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Tuesday, November 04, 2014

EU budget row: How much interest will the UK pay if it refuses to cough up?

300% interest - in the EU it is legal
As most of you will know by now, the European Commission has asked the UK to pay an extra £1.7bn surcharge into this year's EU budget - before December 1. David Cameron has said he won't pay anything "near that amount", which in turn has triggered an almighty stand-off with the Commission itself insisting that if the UK fails to pay, it'll be charged interest from day one.

There has been a lot of confusion as to how much interest the UK will be legally liable to pay if it follows through on David Cameron's threat to refuse to pay. The answer as always lies in an EU Regulation as we pointed out here.

So how much is it? The short answer is a lot. Let's say Cameron holds out for one month. He'll then owe the EU £3.5 million in addition to the original £1.7bn surcharge. If he holds out for six months, UK taxpayers are looking at an additional £39.1 million while one year will increase the bill to £89 million - the annual interest will then stand at 5.25% . If the debt is still outstanding after 10 years, the UK would owe an eye watering £5.5bn of interest on a £1.7bn debt - over 300% interest.

In other words, under EU rules, the penal rate is ever increasing.

This is how it is worked out. Firstly the regulation states an annual interest rate of 2% above base rates per year - making a current 2.5%. It's worth keeping in mind that this is much more than the UK pays itself to borrow (in maturities up to 12 years or so, see UK yield curve here). However there is a sting - a rising penal rate of 0.25% for each outstanding month, and the total interest is all paid at the higher rate. This quickly adds up as you can see below:

So if this drags on, it has the potential to really become messy. However, as with everything in the EU there is usually a political solution. The Netherlands and Italy are also upset at receiving demands while the calculations (particularly around the interaction with the UK rebate) and the EU amending budget that goes with it are still up for 'clarification' and/or amendment. As reports today also indicated, it seems likely the UK will be able to do a face saving deal to pay something more than zero and less than £1.7bn - but if not the implications are huge.


DeeDee99 said...

Don't pay up. What are they going to do? Invade?

Anonymous said...

There are some mep`s that would like to do that, lets not pay up
and see how far they push it,
and then leave.

Anonymous said...

Again that "The rules are for others but nor for us."

The rules that had been approved by all countries, including UK.

Why do not you just leave?

Rollo said...

There is a simple obvious way of not paying: leave the club. It would help in every way, and release Britain to trade freely world wide, and thrive. We should not pay anything to shackle ourselves to a sinking ship.

Average Englishman said...

The simple answer to OE's question is 'however much the UK Government is prepared to pay'; no more and no less. And in turn, that will be however much the UK Government think that the UK voter will be prepared to swallow; which right now, isn't much.

The EUSSR commissars interpret 'the rules' of their club to suit themselves. They choose not to charge or fine countries when it suits them and they either obey or disobey the rules themselves when it suits them; so why should there be such shock at a sovereign government balking at paying an unreasonable and unexpected charge from an institution that obviously cannot run itself competently, is riddled with corruption and is intent upon throwing the UK's cash earnt from good economic practices at others that are bleeding money due to poor economic practices?

And as for Anonymous No. 2's question (pick a name for goodness sake, even a daft one like mine) as to why doesn't the UK just leave; I really cannot see why we shouldn't either and the sooner the better.

Anonymous said...

@ Average Englishman

The European Commission actually does try to apply the rules and e.g. proposes sanctions for too high budget deficits.
Just read OE posts with a view of its constant whining that the Commission applies the law and does not give UK any special, preferential treatment.

The reason the rules are not always actually applied is that the final decision is not, in fact, taken by the Commission, but by the governments of all Member States. Which may -and often do- by appropriate majority decide to reject the Commission proposal. It is exactly the kind of majority OE writes about in one of its October posts on UK contribution.

As to the corruption etc.: do let us know more, and if you know any actual facts do inform the appropriate authorities, SVP.

I agree that you should leave, and as soon as possible. Any country that actually believes that its obligations stem not from the rules adopted (also by itself), but from the national politicking, guided by tabloids' headlines, is only a burden to the rest. Out, out, out with you.

Average Englishman said...

@ Anonymous

The UK has never sought 'special preferential treatment', just a reasonable approach from Brussels, which has been lacking for as long as the UK has been in the 'Common Market' as was and the 'EUSSR' as now is. That is why Margaret Thatcher had to get her handbag out many years ago.

Your admiration for the Commission is touching but sadly misplaced. I am sure that there are many well meaning people working in Brussels but their approach is fundamentally misguided, as I believe, with respect, is yours. The joining together of Europe (and indeed the whole world) is something that will take place organically over time due to increased open trade and ever closer communication - both physical and electronic. That is why I voted for the UK to join the Common Market back in 1975. It is not something that can be dictated to the people of Europe by so called 'elite' bureaucrats.

Like you, they seem to have a contempt for democracy. 'National politicking' as you call it, is the fundamental democratic foundation upon which all of the European countries rest. Napoleon, Hitler, Stalin and others thought that Europe could be organized better by dictats from a central elite but most people kind of rejected that idea. Your comments betray what is basically wrong with the whole EUSSR at present: an arrogance and contempt for the democratic process and the will of the people of Europe and if this approach does not change the EUSSR will eventually fall, aith or without the UK.

The French vote unexpectedly against the EU Constitution; well, that's OK we'll just call it the Lisbon Treaty instead and not bother to ask anyone's approval this time. The Irish don't vote how they must; well, just threaten them with goodness knows what and get them to vote again until they do the right thing. This is the fundamental moral corruption that I mainly complain of, along of course with cash fiddling that is better expounded by others (if there is none why are the accounts still not approved after so many years?).

Still, at least we agree upon a solution for the UK, which is excellent. Truly an entente cordial.

James Campbell said...

Using a penal interest rate is a standard way in which prompt payment of debts is encouraged. English Courts apply penal rates of interest in various situation.

If the Govt thinks that the whole amount is not legally due, then it should pay nothing. If it thinks some is due, it should pay this estimate and so limit its interest liability to the remaining amount.

If the Govt knows the whole lot is due and is just playing silly wotsits, then the Cabinet should pay the interest out of their own pockets. I would not object to this.

If the Govt ends up paying interest from taxpayers' money with no legal argument for its delay, then the cabinet should resign for wasting our money so stupidly.

Andrew Warren said...

@James Campbell

At last, a sensible contribution to this debate. This website is fast becoming nutters' corner.

Anonymous said...

@ Average Englishman

I do not know how you draw conclusions on my stance on democracy: by 'politicking' and tabloid reference I referred to Cameron's competing with UKIP, obviously looking for support from Daily Mail and such. Which is not necessarily in the best interests of the UK, as noted by Mr Campbell. Nor is it in line with the rules at force.

As to democracy, I fully support the right of the British people to vote for Brexit. This I made clear enough.

However as long as you are in, the usual rules apply to you as they do to everybody else. Or at least they should. The "Fundamental foundation" of our civilisation is -since Roman times- the rule of law. As opposed to taking decisions on purely political basis, which clearly Cameron and OE (see post with the calculation of votes for potential veto) would like to push through.
This was actually the attribute of countries like Soviet Russia, where the authorities (by the way: very popular with large part of the society) did as their current politics warranted.

[And just to be clear: I do not work in Brussels.]

However, we agree that Brexit is a good idea.

Good bye.

Jesper said...

Did this happen (from page 25 of the linked to regulation)?
"After 30 September of the fourth year following a given financial year, any changes to GNI shall no longer be taken into account, except on points notified within this time limit either by the Commission or by the Member State."

Seems a bit surprising to me. Informing of a need to adjust and then eight (?) years later doing the adjustment.

christhai said...

Hey, let's forget Cameron and his theatrical histrionics.

The quintessential problem is VERY poor VALUE.

The EU is not a good deal for the UK.

Never was, isn't now and never will be.

It will ALWAYS cost more than its return.

In short we have to spend 10 pounds to make 4 pounds.

Every part of our lives is interfered with by the meddling of the Commission or their satraps in the ECHR.

So I agree with one and all on the "EU side".

Let us leave the EU Club, looking forward to good relationships with good neighbours immediately.

Note - that's neighbours and former Club members.

If the EU members get in to trouble - well to be fair - we've always been there to help in the past.

It may work for some of you - but it didn't work for us.

But let us stop this death of a thousand cuts by our pansy politicians.

We certainly don't trust Labour or the Conservatives to "Lead us OUT".

They are too dishonest for us and too dishonest for the EU.

Let us use UKIP - honest, straightforward and dedicated to end the UK's membership of the EU.

christhai said...

Reply to @anonymous

"As to the corruption etc: do let us know more, and if you know any actual facts, do inform the appropriate authorities"

Anonymous, corruption, stealing public funds, favouring certain manufacturers by uttering "Directives" to promote their products are synonymous with the EU Commission and their hangers on.

But you know this.

Take a look at this:

EU Court of Auditors: £109bn out of £117bn spent by the EU in 2013 “affected by material error”

Average Englishman said...

@ Anonymous
Thank you for taking the trouble to explain yourself further. Our disagreement would appear to be simply a matter of emphasis and relative importance. You seem to see the rule of international law applying above all else, however crass its interpretation. I see the rights of a sovereign nation expressed through the will of its people to a democratically elected government as being all important. Your view is correct at one level but does not take into account 'realpolitik' and in my view a UK citizen's, fundamental democratic rights. Perhaps upon reflection in this case you are correct thouigh, in that the UK should pay up and leave, then we'll both be happy!

@ James Campbell
On a technical interpretation of matters I would agree with you. However, you take no account of the lack of respect shown to a sovereign government. Either The EUSSR commissars are inept or knew exactly what they were doing and chose to put Dave in his place as a show of power. I certainly do not rule out the former but my money is on the latter. Also, there is plenty of room for different interpretations to apply for virtually all such laws or there would not be so many lawyers in business.

@ Andrew Warren
Why not take the trouble to put forward an argument rather than lazily abusing unspecified contributors as 'nutters'? Such an approach hasn't worked for Dave now has it or UKIP's popularity wouldn't be increasing on a daily basis? If you think a nutter (and I can't imagine who you could possibly mean) is wrong let us hear why. Show some respect for other people's apparently deluded opinions and explain why your own thoughts are superior and you may just convince someone you are correct; abuse will just confirm their initial views. Also, blogs such as this should give free expression to your 'nutters', as to mean anything freedom of speech must be inclusive and however much it may annoy you to accept it, a nutter's voice and vote is worth just the same as yours, (and as much as a Sorbonne educated Eurocrat for that matter).

NobodyknowsNobodycares said...

@ Christhai

From the source itself:


"The ECA’s estimate of the error rate is not a measure of fraud, inefficiency or waste. It is an estimate of the money that should not have been paid from the EU budget because it was not used in accordance with EU rules. Typical errors include payments to a company declared as an SME, which is in fact owned by a large company, or making additions to an existing public contract without giving other tenderers a chance to bid.
Most errors occurred in spending areas where management is shared between the Member States and the European Commission."