lord Thomas, pointed out, the UK will be leaving the EU some 19 months before the end of the current multiannual financial framework. That framework sets a ceiling on the EU’s expenditure. It is not a commitment to expenditure. The UK was a party to it but it does not commit us to spending up to the ceiling which we agreed in that negotiation. If the UK’s gross budget contribution of 12.5% ends in March 2019 it will leave a big hole in the EU’s spending plans, and if instead of ending its contribution on departure the United Kingdom were to continue its budget contribution until the end of the current period of the framework, the committee calculates that that might cost the UK some £15 billion. But as I have pointed out, the MFF sets a ceiling; it is not a commitment to spend, and here I differ from the noble Lord, Lord Thomas.

The commitment to spend is set by the annual budget—

Photo of Lord Thomas of Gresford Lord Thomas of Gresford Liberal Democrat Shadow Attorney General

My Lords, with respect, I suggested not that we were committed to pay under the multiannual financial framework, but that we are committed to spend on the budgets which rely on the MFF in order to come to a conclusion of what can be spent.

Photo of Lord Butler of Brockwell Lord Butler of Brockwell Crossbench

I accept that but the point is, as the noble Lord has said, that the budget for the periods after we leave have not yet been set so we are not committed to them. The annual budget for 2019 and 2020 has not been set, so I regard any claim on the UK in respect of those years as weak. As paragraph 46 of the report points out, this view seems to be shared by the German Finance Minister, Wolfgang Schäuble, who has said that it will be necessary to negotiate a new MFF on the assumption that the UK contribution ceases in 2019—when we depart from the EU. Continuation of the UK’s payment under a multilateral financial framework that continues after we have left is not in fairness a strong claim on the UK.

The second element of a possible EU claim is the commitments made in budgets to which the UK has been a party, which will remain to be paid after March 2019—the so-called reste à liquider, or remainder to be liquidated. Like others, I regard this claim as stronger. There is probably no legal obligation to make these payments after the UK has left the EU, but it may be argued that there is a moral obligation since the commitments were entered upon and budgeted for while the UK was a member.

The EU estimate of the commitments that will be outstanding at the end of 2020 is £254 billion. We do not have an estimate for the outstanding commitments at the end of March 2019, but since commitments contracted for but not paid tend to diminish as the MFF wears on, the figure at the end of March 2019 for outstanding commitments may be higher. However, as has been pointed out, some of these may never materialise. Moreover, some commitments are to the UK itself. These should be netted off, after which the UK share of commitments to other partners is unlikely to amount to more than £10 billion. If the UK were to agree to meet these it would be sensible to do so not in a lump sum but over the next few years as the commitments materialise.

It is right to add that the respected Brussels think tank the Bruegel Institute produces a much larger figure for commitment outstanding, including a large element under the heading, “significant legal commitments”. These are commitments pledged in legal terms but not yet budgeted for. Since they are expected to be budgeted only over a long period, they are not included in the EU’s balance sheet nor in the reste à liquider. In this case it seems difficult to argue that the UK has any liability for these unbudgeted items after leaving the EU.

Thirdly, there is the possibility of a claim based on pension liabilities for past or present employees of the EU or its institutions. Here I agree with the noble Lord, Lord Thomas of Gresford, that this is a weak basis for a claim. UK nationals constitute some 4% of EU staff at present and have never been more than 8%. The Commission currently estimates its actuarial liability for future pensions at €63.8 billion. However, pensions are paid out of each year’s budget. Employees make a one-third contribution to them. Like the noble Lord’s, my view is that, on leaving the EU, the UK has no greater liability to contribute to the annual pension bill that someone leaving a club would have to contribute to the pensions of past and present employees. The nationality of these employees is immaterial. Even if the UK were to make an exit contribution based on the proportion of UK nationals employed, and if the EU’s calculation of a total actuarial ability of €63.8 billion is right—the Bruegel Institute puts it much lower than that—it would not amount to more than a handful of billion euros.

Photo of Lord Davies of Stamford Lord Davies of Stamford Labour

Does the noble Lord agree that there are two, quite separate, issues here? One is potential liability for pensions to be paid—there, I rather agree with the noble Lord’s assessment. The second issue, which is quite specific to this instance of a country leaving the European Union, is the effect on British national employees of the European institutions, who will lose their jobs because it is a condition of their employment that they are a citizen of an EU member state. They will cease to be on the day on which we leave the European Union. They will therefore be fired and have to be given redundancy payments. Do we not have the moral responsibility of making sure that those payments are made? We cannot expect our partners to pay those sums of money, and we certainly cannot expect those employees who are fired for no better reason than their nationality not to receive proper compensation.

Photo of Lord Butler of Brockwell Lord Butler of Brockwell Crossbench

With respect, I do not take that view. These are employees of the EU and its institutions. If they are fired for whatever reason, their redundancy payment and severance terms will be determined by their contract and negotiation with the EU and the EU institutions. That does not seem to me a matter for which the UK has a liability.

I again agree with the noble Lord, Lord Thomas, about the other side of the balance sheet—namely, the EU’s assets. I shall not discuss those in any detail, because I doubt whether the EU would agree to distribution of these to a country departing from the EU any more than it would require a contribution as an entry fee from a country acceding. One exception to that is the UK’s stake in the European Investment Bank which, if it has to be surrendered, could be worth anything from €3.5 billion to €10 billion to the UK.

Unless there are other elements of a claim for an exit payment which neither the EU Committee nor others have thought of, it seems clear to me that any reasonable claim that can be made will not amount to anything like the €60 billion figure attributed to M. Barnier and his team. It follows that, leaving aside the legal aspects, UK negotiators do not have a great deal to fear from a negotiation on this subject. In a reasonable world, it should be possible to make sufficient progress to open the way to negotiations on a future trade relationship.

There is one final piece of advice that I would give—again, this point was made by the noble Lord, Lord Thomas. By all means, let us seek to reach agreement on the principles of an exit payment and a future financial relationship, but it would be unwise to agree the details, the actual figure, until the principles of a trade relationship are also agreed. This is an area where, whatever the sequence of the negotiations, nothing should be agreed until everything is agreed.

Photo of Lord Hannay of Chiswick Lord Hannay of Chiswick Crossbench 12:43 pm, 6th April 2017

My Lords, I am delighted to follow my noble friend Lord Butler. I am even more delighted that, unlike him, I will address the vexed legal issue, because that avoids a situation in which we might disagree, which we seldom do.

I should begin by declaring an interest: over many years of my professional career, I struggled with the intricacies of the EU budget: during our own accession negotiations in 1970-72, when this issue was at their heart, and then during the late Lady Thatcher’s five-year long battle to secure and entrench a two-thirds rebate on our net contribution—that was from 1979 to 1984, when I was her principal Foreign and Commonwealth Office adviser. In the negotiations of what was subsequently called the Delors package, in 1987-88, when for the first time an overall framework for EU spending priorities and policies began to take shape, I was the permanent representative to the European Union. So I bear the scars of these endeavours and I did acquire, I think, some familiarity with the subject of the report we are debating today.

The report before the House is a valuable one, in my view, and I congratulate the noble Baroness, Lady Falkner, on having chaired the committee during its production. It has much useful material and detail about the issues that will confront our negotiators during the negotiations that are about to take place. For the most part, with one exception which I will return to in a minute, I have no hesitation in endorsing it as a genuinely useful background brief on a subject that will inevitably come up before this House again and again as these negotiations progress.

What lessons do I draw from my experience negotiating on budgetary matters in the European Union? First, I suggest that you should never think that you know enough about this subject to allow you to make sweeping assertions about it in advance. Just do not do that. If you do, all too often a black hole will open under your feet as soon as you have done it and you will have to revise everything you have said. When I heard a former Minister of the Crown—a Minister who was actually responsible for the largest spending department in the UK, Mr Iain Duncan Smith—musing that perhaps the European Union would end up owing us money, I could barely avoid grimacing at his woeful ignorance.

Secondly, do not establish in advance, and do not let anyone know, what overall figure you might settle for. Lady Thatcher never did that and she was right not to. You must retain a degree of flexibility. Then, never say that no deal is better than a bad deal. Lady Thatcher also never said that. I had hoped that the Government had stopped saying it when it went missing from the letter to Donald Tusk, but, alas, it then popped up within a week in the White Paper on the repeal Bill. If you want the other side to move their figures, they have to believe that if they do so, you might strike a deal with them. If you start saying that you are not going to strike a deal with them, they will not move.

It follows from what I have just said that I believe that the Commission has already made one fundamental and egregious error by allowing an unsubstantiated figure of €60 billion to slip into the public domain. I believe that it will come to regret it, because that will not be the outcome, but also because the only way to reach any agreed settlement is for both parties to the negotiations to work their way, painfully and painstakingly, through the detailed components of any overall figure. That is the work of the coming months; it cannot be done in advance, unilaterally, by one of the parties to the negotiations.

Now for my beef, which is paragraph 135 of the report. I do not believe that the committee should have accepted so uncritically and endorsed the legal opinion that in the absence of any deal the United Kingdom would have no financial obligations to the European Union. To put it mildly, that is only one legal opinion among many. It could only be settled in a court of law and it would be exceptionally unwise, in my view, if the Government went down that road, because the collateral damage to the United Kingdom from doing so—economic damage, trade damage and political damage—would be massive. That is, no doubt, why the Government are so coy about telling us what the consequences of leaving without a deal might possibly be. Unfortunately, this conclusion—the one in the report about the legal liability—is all too likely to encourage those of the Government’s supporters who are, in any case, showing many signs of wishing to leave without a deal to believe that they have a “get out of jail free” card. They do not; this would be a “get out of jail very expensively” card. I am glad that the Government show no signs of being tempted to go down that road. The Tusk letter certainly implied that they do not wish to do so.

We in this House surely need to ensure that that distinctly contentious and dubious legal opinion is not available to be hung around the neck of the Government, like the dead albatross around the neck of the Ancient Mariner, when the Government return one day, as we must hope they will, with an agreement for us to consider and approve. How it can best be done that the House does not continue to support that legal opinion I leave to the noble Baroness, Lady Falkner, who may perhaps take a shot at it—she tiptoed up to it in her introduction—when she replies at the end of this debate. I do not believe that we should either credit it or allow it to stand.

Photo of The Earl of Lindsay The Earl of Lindsay Conservative 12:51 pm, 6th April 2017

My Lords, I, too, thank the noble Baroness, Lady Falkner, for introducing the report. In so doing, I should record my appreciation for the engaged and effective style with which she chairs the committee and chaired all our witnesses. I will also take this opportunity to thank the clerks, the policy adviser and our support team.

We have heard that the report looks at the financial issues that will have to be addressed in the negotiations when seeking a Brexit settlement. In particular, as has been explained, the report seeks to explore the certainties and uncertainties that attach to those issues, and how they might be addressed and calculated.

Before I look at one area of uncertainty, I should remind noble Lords that there is a fundamental question which it would sensible for the UK and EU negotiating teams to consider before detailed discussions begin. After the contribution from the noble Lord, Lord Thomas of Gresford, it could perhaps be called the Reform Club question. The question is well articulated in the title of the recent publication by the Bruegel think tank, to which the noble Lord, Lord Butler, referred: Divorce Settlement or Leaving the Club? A Breakdown of the Brexit Bill. At the beginning of its text, the report expands on that question as follows:

“The key question is whether one considers Brexit to be a cancellation of a club membership or a divorce. In the former case, the UK would have no claims on any EU assets but would still need to pay its outstanding membership fees. In the latter case, both assets and liabilities would have to be split”.

Every pronouncement from leading EC and EU figures since last June’s referendum suggests that they have been determined from the outset to see the Brexit negotiation as a divorce settlement. Their focus appears, from their public utterances, to have been on what share the UK owes in terms of EU liabilities. For whatever reason, they appear to have given no consideration to the possibility that treating the Brexit negotiation more as the cancellation of a club membership than a divorce settlement might avoid many months—possibly years—of detailed wrangling over the complications that come with striking an agreement on the UK’s share of the EU’s assets and liabilities.

It might be a better direction of travel for both the UK and the EU to see this as a cancellation of a club membership—or it might not, but at the very least the option should be considered, in case it has merits and serves both parties’ interests. I would be interested to hear from my noble friend whether Ministers accept that the Brexit settlement will be treated as a divorce settlement or whether alternative approaches could be on the table.

One of the complications that our report considers, which has already been referred to in this debate, is in respect of pensions and how the UK’s share of pension liabilities might be calculated and allocated. As we heard from the noble Lord, Lord Butler, in the EU’s 2015 annual accounts, accrued pension liabilities were shown at a capitalised figure of €63.8 billion. This raises two key questions: first, is the UK under a legal obligation to make a contribution towards those long-term pension liabilities; and, secondly, if it is, how should the UK’s share of this €63.8 billion be calculated?

A number of our witnesses appeared to be very confident that it is an unavoidable and enforceable obligation on the UK that we will have to meet. Their focus was on the different ways in which the UK’s contribution should be calculated. A range of propositions was suggested to us: for instance, that it should be based on the UK’s contribution to the EU budget, either with or without the UK rebate being taken into account; or that it should be based on the past and present numbers of UK nationals employed in EU institutions; or that it should be based on the proportion of those in receipt of an EU pension who are UK nationals; or that it should be based on the UK’s share of the EU population. In other words, among all those witnesses who agreed that there was a binding obligation on the UK to make a contribution to accrued pension liabilities, there was no agreement on the right methodology to calculate that contribution.

Beyond that, there were also differing views on how EU enlargement over the years of the UK’s membership could be overlain on some of those methodologies, and there were queries about the actuarial and accrual accounting methods that had been used to calculate the €63.8 billion capitalisation of the long-term pension commitments.

Other witnesses challenged the assumption that the UK is legally liable for a share of accrued pension liabilities, especially those liabilities not falling due until after the date when the UK ceases to be a member of the EU. They also offered us a range of propositions to support that view. For instance, it was pointed out that pension liabilities, unlike other member state budgetary liabilities, relate to rights that are accrued by individuals through their service in European institutions; that the nationality of employees or pensioners is irrelevant; and that the legal responsibility for meeting those pension entitlements clearly rests, in the first instance, with the employing European institutions and thereafter with the EU, with member states acting as guarantors—but a member state cannot be retrospectively liable as a guarantor after it has ceased to be a member state. We also heard that the UK might claim that it had overcontributed to EU pensions over the years of its membership.

From the conflicting views and evidence that the committee received, it is difficult to conclude that the UK is subject to a clear-cut and unarguable legal obligation to make a contribution either towards accrued long-term pension liabilities as part of a Brexit divorce settlement or to any continuing enforceable post-Brexit liability for accrued pension entitlements thereafter.

It was put to us that, regardless of any uncertainties around the legal position, the UK is none the less under a moral obligation on both counts. Once again, the evidence we heard was conflicting and suggests that this may be one of those moral obligations that is in the eye of the beholder, compelling to some but unseen by others. In other words, if the UK is subject to a moral obligation, like the legal position it is not clear-cut.

However, regardless of the differences of opinion on whether or not a solid legal or moral obligation exists, there was perhaps a greater consensus around the view that the UK will very likely be under a strong political obligation to address expectations around EU pensions. If, as we have heard, the UK wants a Brexit deal that achieves a new strategic partnership, beneficial trade arrangements, future UK participation in EU programmes and, as my right honourable friend the Prime Minister said and the noble Baroness, Lady Falkner, quoted,

“a new deep and special partnership”,

it is difficult to contemplate those objectives being achieved without the UK being prepared to come to some agreement with the EU on pension liabilities.

At the same time, if the obligation to reach a deal on pensions is largely political and the Brexit negotiations descend into territory that either could be called a bad deal or that raises the prospect of no deal, the UK may indeed be able to disregard the need to reach that agreement on pensions and to avoid any gesture or contribution towards long-term liabilities.

The EU negotiators may disagree with that scenario and claim that they have both the law on their side and access to the jurisdiction and enforcement processes post Brexit that will enable them to compel the UK to honour its share of accrued pension liabilities. They may be right—but, on the balance of the evidence taken by the committee, there have to be doubts about whether such confidence would be well founded.

This leads me to offer the following conclusions, which are very much in line with what the noble Baroness, Lady Falkner, said in introducing this debate and the comments of the noble Lord, Lord Butler, about the sense of a reasonable agreement being reached and the benefits that will accrue to both sides of the negotiation. If the UK wants a good Brexit deal, it must be ready to contribute to the EU’s pension liabilities, regardless of the fact that the UK may not be under a legal or moral obligation to do so. Equally, if the EU wants the UK to contribute to the EU’s accrued pension liabilities, the EU must be ready to address what the UK is seeking from the rest of the Brexit negotiations. If both parties approach the negotiations with that mindset, I do not see pensions necessarily holding up the Brexit discussions.

There is one other way to avoid pensions becoming a time-consuming blockage in the negotiations—and this goes back to the Reform Club question. It is to treat pensions within the negotiations as being a resignation of membership issue rather than a divorce settlement issue.

Photo of Lord Shutt of Greetland Lord Shutt of Greetland Liberal Democrat 1:03 pm, 6th April 2017

My Lords, I too pay tribute to my noble friend Lady Falkner of Margravine for her leadership and the way in which she has conducted the committee while she has served as our chairman. As she has indicated in her generous comments to me, this is my last contribution as a member of the European Union Financial Affairs Sub-Committee prior to my being rotated off for further service elsewhere. It has been thoroughly brain-taxing work but I have come to the conclusion that perhaps I will miss the weekly thick brown envelope arriving each Saturday morning. Twenty-seven days after the referendum, the sub-committee met and decided to have two inquiries, one into Brexit and financial services and the other on this subject, Brexit and the EU budget. The first one was debated on the last day before the Christmas Recess, and here we are debating this topic on the last day before the Easter Recess. I have a feeling that the business managers take the view that if there are difficult areas with lots of numbers, they should table them on the last day.

I tend to the view that these occasions are not for the members of the sub-committees to speak but for others to speak, and it is not for us to puff up the work. However, on this particular report perhaps it is right for us to speak on this occasion. Four members of the sub-committee have spoken so far and the noble Lord, Lord Haskins, is yet to come. I will try not to repeat too much of what has been said.

The first point is that the EU budget is very complicated. We have looked at the income side and tried to understand it. Three-quarters of the income is based on the gross national income of member states, along with money from customs duties, VAT rebates and corrections. The expenditure side is based on a seven-yearly financial spending plan, the multiannual financial framework, enhanced by an annual budget as amended several times during the course of the year.

One area that we have been trying to get to grips with is where on Brexit the UK’s financial responsibilities would stop, on the basis of a departure in two years’ time. How does that fit with a seven-year budget? Here we are in the seven-year period 2014-20. Certainly before our departure there will be talk of the budget for 2021-27. We have heard about the RAL, which is yet to be paid—in other words, promises. It is committed in 2014-20 but to be paid later, with some of it perhaps coming to the UK. We have even been told that it may be several years beyond 2020 before some of it is actually spent.

The noble Earl, Lord Lindsay, has spoken about pensions. We have discussed that, including the question of whether we are talking about proportions of pensions or entire pensions, and the issue of UK pensioners. We have looked at the share of assets, cash, property loans and what the percentage is that one would put to the UK. I am interested in the Reform Club analogy. I also wonder about the analogy of the building societies, where the clock stopped and the people who were members ran at that point. And what about the inherited wealth of those who started this work in the middle of the century before last? We also looked at the European Investment Bank.

It was trying to tease out what the UK’s liabilities are and seeking legal opinions that led us to what seems to be a very surprising position—or was it in fact surprising that there was this “walk away” option because a deal could not be enforced? We took legal opinion. Three lawyers came before us and then we sought our own legal advice from the legal adviser to our committee here in the House of Lords, which is printed in full. All that evidence was taken on the public record, and other distinguished lawyers who saw that could have come rushing to our committee and said, “We want to give some evidence to you because we think differently”. I do not think that happened. That is what we found, and we would have been criticised if we had said, “We will ignore all that because it doesn’t seem right”. So it is there, it is in the evidence; it had to be.

The one thing I conclude is that Brexit or any other exit was not meant to happen. That is why we are in the pickle that we are. Is it any surprise that no deal is a possibility? No, because unless Article 50 had a substantial annexe detailing how an agreement could be formulated and would be enforceable, how could it be otherwise? With due deference to my noble friend Lord Thomas, Article 50 contains no reference to lawyers or courts. That is amazing, but that is what the document says. As I said, I do not believe it was meant to happen.

Hence, perhaps, Mrs May’s position. On the one hand, she says that she wants a smooth, orderly exit from the EU, but on the other that no deal is better than a bad deal. What is a bad deal in those circumstances? I suspect that she means an expensive one. I do not know, but what other definition would there be? I conclude that no deal and walk away is the bad deal, because to walk away means that the UK could not hold its head high in the international community, nor would it be trusted to honour international agreements ever again. That seems to me a perilous journey.

So the committee is clear: we need to agree. The numbers are not clear: they need to be negotiated. We can see the circumstances in which the numbers may arise in any deal. On page 29, we indicate how we see that, by agreement, the figure could be as low as £15 billion or as high as £60 billion.

In the last brown envelope to come to my house last Saturday morning was a report by a European think tank, Bruegel. Its numbers are more precise. It has done a similar job to our committee. I do not know its methodology in reaching its numbers—perhaps it has just beavered away—but it comes up with figures between £31.7 billion and £35.1 billion, a much narrower position. It took no account of the European Investment Bank, and I believe that UK involvement in that amounts to £10 billion, so in those circumstances it would narrow down to £21.7 billion to £25.1 billion. Of course, all these numbers can change because of financial behaviour in the next two years—particularly, for the UK, whether the expenditure budget moves away from us or there are more benefits to the UK.

In conclusion, I cannot believe that there is any solution other than orderly agreement. However the sequencing should be, unless the financial settlement is sorted, I cannot see there being good will for a future beyond it. Therefore, it is very important.

Photo of Lord Haskins Lord Haskins Crossbench 1:14 pm, 6th April 2017

My Lords, the series of House of Lords inquiries about the impact of Brexit in recent months have been illuminating and made a powerful contribution to the national debate on the subject. They have provided balanced analysis and information, which has been seriously lacking elsewhere. This report is no exception, although one of its conclusions is proving rather contentious and raising a head of steam. My comments on the report are those of a business person, rather than a parliamentarian or, indeed, a lawyer.

Four major factors have determined the Brexit vote. All of them are now being subtly reassessed by the Government. The first was to reduce drastically migration from the EU. It is now clear that tackling this in the short term would have serious economic consequences, which Ministers seem to be beginning to recognise, and only the most rabid Brexiteers would ignore. The second was to take back control. It seems that the great repeal Bill will say, “Yes, we will, but not quite yet”, because a substantial quantity of EU regulation which business wants to maintain would have to continue to be subject to some sort of EU supervision. In the short term, the vast majority of EU regulation will be transposed into UK law without amendment. The third was to withdraw from the jurisdiction of the European Court of Justice. Again, it seems that the Government are saying “Yes, but not yet”, because on the first two issues the European Court of Justice has to remain in place.

The fourth, which relates to our report, was to make significant cost savings by not having to contribute to the EU budget. This, too, is becoming a mirage. Brexit will not throw up vast sums which can be put into the NHS, as was suggested during the campaign. On the contrary, if the Government are to honour their promises to the main UK recipients of EU funds—farmers, universities and local authorities—and if, as both the Prime Minister and the Chancellor have already recognised, we are to honour our budgetary obligations triggered by Brexit, in the short and medium term there will be a not insignificant cost.

Our report spells out the range of the UK’s potential financial obligations on withdrawal, if we are at the same time to establish a constructive economic and political arrangement with the EU going forward. The range is enormous, as we know. However, our report says, based on the legal evidence we received from two assertive but also two more ambivalent lawyers, that the UK would not be legally liable for any obligations if we withdrew unconditionally. However, we say in the report that the political and economic consequences of such action would be profound.

These consequences need to be spelled out quite clearly. If the UK refuses point blank to honour any of these obligations based on a legal technicality, two developments are inevitable. First, negotiations would break down almost before they had started and a cliff-edge hard Brexit would be triggered, with a so far incalculable—according to Mr Davis—impact on the economy. The second is that the honour and integrity of the UK would be at risk because, despite what the lawyers told us, you can bet your bottom dollar that the EU would find mountains of lawyers to take Britain to court and argue that there was a legal obligation—good for the lawyers, but not for the rest of us. Our global creditworthiness might be affected. Fortunately, the Government—although not some of the more fervent Brexiteers—show no inclination to go down that route, and our observation will, we hope, remain of only academic interest to lawyers, not to business people such as me.

The real value of the report lies in its spelling out of the huge range of financial obligations which the UK’s exit might trigger following withdrawal. At the highest level, we have heard about £60 billion, which in my view is far-fetched, as is the zero level. A deal will be done between those two levels. Based on the information that the committee received, my opinion is that the UK’s share of the MFF commitment between March 2019 and December 2020, which happens to be the end of the present MFF 2014-20 commitment, should be honoured. We have different figures, but mine is €12.5 billion. In addition, the Government have promised to match the funds for UK farmers and beneficiaries of EU structural funds for the year to March 2020, which is another €3.5 billion. I am not convinced that there is a pension liability.

UK liabilities under the present MFF which extend beyond 2020 are much more questionable, and very substantial, as we have heard. Much of this commitment is fanciful. Poland, for example, is yet to spend any of its 2014-20 award, and there is some money hanging around that was agreed as far back as 2007 and has not been committed.

Finally, I very much hope that the Government’s approach to these historic negotiations is strategic and not, as in the past, game-playing between the 28 participants. While an all-night, last-minute horse trade might be okay when handing out fish quotas and subsidies to farmers, such an approach would be highly irresponsible in these historic discussions, where so much is at stake for both sides.

Photo of Lord Taylor of Warwick Lord Taylor of Warwick Non-affiliated 1:20 pm, 6th April 2017

My Lords, I add my thanks to the noble Baroness, Lady Falkner, for moving this important debate. My thanks go also to the European Union Committee for producing such a comprehensive report.

For more than 40 years Britain has been a part of the European family. The famous soul music hit “We Are Family” summed up the relationship. But, sadly, wedlock increasingly became seen as padlock. On 23 June last year the British people decided to adopt another tune. This could best be described by the rock supergroup Queen’s anthem “I Want to Break Free”.

Britain is leaving and we have two years in which to exit, and we have triggered Article 50. The big issue now is the terms on which we exit. I would not normally associate the TV personality Noel Edmonds with Britain’s exit from the European Union but for 11 years he presented 3,000 episodes of the popular high-tension TV game show “Deal or No Deal”. That is the situation we are now in—deal or no deal—but we do not have the luxury of 11 years and this is more important than a game show. It is about Britain’s future.

Surely the most important point is that it is in everyone’s interests that harmony be maintained. About 45% of UK exports go to the EU, while 53% of our imports are from the EU. The British-EU trade relationship will still be important post Brexit. As the Prime Minister said in January:

“We are leaving the European Union, but we are not leaving Europe”.

It is not in the EU’s interests to punish us by forcing us to resort to the World Trade Organization’s rules. I had the privilege of being a speaker at the WTO in Geneva. I formed the impression of an organisation which, although well-meaning, is actually hindering, not helping, free trade through its punitive rules.

Article 50 is very clear. There are three elements. First:

“Any Member State may decide to withdraw from the Union”.

Secondly, such a member state has to notify the Council—we have done that. Thirdly:

The Treaty shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement”.

I submit that in its very brevity Article 50 points to the departure being a clean break. It also means that trading negotiations should not be put on hold. If we talked about exit terms for the next two years and put off all thoughts of trade deals, imagine the effect on the markets and the jobs that would be lost. Surely these terms need to be negotiated in parallel.

About a decade ago I was a guest speaker at a Nevada business forum in Las Vegas. Just before the start of the dinner the host came over and asked me to give a welcome speech on behalf of the United Kingdom. It took me by surprise since I thought I was only due to speak later. But I took the opportunity as it presented itself then, which is what we should do with these discussions. Let us not forget that 85% of the global economy lies outside Europe. There is a big world waiting for us outside Europe: the Commonwealth, China, India and America.

The European Commission’s chief negotiator, Michel Barnier, has suggested that the UK’s exit bill could be as high as €60 billion. This has not been justified or itemised in any way. What we do know is there will be a €10 billion per year hole in the EU budget as a result of the UK exit. So one can see why Mr Barnier is keen to find ways of making good that loss. But he needs to understand that when a house is on fire, it is too late to take out an insurance policy. There was no mention of a possible exit bill when Britain first joined the EU. Furthermore, there is no mention of an exit bill in Article 50.

It is right to take into account paragraph 135 of the report. The committee did not rely on just one legal opinion; it took a variety. In its submission, we do not owe any money at all. Of course, that needs to be debated and discussed but to ignore paragraph 135 would not be right. When one considers that part of the exit bill would cover the pension costs of retired EU officials, one can see why this could be contentious.

Having said that, it is not just about the legal obligation. There are other factors to take into account. During our 40-year membership of the EU, we have been a net payer to the EU budget, subsidising the poorer EU member countries. This is why we receive a European rebate. In 2015 the UK made the second-largest net contribution to the EU budget in absolute terms: €14 billion. When the UK makes its final contribution as a member state, we should expect the usual rebate payment. That could come to over €7 billion. So the rebate could be used to reduce any final exit bill. In our negotiations we could also call on the EU to hand back €10 billion of UK assets held by the European Investment Bank.

The Chancellor Philip Hammond has said that he does not recognise our liability for the Brexit divorce bill. I think that is wise at this stage. But we have also said that we may wish to pay to continue to take part in some EU programmes, such as Horizon 2020, the EU’s research and innovation programme. I think that is sensible.

It is illuminating that throughout the Bible there is a theme of one empire after another eventually overreaching itself and gradually collapsing. In the Old Testament there were the Egyptians, followed by the Assyrians, the Babylonians and finally the Persian Empire. In the New Testament there were the powerful Roman rulers. But all these empires eventually fell, because national sovereignty proved more sustainable than the politics of imposed empire.

Over the next couple of years and beyond, there will be no shortage of critics scaremongering and predicting disaster for Brexit. But fear is that dark room where only negatives are developed. We must not be like the paranoid patient who visits his doctor, to be told, “Please listen. You’ve got hypochondria”, and the patient replies, “Oh no, not that as well!”.

Will our negotiations with the EU be a good-natured “Strictly Come Dancing” duet or a bad tempered “High Noon” duel? Earlier this week the Prime Minister urged “jaw-jaw” not war-war. I was also encouraged by the comment yesterday by the President of the European Commission, Jean-Claude Juncker, who told MEPs:

“We will of course negotiate in friendship and openness and not in a hostile mood, with a country that has brought so much to our union and will remain close to hearts long after they have left”.

I was further heartened by the EU’s Michel Barnier adding yesterday:

“The ‘no deal’ scenario is not the scenario we are looking for. We are looking for success, not against the United Kingdom but with the United Kingdom”.

I note also that this very lunchtime Donald Tusk is meeting our Prime Minister, and that augurs well.

I am not suggesting that the next two years will be easy. But the British people and both Houses of Parliament have spoken, Article 50 has been triggered, and we must approach these Brexit and trade negotiations with a confident, robust spirit. As Sir Winston Churchill once said:

“Difficulties mastered are opportunities won”.

Photo of Lord Jay of Ewelme Lord Jay of Ewelme Crossbench 1:30 pm, 6th April 2017

My Lords, it is a pleasure to follow the noble Lord, Lord Taylor. I speak as a member of your Lordships’ European Committee, though not as a member of the sub-committee which produced this report. I congratulate the members of the sub-committee and its chairman, the noble Baroness, Lady Falkner, on the report. The noble Baroness and I were in Berlin yesterday on behalf of the EU Committee talking to the Bundesrat about Brexit and indeed about this report. I very much agree with what was said earlier today about the importance of contacts between this House and your Lordships’ European Union Committee and the Parliaments of other EU states.

This report is timely, since it is clear that negotiations on the withdrawal agreement to which the negotiations on the UK’s financial contribution will be a large and key part will take place towards the beginning of the two-year process now under way with the implementation of Article 50. It is not entirely clear to me when the real negotiations will start. But, if as expected, formal European Council guidelines are to be agreed towards the end of this month, with the negotiating mandate given to Michel Barnier shortly thereafter, we may be engaged in at least preliminary skirmishes among officials by around the middle of May.

Like others who have spoken today, I see no great advantage in trying to guess exactly how much the bill will be. I note that the draft European Council guidelines talk of a single financial settlement of the budget question. That does not seem to me to be the same as a single figure and my guess is that the single financial settlement will consist of a combination of liabilities, contingent liabilities and payments, or potential payments, over a number of years. I do not think that we can sum those up into one single figure. Furthermore, on the UK side, there will be a case for continuing contributions in return for some continuing advantages. European research and co-operation is one area sensibly mentioned in the report we are discussing today. Another possibility would be continued payments for both sides of the border between the Republic of Ireland and Northern Ireland which would otherwise fall away when we leave the European Union. It is encouraging that the need for sensitive and sensible handling of the implications of Brexit for Ireland are recognised both in the Prime Minister’s letter and in the draft Council guidelines.

It should also be said that on the EU side, one effect of the withdrawal of the UK’s net contribution will be the need to cut back on expenditure or shift the pattern of distribution of expenditure with really very difficult decisions, particularly in eastern and central Europe for recipients, and also difficult decisions for contributors, notably Germany. There will, therefore, be a tough and fraught negotiation carried out at least on this side of the channel in the full glare the press. It will not be a pretty sight.

It would, I suppose, be foolish to rule out completely a breakdown in talks leading to the two-year period specified in Article 50 ending without agreement. But, like the noble Lord, Lord Shutt of Greetland, I cannot see that that would be in anybody’s interests. Talk of WTO terms for our trade that in my view would be deeply unsatisfactory ignores the crucial issues that fall outside the trade and economic relations, which would fall away too if there were no agreement at the end of two years. I think of justice and home affairs, foreign and security policy, and the fate of EU citizens in Britain and of British citizens in the EU. To reach the stage of complete collapse would be a colossal failure of negotiators on both sides, and it would be directly contrary to the statement by the Prime Minister in her letter at the end of March to Mr Tusk and the draft European Council negotiating guidelines of the importance of a longer term co-operative relationship between the UK and the EU, which as others have said in this debate, will be so important for our future.

Against that background, I cannot see that the conclusion that the UK will be under no legal obligation to meet the outstanding financial obligations after leaving the EU will, in practice, be particularly relevant to the way in which these crucial negotiations will evolve over the next two years.

Photo of Baroness Ludford Baroness Ludford Liberal Democrat Lords Spokesperson (Exiting the European Union) 1:35 pm, 6th April 2017

My Lords, I too thank the sub-committee under the chairmanship of my noble friend Lady Falkner for a very interesting report. Before I go any further, I should draw attention to my interests declared in the register. I particularly agree with the contributions of the noble Lord, Lord Davies of Stamford, my noble friend Lord Thomas of Gresford, and the noble Lord, Lord Hannay, and with much of what my noble friend Lord Shutt said. I am sure that the sub-committee will be much the poorer for his contributions sadly having to come to an end.

We mainly all agree that an orderly withdrawal arrangement is needed, free of what the noble Lord, Lord Haskins, called irresponsible game playing. I was glad that the noble Lord, Lord Taylor of Warwick, stressed that these negotiations were more important than a game show. I was getting a bit nervous with all his references to people such as Noel Edmonds.

I am among those who are not really persuaded by the report’s conclusions—indeed I find them quite puzzling in the light of the weight of the evidence from legal witnesses, and the clear reading of Article 50 of the treaty and Article 70 of the Vienna convention. I find it quite awkward to disagree with the very distinguished former legal adviser to the EU Select Committee whose period of employment ended on the very day that the report was published, so there was no opportunity, even in private, to discuss it with him. I feel rather uncomfortable commenting on that legal advice. I do not know whether there is any precedent for the legal advice of an official being published in a report. I am not sure that it is one I would recommend to be followed.

I found myself much more persuaded by the evidence on the legal situation from Professor Tridimas and Rhodri Thompson QC than by that of Dr Sánchez-Barrueco, and it is surprising that the advice of our former legal adviser does not reflect what I regard as the balance of that evidence.

Of course, the practical situation is that it is not about what the UK might agree to pay for future post-Brexit access. The issue is about the liability for obligations assumed while we were still a member. I find the sort of everyday examples that I can relate to include those invoked by Rhodri Thompson QC that if you have a 10-year lease and give notice to leave the premises after six months you may well still be liable for the full term of the lease. Indeed, in view of my current domestic travails with my telecoms supplier, which I will not bore noble Lords with, it is common for telecoms contracts to commit one to paying money if you want to leave a contract in less than the 12 or 24 months that you signed up to. So that is the kind of situation that we are in. The obligations under the EU treaty that the UK assumed as a member state do not disappear when we decide to denounce that treaty. That is a fairly common-sense conclusion.

The advice from the former legal adviser drew attention to the incontestable fact that Article 50 sets out the provisions on withdrawal from the EU. The rules on withdrawing from a treaty in Article 70 apply only if the treaty in question does not have any provisions on withdrawal. But withdrawal is not the issue: Article 50 clearly governs the process of withdrawal from the EU. What it is silent on is the assumption of rights and obligations, and their discharge, assumed when one was a member of that treaty. So the conclusion of the former legal adviser, that Article 50 does not need to be interpreted in the light of the Vienna convention but on its terms alone, is the one I find the most difficult to accept. It is precisely because Article 50 is silent on the question on the ongoing liabilities that I believe that, if we were to withdraw without an agreement, Article 70 of the Vienna convention would kick in to take up the slack. If we have, as I very much hope we will, an orderly withdrawal agreement, we are all expecting that that would cover the question of negotiated liabilities. I am certainly not desiring that this country should pay a penny more than is reasonable as a result of negotiations undertaken with good will on all sides. There is no reason for us to be overgenerous, but to undertake that in the spirit of all lively negotiations. Of course, there are plenty of other calls on money in this country.

The very fact that there is no express provision in Article 50 on picking up the existing rights and obligations means that Article 70 of the Vienna convention comes into play, because there are no rules in Article 50 to prevail over Article 70 of the Vienna convention. So Article 50 has to be interpreted consistently with Article 70 of the Vienna convention, because Article 50 does not dictate any specific solution.

The question of jurisdiction and enforcement is another matter. As we know, under EU law, the interpretation of EU law is ultimately a matter for the Court of Justice, and the 27 member states will be bound by Article 36 of the TFEU, which states:

Member States undertake not to submit a dispute concerning the interpretation or application of this Treaty to any method of settlement other than those provided for therein”— the Court of Justice of the European Union. The EU institutions, in the draft Council guidelines and the European Parliament resolution of yesterday, are making it very clear that EU enforcement mechanisms apply. It is going to be a very interesting discussion on how you work all that out once the UK is no longer a member state, but we can all see that there will be a very good argument why the Court of Justice may well come into play in the negotiation of a transitional agreement and a future relations treaty.

I am reminded of the fact that the Brexit White Paper not only recognised the established position of the CJEU as the EU’s,

“ultimate arbiter on matters of EU law”,

but also committed to the fact that the UK,

“will of course continue to honour our international commitments and follow international law”.

Whether it ends as a matter of enforcement under EU law by the CJEU or through some international means and tribunal is above my pay grade, but I should have thought that, one way or another, the question of jurisdiction and enforcement will be rather closer to the CJEU than any other solution. The Government will want that jurisdiction enforcement to be worked out and not left hanging in the air, not least because, as all the legal witnesses to the committee stressed, there would be a significant price to pay politically were the UK to refuse to honour obligations under EU law that the CJEU were to find that we owed. It would not leave us in a very comfortable place, if we refused to honour those obligations. There would also be significant international implications if we were not prepared to comply with our obligations on exit from the EU. It would not augur well for all these other international treaties that are being mooted.

I am not sure that it is terribly helpful to the Government to be told that they do not need to pay anything at this part of our process of exit from the EU. I would love to have been a fly on the wall when the Government read this report. Although we have heard various statements in the public domain about how, “Of course, we do not owe a penny—that is absolutely the case”, I am sure that in private they know that that is a long way from the real world and that negotiations will have to converge on some kind of honourable solution all round. The noble Lord, Lord Jay of Ewelme, reminded us that the press is not going to be a pretty sight when told the sum that the UK does agree, and the Government would do well to prepare the press for that day, not for any kind of overpayment but for whatever is agreed in the negotiations to achieve other negotiating objectives over the next few years. In that context, I look forward to hearing how the Government interpret the report as a guide to their future conduct.

Photo of Lord Tunnicliffe Lord Tunnicliffe Opposition Deputy Chief Whip (Lords), Shadow Spokesperson (Defence), Shadow Spokesperson (Treasury) 1:48 pm, 6th April 2017

My Lords, I thank the noble Baroness, Lady Falkner, for opening this debate and for the work that she and other members of the committee have done to produce this report. The House has benefited enormously from the broad range of EU Committee reports produced over recent months, each highlighting the complex challenges that we face in dealing with Brexit. Last weekend, I was in the pub relaxing with my neighbour, who said, “How’s life?”. I said that my aspiration to die before understanding the structure of the EU budget had been somewhat frustrated by my nomination to this role today. So I thank the noble Baroness, Lady Falkner, and the committee for producing what is an excellent primer to anybody coming to the question for the first time. I have found the report very useful in setting out the structure of the budget and the different dilemmas.

I know that noble Lords on all sides of the House have taken great pleasure in and placed great importance on contributing to these debates. However, today I have been somewhat surprised by the balance of the discussion. The noble Baroness, Lady Falkner, set out the legal issues in a reasonably straightforward way. The best interpretation of that part of the report is that if one fails to agree, one does not need to pay. As most noble Lords who talked about the realities of the situation recognised that no agreement is pretty well unacceptable, I shall focus rather more on what might be reasonable, as I believe that an agreement is essential to the future of our nation and how it lives with Europe.

Of course, this is the first EU Committee report to be debated after invoking Article 50. This only serves to focus our minds on the importance of this issue, and on the need for the negotiations to be conducted in a positive spirit. As we have heard during this debate, the report focuses on the UK’s current role as a net contributor to the EU and outlines some of the potential financial implications of our upcoming withdrawal. As I say, it concludes that there is a technical possibility of our walking away without agreeing a financial settlement. However, as the report acknowledges, there are clearly other forces at play. I will return to this later.

We do not know what the EU 27 will ask of us. We have heard speculation of between €50 billion and €60 billion, but talks have not yet formally begun and there are, as the report outlines, many factors to be considered. What we know is this: both the draft guidelines published by the European Council and the resolution adopted by the European Parliament refer to some form of exit payment. The committee’s report notes three headings under which the EU may carry out its calculations. The multiannual financial framework runs to the end of 2020. As a nation, we signed up to contribute for the entire period. It is not yet clear whether we will be asked to pay until the end of this period and, if so, whether we will receive the same benefits. Clarifying these points must be a priority for our negotiation.

The second heading—the UK’s liability for RAL—is just as difficult to predict. We do not know at which rate the EU would have us contribute, nor for how long. As with the MFF, these are commitments that the UK has already made and we must show maturity in our discussions.

Member states guarantee the pension entitlements of EU staff. The EU has benefited from the expertise of thousands of officials from the UK. We are grateful to them, and to those of other nationalities, for their work during the period of our membership. While we should not pay more than is necessary, we have a duty to pay our way.

Clearly, demands under these headings will need to be subject to detailed scrutiny and appropriate challenge. Nevertheless, the Government and the EU seem to be in agreement on the need to establish the general principles on which the final sum will be calculated early on. In the light of this, could the Minister confirm that the Government expect a claim from the EU for an exit payment? If they do, could he confirm whether the Government accept the three headings identified in the report as the likely basis on which the EU will calculate the amount? Lastly, could the Minister shed any light on what consideration his department has given to how it will assess the accuracy of the final claim, and how it will develop arguments to contest and scrutinise it? Labour is clear that the UK is a responsible partner. We have made commitments to our European colleagues and, while we will need to look at the figures in detail, it is only right that this country recognises and meets its obligations.

I return to my earlier remarks on the other forces at play. Following the handing over of the Prime Minister’s letter, the country will now engage in the most serious political negotiations it has undertaken since the Second World War. Decisions taken in the next two years will have a profound impact on our country’s future. After some hesitation, the Prime Minister and Secretary of State have now acknowledged the point I made earlier—that the UK is a law-abiding nation that meets its obligations.

The Government have also accepted that we may continue to contribute to the EU budget on a case-by-case basis. There is a clear national interest in maintaining co-operation with the EU in some areas. As we all know, nothing in life is for free. However, we remain disappointed that the Government and some noble Lords who have spoken today would be prepared to walk away with no deal. I was very seized by the comments of noble Lords who, like me, feel that this would be very unwise, particularly the noble Lords, Lord Hannay, Lord Haskins and Lord Jay, who I think all came to the same conclusion from different directions. The description of the negotiations mentioned by the noble Lord, Lord Hannay, has particular resonance for me. I spent part of my career negotiating in fractions of billions rather than multiple billions, but I think the experience is very much the same. He brought out the importance of painfully going through the detail. To that I add the next step of painfully going through the detail to find areas of common interest, and building on that common interest for the future of the United Kingdom and of Europe. Failure to agree a relationship with the EU that supports our economy and protects vital social and environmental rights could be “very destructive”. That is not just my view but the view of the Commons Foreign Affairs Committee.

Labour has laid out six tests for the Government, and my noble friend Lady Smith of Basildon has added a seventh: honesty. This test is just as vital for this issue as for any other. While the report stresses the legal point, we will struggle to strike deals with new partners if the UK is viewed as unreliable and untrustworthy. In this sense, the legal reality is secondary to the political and economic reality.

I once again thank the committee for this report. I hope that the Minister has listened carefully to this debate and that the Government will continue to engage as negotiations progress.

Photo of Lord Young of Cookham Lord Young of Cookham Lord in Waiting (HM Household) (Whip), Lords Spokesperson (Cabinet Office) 1:57 pm, 6th April 2017

My Lords, when the noble Lord, Lord Tunnicliffe, returns to the pub and resumes the dialogue with his drinking friend, I hope that he will share with him his deep insight into the mechanics of the EU budget. I am sure that he will be fascinated to learn even more about it.

I thank all those who have taken part in this debate, particularly the noble Baroness, Lady Falkner of Margravine, who not only chaired the committee but also introduced this debate. I particularly welcomed her peroration with its plea for fair play and an amicable settlement—an emotion that was shared by nearly everybody who spoke in the debate. I particularly recall the interventions of the noble Lord, Lord Butler, and my noble friend Lord Lindsay in that respect. Having listened to the noble Lord, Lord Thomas of Gresford, I came to the conclusion that if only those on this side of the negotiating table and those on the European side of it were all members of the Reform Club, our withdrawal could be settled quite quickly after a decanter or two of very good port.

This committee, together with the others under the umbrella of the EU Committee, continues to inform and influence the Government’s approach to the EU negotiations and I welcome the significant contribution this report has made in that respect. I reread earlier this week one of the first reports on this subject, The Process of Withdrawing from the European Union, which came out nearly a year ago, when withdrawal seemed unlikely. Like today’s report, for those of us for whom the EU is not our special subject, it was clear, concise, eminently readable and cogently argued. I was struck by how perceptive that original report was, particularly on the key role of the European Parliament in consenting to any agreement, and on the process of disentangling the UK from EU law, where the report quoted the chilling comment of Sir David Edward, a former judge of the Court of Justice of the EU who said:

“The long-term ghastliness of the legal complications is almost unimaginable”.

On the report, I certainly take on board the advice from the noble Lord, Lord Hannay, who said that sweeping assertions should be avoided. Throughout this report on the EU budget, the committee has successfully identified the legal and technical issues, as set out by the negotiation guidelines recently published by the European Council and the European Parliament. I can confirm, in response to the question posed by the noble Lord, Lord Tunnicliffe, that the headings identified in the report as liabilities are the liabilities identified in the EU’s annual accounts. The Government will publish their formal response to this report in the usual timeframe. But I say from the outset that this is a significant contribution to the EU budget discussion in which, so far, much heat but little light has been generated. We have had a very high-quality debate inspired by this report.

As the Prime Minister made very clear in her Statement to the Commons last week, we will begin our negotiations with the European Union with the ambition to be not just a truly global Britain but the best friend and neighbour to our European partners. We have set ourselves a clear and ambitious plan for the negotiations ahead. During these, we will seek to achieve the best outcome, not just for the UK but for our European partners as well.

The Article 50 letter that was delivered last week by our UK representative in Brussels to Donald Tusk, President of the European Council, formally set out what we are proposing to our European partners on the forthcoming negotiations. The Council has responded with draft guidelines which say, on the subject we debate today:

“A single financial settlement should ensure that the Union and the United Kingdom both respect the obligations undertaken before the date of withdrawal. The settlement should cover all legal and budgetary commitments as well as liabilities, including contingent liabilities”.

Therefore, the response to another question from the noble Lord, Lord Tunnicliffe, is yes: both the European Union and the European Parliament are looking for a single financial settlement.

The UK Government will now seek a deep and special partnership that covers both security and economic co-operation with a bold and ambitious free trade agreement, greater in scope than any such agreement before. We should begin these negotiations constructively, in a spirit of sincere co-operation, as indeed has been advocated in today’s debate, and we are confident that, at the end of the day, Britain can secure a deal that works both for us and for the EU. I agree with what a number of noble Lords have said—the noble Lord, Lord Butler, for one—that we want an agreement, but so does the EU.

Before I get into the legal arguments about whether we owe the EU a so-called exit bill, I will briefly set out the Government’s ambition in this area. As the Prime Minister made clear in her Lancaster House speech on 17 January, having been a net contributor to the European budget since we joined the Common Market in 1973,

“the days of Britain making vast contributions to the European Union every year will end”.

While we remain a member of the EU, the UK will continue to play a full part in EU business, including EU budget negotiations—a matter the noble Lord, Lord Thomas, referred to—and meeting our contributions. We will remain committed to budgetary restraint and ensuring that we live within the current deal on the multiannual financial framework. However, what is important is that, once we have left the EU, control over how our money is spent will reside with the UK Government and Parliament.

Throughout the negotiations on withdrawal, we have to look at the rights and obligations we have as a departing member state, in accordance with the law but also in the spirit of continued partnership with the EU. As the report makes clear, a whole range of issues for the UK and the EU will need to be addressed as we leave the Union. The House will not be surprised, against a background of earlier debates on this subject, if I say little about the Government’s negotiating strategy, not least because the formal negotiations have not started yet. In any case, that was the advice I was given by the noble Lord, Lord Hannay, when he spoke a few moments ago. The guidelines are still being agreed and the debate over UK payments according to the rights and obligations of our membership is just speculation at this stage—speculation that has prompted a range of figures from the other side of the channel, which some noble Lords have referred to in this debate.

As the Prime Minister has said, the UK is a country that meets its international obligations. It is in the interests of both the UK and the European Union to agree a new partnership in a fair and orderly manner, with as little disruption as possible. There is indeed no reason why a new deep and special partnership between the UK and the EU should not be achievable.

On the specific issues raised in the report and in the debate, throughout the report there are a range of different opinions about the legal interpretation of potential obligations which the UK may or may not be legally required to pay. Witnesses to the committee are a testament to the complexity of it, and disagreement and uncertainty over the liabilities of a member state under Article 50 are to be expected in an area that has of course little precedent. The legal nuance is interesting. The report concluded that the wording provided under Article 50—in particular,

“The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification”— was sufficient to clear the UK of any ongoing obligations. My noble friend Lord De Mauley said that this was a useful incentive for the EU to seek agreement, and my noble friend Lord Taylor of Warwick made the case for that side of the argument more forcibly.

Other legal experts argued that Article 50 does not expressly deal with the question of financial consequences as a member state withdraws from the Union. The noble Lord, Lord Davies of Stamford, developed that case, as did the noble Lord, Lord Thomas of Gresford. The noble Lord, Lord Haskins, made the point that, whatever lawyers on one side for the argument might say, lawyers to support the other side of the argument can fairly easily be recruited. They argued the other side of the argument, that rights and obligations upon the termination of a treaty is governed by Article 70 of the Vienna Convention on the Law of Treaties. This states that obligations undertaken when the UK was still bound by the EU treaties would not disappear at the moment of Brexit.

We are far from exhausting the range of opinions that can, and will, be given on this matter over the next few years. Superimposed on the legal uncertainty over what is or is not a survivable obligation on the UK, there is the additional ambiguity over the size of each obligation and how to calculate the UK’s share—a point the noble Lord, Lord Jay, made in his contribution. As the report makes clear,

“if it were to be accepted that the UK had any financial liability on leaving the EU, no single figure can incontrovertibly represent an amount that the UK might be requested to pay”.

Again, for each potential obligation, witnesses before the committee highlighted various ways in which you could calculate its size and various ways in which you could calculate the UK share. At least four different percentages were given with respect to pensions alone. Reading all this as a layman—indeed, it has been confirmed by this debate—my conclusion was that a solution will not be arrived at by lawyers but by politicians.

A number of noble Lords mentioned the question of the MFF and what would happen when, without UK funding, the EU 27 would face an immediate decision on how to manage the shortfall in the remaining years of the MFF once we have left. Again, the noble Lords, Lord Jay and Lord Butler, raised this issue. Member states will face a difficult choice between increasing contributions or cutting payments. Increasing contributions will be unpopular with member states who are net contributors, but of course cutting payments will be equally painful for those who rely on receipts. The noble Lord, Lord Butler, referred to a comment from the German Deputy Finance Minister, Jens Spahn, who has already said:

“We shouldn’t be talking about more money for the EU budget, but how to make better use of our resources”.

The noble Lord, Lord Thomas of Gresford, asked whether beneficiaries of the UK would continue to receive EU funds. I am sure he is aware of the commitment, given by the Chancellor, that the Government will guarantee funding for projects signed before exit, even if they continue after we leave.

My noble friend Lord De Mauley asked whether it was realistic to try to expect an agreement in two years. We start from the advantage of close regulatory alignment with the institutions of the EU, with an understanding and indeed a trust in each other’s institutions, and with a spirit of co-operation which stretches back some decades. We hope that those attributes will be useful in trying to reach an agreement within that time span.

The noble Lord, Lord Davies of Stamford, asked whether the CJEU jurisdiction would still apply post exit. The UK is leaving the EU, and we have been clear that that means bringing to an end the direct jurisdiction of the CJEU in the UK.

On the question of the European Investment Bank, raised by the noble Lords, Lord Shutt and Lord Butler, we remain a full member of the EIB. The EIB has signed and approved new projects in the UK since the referendum, including £60 million for the purchase of new trains, which will improve passenger services in East Anglia, and £800 million for the upgrade of the national grid’s gas network. However, as with other items on the table, as part of the UK’s withdrawal from the EU the UK’s long-term relationship with the EIB will need to be resolved, and we are currently evaluating a full spectrum of options for the nature of that long-term relationship.

During our debate, there was a discussion on the size of the RAL and the liability relating to pensions. The noble Lord, Lord Butler, with agreement from other noble Lords, said that the liability rested with the EU. My noble friend Lord Lindsay said that that may be the case but that we have a moral obligation to make sure that it is happily resolved. Again, I say to your Lordships that we are approaching discussions on all these issues constructively and respectfully, and we are confident that we can achieve an outcome that works in the interests of both sides.

The noble Lord, Lord Butler, asked, I think, whether nothing is agreed until everything is agreed. I have in front of me the communication from the Council of the European Union. Paragraph 2 says:

“Negotiations under Article 50 TEU will be conducted as a single package. In accordance with the principle that nothing is agreed until everything is agreed, individual items cannot be settled separately”.

That was in the communiqué from Brussels that came out on 31 March, and I hope that that answers his question.

My noble friend Lord Lindsay asked a rather binary question: are we talking about a divorce or cancelling club membership? The honest answer is that we see this process as the UK leaving the European Union. We want to negotiate this withdrawal in good faith and with the ambition of being the best friend and neighbour to our European partners.

To sum up, this is a complicated topic whose complexity the committee has done very well to bring out. Equally important is its reflection—less well reported—on the importance of the spirit of the negotiations as much as the legal issues. That has been one of the themes running through this whole debate: we have to get the tone and the spirit of those discussions right. Therefore, I very much agree with the report’s conclusion, which is worth repeating here in full:

“It is also a negotiation about establishing a stable, cooperative and amicable relationship between the UK and the EU, so as to promote the security, safety and well-being of all the peoples of Europe”.

We want to play our part in making sure that Europe remains strong and prosperous and able to lead in the world, projecting its values and defending itself from security threats. We want a deep and special partnership, taking in both economic and security co-operation.

This report is a welcome and comprehensive contribution to this debate, as indeed our discussion has been today. It has highlighted critical uncertainties over the legal position with respect to survivable obligations and the approach to exactly what this means for UK finances. Our approach to the budget negotiations is ambitious but grounded in the principle of achieving the best outcome, not just for the UK but for our European partners as a whole.

I hope that the tone of this debate, in which different views have been expressed by Members of different parties and none, is matched by the tone of the negotiations, which are to start shortly.

Photo of Baroness Falkner of Margravine Baroness Falkner of Margravine Chair, EU Financial Affairs Sub-Committee 2:14 pm, 6th April 2017

My Lords, I start by thanking all noble Lords who have spoken in this debate. It has been extremely valuable and we will of course reflect on all the comments that have been made. I particularly thank the members of the committee who have spoken. As my noble friend Lord Shutt pointed out, a debate on the last day of term seems to be the fate of European Union Sub-Committee A, but as a committee we felt that we should take this date as offered, because this is one of the topics that will be addressed at an early stage and it is important to hear all sides of opinion in this House. What a debate it has been and what opinions we have heard. I will go through some of the substantive points and believe that I should address them as this is a debate.

I start with the noble Lord, Lord Davies of Stamford, whose presence on our committee we still miss, and I was delighted that he was able to find the time to speak. I need to address early on an issue which he raised and which it is of fundamental importance to get on the record. I refer to the rights of EU citizens who are working for EU institutions today. The noble Lord inferred that they would be fired at the end of the United Kingdom’s departure from the EU, and I thought it would be useful for the House to reassure them—in case they pick up Hansard—by reading Mr Juncker’s email to staff of 24 June, which particularly addresses this issue. He said:

“I know many of you are concerned about your future after this vote … you are Union officials. You left your national hats at the door when you joined this institution and that door is not closing on you now … our staff regulations will be read and applied in a European spirit”.

So not only does the United Kingdom Government stand by EU citizens, as I understand it, but the European Commission does, too, and that is an important clarification.

The noble Lord, Lord Davies, also led us through an exposé of the origins of jurisprudence which was worthy, if I may say so, of a university seminar. I tend to prefer the science of economics to the discipline of law, and I suggest that the established finding of behavioural economics, which borrows heavily from psychology, might apply here in terms of “confirmation bias”. Confirmation bias, as is defined,

“occurs when people filter out potentially useful facts and opinions that don’t coincide with their preconceived notions”.

The noble Lord, Lord Davies, also said that no one is suggesting that we will have liabilities after departure. We caveat our report by referring, as the noble Lord, Lord Tunnicliffe, said, not just to what will happen when we leave. After we leave there will be ongoing commitments, which is why the legal advice is significant. We know—and the report spells out—that there is a rule called n+3, whereby the expenditure continues for three further years after the end of the MFF period. I think it was the noble Lord, Lord Butler, who reminded the House of the comments of the German Finance Minister, Wolfgang Schäuble, who thinks that the liabilities could continue till 2030.Therefore, in that sense, this legal advice is absolutely pivotal.

My noble friend Lord Thomas of Gresford joined the noble Lord, Lord Davies of Stamford, on the overarching obligations of the Vienna Convention on the Law of Treaties. I refer noble Lords to page 60 of our report, which takes us back to the intentions of the drafters of the Vienna convention in 1966—the UN’s International Law Commission—which explained the thinking behind what it said in Article 70(1) of the convention. That article contains the words “unless the treaty” in question “otherwise provides”. The commission says:

“Clearly, any such conditions provided for in the treaty or agreed upon by the parties must prevail, and the opening words of paragraph 1 of the article”— which are, “unless the treaty” in question “otherwise provides”—

“(which are also made applicable to paragraph 2) so provide”.

Therefore, the Vienna convention rules itself out where there are other provisions in treaties.

The committee cannot be faulted for the fact that the treaty in question might not have provisions in it about how to go about an orderly withdrawal, the obligations and liabilities and so on. I suggest that the House, which has debated Article 50, might perhaps think about how it was so carelessly drafted as to leave out these important caveats. I understand from my conversations in Brussels that there is much gnashing of teeth among Commission lawyers about the manner in which Article 50 was drafted.

Let me turn to another point made by my noble friend Lord Thomas of Gresford. He gave the example of an EU project in Wales where the money might, on the whim of someone, be used for a purpose other than that for which it was provided. I agree that that would palpably be illegal. However, I also agree that the receipt of this funding would take place while the EU treaties are extant. Once we have left the European Union, the treaties do not apply. Therefore, neither does the justiciability of the CJEU, unless a withdrawal agreement decided to accept that as a condition.

I turn now to the noble Lord, Lord Hannay of Chiswick. I agree completely with his advice on the manner of negotiations and how one’s perceptions can be confounded as one goes deeper into the negotiation. However, he disagreed specifically with paragraph 135, and said that the committee should not have accepted the legal opinion. Perhaps he thought that we had taken only a single legal opinion into account. We did not. All the lawyers we spoke to knew the EU institutions well. We tested each opinion given by a lawyer and, as time went on and we had a subsequent opinion, we wrote back to the original lawyers asking them to give their opinion again in the light of what we had heard.

I am being encouraged to move on, and I will—I am coming to my final comment.

We exercised our collective judgment and came to our views based on how we saw the evidence. However, the noble Lord, Lord Hannay, suggested that I was somehow tiptoeing around some of these issues. Let me give him some advice: when confronted with counterintuitive situations, I find it better to tiptoe around new evidence rather than dismiss it through confirmation bias.

In conclusion, there is only one way to test whether our judgments in this report have been right or wrong, and that is through a court of law. We have heard from the Minister and from all sides of the House that we will not be going there; that we want an orderly exit and a deep and lasting relationship with our nearest partners, and that is what we should all be seeking to achieve, not least the Government, who speak in our name. I hope the report will be seen as perhaps an important milestone in making us all much more competent in dealing with the pitfalls that lie before us. I hope it will be taken in the best spirit of EU Select Committee reports, which perform such a valuable service to the House and beyond.

Motion agreed.