Documents considered by the Committee on 16 October 2019 Contents

4No-Deal Brexit: financial support for European businesses from the EU budget

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; further information requested; drawn to the attention of the Business, Energy and Industrial Strategy Committee and the Committee on Exiting the EU

Document details

(a) Proposal for a Regulation amending Council Regulation (EC) No 2012/2002 in order to provide financial assistance to Member States to cover serious financial burden inflicted on them following a withdrawal of the United Kingdom from the Union without an agreement; (b) Proposal for a Regulation amending Regulation (EU) No 1309/2013 on the European Globalisation Adjustment Fund (2014–2020)

Legal base

(a) and (b) Article 175 TFEU; ordinary legislative procedure; QMV

Department

Treasury

Document Numbers

(a) (40806), 11919/19, COM(19) 399; (b) (40805), 11920/19, COM(19) 397

Summary and Committee’s conclusions

4.1As a matter of European law, the UK is due to leave the European Union on 31 October 2019. The draft Withdrawal Agreement, which would preserve the status quo for trade between the UK and the EU, has not been ratified. However, both the EU and the UK Government acknowledge that a ‘no deal’ Brexit could cause significant economic disruption, and have therefore made preparations to mitigate that impact where considered desirable and possible.

4.2As part of these preparations, in September 2019 the European Commission tabled draft legislation that would allow the EU budget to be used to provide financial support to any of the remaining 27 EU Member States—and their businesses—severely affected by a disorderly UK withdrawal. In total, roughly €750 million (£668 million) would be available from the EU budget to support Member States and businesses adjust to post-Brexit disruption, to be drawn from the European Globalisation Adjustment Fund (EGAF) and the European Union Solidarity Fund (EUSF). Member States could use any support granted from the EU budget to provide financial lifelines to companies that might otherwise go insolvent when trade with the UK is disrupted, or to fund public functions related to trade with the UK (including the operation of “border, customs, sanitary and phytosanitary controls, including additional personnel and infrastructure”). Individual EU countries could apply for funding if they could demonstrate a direct link between the UK’s withdrawal and any resulting adverse economic impact or costs incurred.

4.3Financial support to Member States from the EGAF and EUSF would be in addition to other Brexit-related funding from the EU budget already available for certain specific sectors, such as farming and fisheries, and any grants or loans provided by the EU’s national governments themselves to their domestic businesses (such as Ireland’s €1.2 billion (£1.1 billion) ‘no deal’ support package announced in October 2019).45 The remaining Member States and the European Parliament must jointly approve the proposals for the €750 million support package before the money can be formally committed.46 Such agreement is expected later this autumn, with any funds to be paid out in 2020 if a ‘no deal’ Brexit has in fact taken place.

4.4We have described the contents of the Commission proposals, in the context of the EU’s wider Brexit preparations, in more detail in “Background” below. [As of 16 October, the Treasury—as the Government department responsible for EU budgetary issues—has failed to produce the customary Explanatory Memoranda setting out the UK’s position on these EU proposals. The Chief Secretary to the Treasury (Rt Hon. Rishi Sunak MP) has not provided an explanation for this delay.]

4.5The UK Government is also preparing its own financial support mechanism for British businesses experiencing liquidity problems as a result of a ‘no deal’ Brexit, termed “Operation Kingfisher”. The existence of this scheme was first acknowledged publicly by the Chancellor of the Duchy of Lancaster (Rt Hon. Michael Gove MP) in August 2019,47 but the Government has yet to make any formal announcements about its funding, scale and functioning. According to press reports, it is targeted primarily at larger businesses which are “otherwise fundamentally viable” but could be “tip[ped] into administration” by a disorderly Brexit.48 Although further details are reported to be due for publication in October 2019,49 it is not currently possible to compare the Government’s efforts in this area with the European Commission’s detailed formal proposals.

4.6The Commission’s decision to mobilise the EU budget to provide Brexit-related financial support to businesses also present a particular problem for the Treasury in the context of the wider “financial settlement” between the UK and the EU. In the event of a ‘no deal’ withdrawal, the multi-billion pound “Brexit bill”—under which the Government would pay into the EU budget as if still a Member State until the end of 2020—would not be legally binding. As noted in a separate chapter of this Report, in such an eventuality the EU has asked the Treasury to continue making its contributions until the end of 2020 even in a ‘no deal’ scenario.50 On 7 October, the Chancellor again refused to explicitly rule out such continued contributions are being considered as a way of facilitating negotiations on a new trade agreement with the EU.51 However, even if the UK made further payments into the EU budget following ‘no deal’, the Commission has proposed that British firms should be explicitly barred from accessing the Brexit-related schemes. This creates the possibility that the Treasury could be part-funding financial support for European businesses affected by a ‘no deal’ Brexit, without the UK being able to benefit from such measures directly.

Our conclusions

4.7Like the UK Government, the EU clearly takes the potential disruptive effect of a ‘no deal’ Brexit seriously. The European Commission has now proposed to use some €750 million from the EU budget to help EU Member States—in particular Ireland—to address disruption in trade and to meet the costs of new customs and regulatory infrastructure needed for trade with the UK. The sum, while in itself not insubstantial, represents only 0.5 per cent of planned EU spending for 2020.52 However, it would form only one part of the overall package of financial support from which European businesses could avail themselves in a ‘no deal’ scenario, complemented for example by Brexit-related grants and loans provided by national governments in the EU themselves.

4.8Our scrutiny of the EU’s proposals for use of the EU budget in the context of a ‘no deal’ Brexit have highlighted several shortcomings in the Government’s approach to transparency and accountability to Parliament and the general public.

4.9Firstly, while the UK remains an EU Member State, the Government is required to submit Explanatory Memoranda to this Committee setting out the UK’s position on new proposals put forward by the European Commission. Despite the clear relevance of the draft legislation to use the EU budget to cushion the impact of a ‘no deal’ Brexit for European businesses, we have not yet received such Memoranda more than a month after the proposals were published. We again ask the Chief Secretary to the Treasury to submit them without delay, accompanied by information on the analogous UK support schemes under “Operation Kingfisher”.

4.10Secondly, as we have noted previously, the EU is requesting continued UK budget payments even in the absence of a legally-binding financial settlement. We have asked the Government repeatedly whether it would accept or reject the EU’s demand for continued budget payments even if the Withdrawal Agreement is not ratified, but as recently as 7 October the Chancellor again refused to rule out making EU contributions in a ‘no deal’ scenario. Consequently, we have devoted an entire chapter of this Report to precisely this matter, and have called again for a debate on this issue on the floor of the House of Commons. We note that these latest EU proposals raise a specific issue in this context: British firms would be barred from seeking Brexit-related support from the EGAF and EUSF, even if those schemes were part-funded by the UK taxpayer. We therefore again request the Minister to confirm if the UK would immediately cease its contributions to the EU budget in a ‘no deal’ scenario.

4.11Lastly, the clarity of the EU’s proposals to use the Globalisation Adjustment Fund and the Solidarity Fund after Brexit serves to underline the complete lack of clarity about the kind of Government support available to UK businesses facing economic headwinds following a ‘no deal’ withdrawal from the EU. Details about “Operation Kingfisher” remain scarce. [As of mid-October, with two weeks until the putative withdrawal date, it is not known what budget the Government will give to the “Kingfisher” scheme; who would be eligible; and how businesses would apply for it. We hope the Government will publicise the details and budget of its Brexit support scheme for businesses urgently, so that those who already anticipate needing to make use of it can begin the application process and avoid liquidity issues in the immediate aftermath of the UK’s withdrawal.]

4.12Given the lack of Explanatory Memoranda received from the Treasury on the EU’s proposals for Brexit-related financial support, we retain both documents under scrutiny. We draw these developments to the attention of Business, Energy and Industrial Strategy Committee and the Committee on Exiting the European Union.

Full details of the documents

(a) Proposal for a Regulation amending Council Regulation (EC) No 2012/2002 in order to provide financial assistance to Member States to cover serious financial burden inflicted on them following a withdrawal of the United Kingdom from the Union without an agreement: (40806), 11919/19, COM(19) 399; (b) Proposal for a Regulation amending Regulation (EU) No 1309/2013 on the European Globalisation Adjustment Fund (2014–2020): (40805), 11920/19, COM(19) 397.

Background

4.13The UK’s exit day from the EU under European law is currently 31 October 2019.53 If the UK leaves the EU without a Withdrawal Agreement in place, the so-called ‘no deal’ scenario, new barriers would immediately apply to trade between the UK and the EU from 1 November onwards. This means, for example, that tariffs would be imposed on UK exports into the EU (and vice versa), and customs and regulatory controls mandated by EU law for ‘third country’ goods would need to take place not only at continental ports like Calais, but also—somehow—at the UK-Ireland border.54

4.14Although an Act of Parliament requires the Prime Minister to seek a further three-month extension of the Article 50 notice period if the Withdrawal Agreement is either not concluded and approved by Parliament or if “no deal” has not been approved by Parliament by 19 October,55 this extension has not yet been secured in law because it also requires the consent of the European Council (excluding the UK) acting unanimously. The legal default therefore remains a ‘no deal’ Brexit on 31 October. In recognition of this possibility for economic disruption in such an event, both the Government and the EU have implemented significant Brexit preparation measures in advance of the UK’s planned withdrawal. Of especial interest to this Committee have been the mitigating measures related to the ‘no deal’ scenario specifically. As set out in more detail in our Report of 10 July 2019, these include temporary permissions for UK hauliers and airlines to continue operating to and from the EU under certain conditions; a visa-waiver for British citizens visiting the EU for short periods; and continued EU funding for the PEACE Programme on the island of Ireland.

4.15The Commission also noted in its June 2019 Communication on Brexit that it stood “ready to propose financial support measures” from the EU budget “to mitigate the impact in the most affected areas and sectors” after a disorderly UK withdrawal, and Member States—especially Ireland—could use “flexible solutions for national measures”, provided they are in accordance with EU State aid rules.

EU financial support programmes linked to Brexit

4.16Existing EU funding programmes already provide for some capacity to support Member States and sectors most affected by the UK’s withdrawal, for example by deploying “market measures“ under the Common Agricultural Policy if there is a sudden drop in exports of agri-food products to the British market. In addition, in March 2019 the remaining Member States and European Parliament agreed on further assistance for European fishermen from the European Maritime and Fisheries Fund, if they are banned from operating in British waters after the UK’s exit from the Common Fisheries Policy.

4.17In early September 2019, the European Commission tabled two further proposals to provide additional ‘no deal’ financial support to the remaining 27 Member States. The specific purpose of these proposals is to create a dedicated legal basis for the use of the EU budget in 2019 and 2020 to support Member States’ public administrations, as well as individual businesses, most affected by a UK withdrawal from the EU, if the Withdrawal Agreement is not ratified. The two proposals would allow for Brexit-related financial support for affected Member States from two existing EU funding programmes until the end of 2020, namely:

4.18The substance of the proposals is summarised in more detail below. They can still be amended by the Member States in the Council and by the European Parliament, which have to agree on the final legal texts jointly under the EU’s ordinary legislative procedure.59 [As of 16 October, the Government has failed to submit the customary Explanatory Memoranda on the proposals, which would set out the UK’s position on the draft legislation. The Chief Secretary to the Treasury (Rt Hon. Rishi Sunak MP), the Minister responsible for the Government’s policy in this area, has failed to provide an explanation for this unacceptable delay. As such, we have made a further assessment of the proposals below without the benefit of any of the Government’s own analysis.]

Brexit and the EU Solidarity Fund

4.19Under the Commission proposal for the Solidarity Fund, the definition of a “major disaster”—the prerequisite before any eligible country60 can ask for assistance—would be amended to cover not only “natural disasters” but also “situations where a serious financial burden is inflicted on a Member State as a direct consequence” of a ‘no deal’ Brexit.61

4.20To apply for Brexit-related support from the EUSF, a country would have to submit detailed evidence that the total, unavoidable “financial burden” triggered by the UK’s disorderly withdrawal exceeded either €1.5 billion in 2011 prices (approximately €1.76 billion, or £1.6 billion, in 2019 prices),62 or 0.3 per cent of its Gross National Income. The effect of the proportional threshold is that smaller Member States would qualify for funding sooner: for example, Ireland—with a GNI of €234.2 billion63—would be able to call on the Solidarity Fund if it took a Brexit-related hit of €700 million (£624 million). Member States could use any support granted to provide financial lifelines to companies that might otherwise go insolvent when trade with the UK is disrupted, or to fund public functions such as the operation of “border, customs, sanitary and phytosanitary controls, including additional personnel and infrastructure”.

4.21Based on the scheduled date of the UK’s withdrawal on 31 October 2019, each Member State could lodge a single, total claim for financial assistance with the Commission by 30 April 2020. If judged favourably, the Commission would submit a formal proposal to use—“mobilise”—the Solidarity Fund to the European Parliament and the Council, who would ultimately decide on whether to provide the requested support. To limit the potential cost of the assistance to EU taxpayers and maintain leeway to use the Solidarity Fund for its original purpose, the Commission proposal limits the available Solidarity Fund support related to a ‘no deal’ Brexit to 50 per cent of its total budget for 2019 and 2020. That would yield a total maximum assistance package via the EUSF of €591 million (£526 million) during that period.64 In addition, the support actually provided to a specific Member State would be capped at a maximum of 5 per cent of the “financial burden” caused by Brexit.

4.22The proposal is not accompanied by an impact assessment, so it is unclear how the Commission believes the funding will be distributed geographically across Member States in practice. The scheme’s €591 million budget results in a theoretical average of €22 million for each the remaining 27 EU countries. However, in practice, the threshold for the qualifying Brexit-related “financial burden” of 0.3 per cent of GNI or €1.5 billion may not be met by all Member States. In turn, this means the support is likely to be focused on Ireland and the continental Member States closest to the UK, where disruption is likely to be more economically significant.

Brexit and the European Globalisation Adjustment Fund

4.23The Commission’s second proposal for support from the EU budget to cushion the impact of a ‘no deal’ Brexit related to the EU’s Globalisation Adjustment Fund (EGAF).

4.24This Fund, established in 2007, provides support for workers “losing their jobs as a result of major structural changes in world trade patterns due to globalisation”, for example “when a large company shuts down or production is moved outside the EU”.65 It works on a co-financing basis, meaning it can provide a Member State which has successfully applied for assistance with up to 60 per cent of the cost of projects “designed to help workers made redundant find another job or set up their own business”. It has a broad definition of ‘worker’, allowing support to be used as well to help those on fixed-term contracts, temporary agency workers, owner-managers of micro enterprises and self-employed workers, as well as young people not in education, employment or training (NEETs) under certain conditions.

4.25Under the Commission’s proposal to deploy the EGAF in the context of the UK’s withdrawal, the list of possible triggers for compensation from the Fund for job losses—which currently include indicators such as a rapid increase in imports of a certain good to the detriment of European producers, or a serious decline of the EU’s market share in a given sector overseas—would be expanded to include instances of “workers made redundant and self-employed persons whose activity has ceased as a result of […] as a result of the withdrawal of the United Kingdom” without a Withdrawal Agreement.

4.26The Commission proposal does not alter the EGAF’s total budget—currently set at approximately €175 million per year—or limit how much of it could be spent on Brexit-related support. However, support provided in relation to job losses linked to the UK’s withdrawal would have to contend with Member States’ applications relating to the Fund’s existing core function (although it has not so far been called on by any Member State in 2019). The other criteria for support from the Fund, such as the requirement for at least 500 workers in a particular company, sector or region to be affected, would also remain in place.66

4.27With respect to both the EUSF and EGAF, the European Commission would not itself select any companies to receive financial support. That would be the job of the Member States’ national governments, with the intended recipients identified in the applications to the Commission to access the funds and subject to the approval of the European Parliament and the Member States in the Council. Similarly, under both programmes, the proposed Brexit-related support would only become available if the UK leaves the EU without a Withdrawal Agreement.

Possible UK financial contributions to the EU’s Brexit support programmes

4.28If the UK leaves the European Union without a deal, it will by default stop being covered by EU law and the Treasury would no longer be under an obligation to make payments into the EU budget. However, given the UK’s status as a significant net contributor to that budget, the remaining Member States have been insistent from the start of the Brexit process that they want the Government to contribute towards EU spending plans agreed while the UK was still a Member State.67 Both the current and previous Prime Minister have indicated that they accept the UK would have residual financial obligations to the EU beyond its withdrawal, although they have refused to clarify the sums involved. In light of this, a detailed financial settlement was set out in the draft Withdrawal Agreement (estimated to represent a net cost to the British taxpayer of £39 billion, if the UK had left the EU on 29 March 2019 as originally planned).68

4.29In the absence of a ratified Withdrawal Agreement, there would be no bilateral arrangement between the UK and the EU on the resolution of any outstanding financial obligations. For this eventuality, as we have set out in a different chapter of this Report, the remaining Member States have agreed to effectively ask the UK to continue making payments into the EU budget until the end of 2020 anyway, in return for which UK-based entities such as universities, charities and local authorities would, by and large,69 remain eligible to receive EU funding on current terms (i.e. as if the UK were still a Member State). However, under the Commission’s proposal for the ‘no deal’ budget legislation, the UK would be explicitly barred from accessing Brexit-related financial assistance under the EU Solidarity Fund and the European Globalisation Adjustment Fund in 2020.70 That means that, if the Government were to agree to pay into the EU budget beyond a ‘no deal’ withdrawal—which the Chancellor explicitly refused to rule out in a letter to us dated 7 October 2019—British taxpayers would be part-financing the efforts of other European countries to adjust to the economic realities of a ‘no deal’ Brexit without being able to access those funds themselves.71

4.30We note in this respect that the UK Government is also preparing its own financial support mechanism for businesses experiencing liquidity problems as a result of a ‘no deal’ Brexit, termed “Operation Kingfisher”. The existence of this scheme was first acknowledged publicly by the Chancellor of the Duchy of Lancaster (Rt Hon. Michael Gove MP) in August 2019,72 but the Government has yet to make any formal announcements about its funding, scale and functioning. According to press reports at the time, it would be targeted primarily at larger businesses which are “otherwise fundamentally viable” but could be “tip[ped] into administration” by a disorderly Brexit.73 On 7 October, the Times reported that more details of the scheme would be announced shortly.74 However, given the lack of information currently available, it is not possible to compare the Government’s efforts in this area with the European Commission’s detailed proposals.

4.31We have set out our views on the EU’s proposals to provide financial support to businesses affected by a ‘no deal’ Brexit in the “Summary and conclusions” section above.

Previous Committee Reports

None.


46 While it remains a Member State, the UK has a vote over the proposals in the Council of the EU. However, the draft legislation is subject to a Qualified Majority vote, meaning in practice the Government cannot veto the proposals before ‘exit day’.

47 The Times, “Bailout fund to prop up businesses after Brexit“ (10 August 2019).

48 Idem.

50 The European Commission has described an agreement on a financial settlement, including continued UK contributions into the EU budget until the end of the 2014–2020 budgetary period, has a “precondition” for talks on the future UK-EU relationship. The EU has already put in place a contingency Regulation requesting such payments from the UK in a ‘no deal’ scenario until the end of 2019, with a proposal to extend this arrangement until the end of 2020 currently under consideration (as we describe in a separate chapter of this Report). The European Scrutiny Committee wrote to the Chancellor on 4 September 2019 to ask if the Government could rule out making any ‘no deal’ payments, but as of 16 October no reply to this letter has been received.

51 Letter from the Chancellor of the Exchequer to Sir William Cash, dated 30 September 2019 but not sent to Committee staff until 7 October. In this letter, the Chancellor stated that—in the event of a ‘no deal’ Brexit—the Government would “have to determine what financial obligations the UK has to the EU” and “any decision” on whether the UK would accept the EU’s request for continued budget payments would “be taken, if necessary, in this context”. Any such payments would most likely require fresh parliamentary approval.

52 In the draft EU budget for 2020, the European Commission has proposed €153.7 billion in payment appropriations. The draft budget is still subject to negotiations between the Member States and the European Parliament.

53 European Council Decision 2019/584 of 11 April 2019, to which the UK Government signified its agreement by letter dated the same day. The definition of the UK’s ‘exit day’ from the EU under the European Union (Withdrawal) Act 2018 was amended accordingly by the European Union (Withdrawal) Act 2018 (Exit Day) (Amendment) (No. 2) Regulations 2019 (S.I. 2019/859).

54 The Withdrawal Agreement on the UK’s withdrawal from the EU, if ratified, would provide for a transitional period during which the UK would temporarily stay in the Single Market and Customs Union. The current absence of border controls on goods moving between the UK and the EU would persist during that period.

56 The legal basis for the EUSF is Regulation 2012/2002. Its budget is set out in Article 10 of the 2014–2020 Multiannual Financial Framework, which stipulates that its maximum annual endowment is €500m in 2011 prices (or €585m as of 2019), plus any unused amount of the previous year’s budget.

57 The UK did not support the use of the EU budget for the Globalisation Adjustment Fund and the Government does not apply for assistance from the Fund for British businesses or communities. A proposal for a revamped EGAF under the 2021–2027 long-term EU budget is currently being negotiated, and remains under scrutiny.

58 Article 12 of the Multiannual Financial Framework 2014–2020 (Regulation 1311/2013) sets the EGAF’s annual budget at €150 million per year, in 2011 prices. Applying a 2 per cent annual deflator yields a 2019 comparable value of €175 million.

59 Within the Parliament, the proposal relating to the EUSF is being looked at by the Regional Development Committee (REGI), while the EGAF proposal falls within the remit of the Employment and Social Affairs Committee (EMPL).

60 While EU accession countries are normally able to apply for assistance from the EU Solidarity Fund, under the terms of the Commission proposal the Brexit-related support would be available to EU Member States only.

61 Article 1(2) of Commission proposal COM(2019) 399.

62 The EU uses an annual deflator of 2 per cent to readjust prices set at historical levels. Applied to the €1.5bn threshold in 2011 prices, that yields a current value of €1.76bn.

63 Central Statistics Office of Ireland, “National Income and Expenditure 2017“ (accessed 6 September 2019).

64 According to the Commission proposal, the EUSF has a budget of €585.8 million in 2019 and €597.5 million in 2020. It expects more than half of the 2019 allocation—i.e. the maximum that could be spent on Brexit-related support—to be carried over into 2020.

65 European Commission, “European Globalisation Adjustment Fund (EGF)“ (accessed 5 September 2019).

66 The EGAF Regulation allows for financial support even where this threshold is not met if “the redundancies have a serious impact on employment and the local, regional or national economy”. See article 4(2) of Regulation 1309/2013.

67 See for example the Brexit guidelines of the European Council, adopted by the 27 remaining Member States on 29 April 2017, which called for a “a single financial settlement [to] ensure that the Union and the United Kingdom both respect the obligations resulting from the whole period of the UK membership in the Union”. The EU’s demands were set out in more detail the European Commission’s ‘financial settlement’ position paper of 12 June 2017.

68 Some of the original £39 billion estimated net cost of the Brexit financial settlement related to UK contributions to be paid into the EU budget for 2019 after the original ‘exit day’ of 29 March 2019. As the UK’s membership of the EU was subsequently extended until 31 October, some of those contributions have now already been made pre-exit. This means the total post-exit bill would be reduced correspondingly, even if the total cost to the UK has not changed.

69 There are a few exceptions to this rule. For example, UK entities could not bid for funding for EU programmes that are ‘security sensitive’, such as parts of the Galileo satellite navigation programme. The European Investment Bank would also treat the UK as a ‘third country’, rather than a Member State, for investment purposes.

70 See the proposal for a Regulation contained in Commission document COM(2019) 461, on the possibility of continued UK contributions to the EU budget in 2020 even in a ‘no deal’ scenario. Under article 4(2) of that proposal, even if the UK continued to make its payments to the EU, “United Kingdom persons or entities […] shall not be eligible” for Brexit-related support under Regulation 1309/2013 (the Globalisation Adjustment Fund) or Regulation 2012/2002 (the EU Solidarity Fund).

71 We have raised concerns of similar issues in the past, for example the possibility of the UK part-funding the establishment of the European External Action Service’s delegation in London. See for example our Reports of 9 January and 10 July 2019 on the 2019 and 2020 EU budgets.

72 The Times, “Bailout fund to prop up businesses after Brexit“ (10 August 2019).

73 Idem.




Published: 22 October 2019