The cost of EU expansion to UK taxpayers.

1.0 – Preamble

It is well known that the EU is constantly seeking to expand its boundaries beyond the original confines of Western Europe and into former Soviet Bloc eastern Europe and beyond. Countries queuing up to become members of the EU are Turkey, the Balkan states, Ukraine, Georgia and Moldova. These aspirant nations are seeking membership because they are all poor countries. Within the EU28, poorer countries receive large sums of money to build up their economies. However, this has to be paid by someone – there is no such thing as free money. The countries which pay for this are the ten richer countries of the EU28, i.e. Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Sweden and the UK. In this post, these countries are called ‘contributor countries’.

This post sets out to answer the question: What is the cost to UK taxpayers of EU expansion?

2.0 – Summary Findings

1. The likely cost to EU Contributor countries by Turkish and Balkan accession will be approximately €43.3 Billion per year.
2. Of this, the majority share is taken by Turkey at €33.7 Billion.
3. A second stage of expansion involving Ukraine, Moldova and Georgia would  increase this cost to EU28 countries by a further €37.9 Billion per year.
4. The likely cost of redistribution of these accession costs to the UK would be approximately €9 Billion per year (£7 Billion), in the case of the first stage of expansion involving Turkey and the Balkan states.
5. The cost of the second stage of expansion taking in Ukraine and Georgia would further increase UK contributions by €7.4 Billion per year (£7 Billion).
6. At that point, UK costs would be an annual total of €21.4 Billion per year (£16.7 Billion). (Baseline costs + Turkey and Balkan costs + Ukraine and Georgia costs).
7. The cumulative costs of EU membership (including expansion costs) for UK taxpayers from now until 2030, will be approximately €226.3 Billion – or £176.5 Billion.
8. For the UK, these costs to 2030 equate to approximately £6,600 per household for every household.
9. The cumulative costs for EU Contributor taxpayers from now until 2030 will be approximately €1.4 Trillion.

 

3.0 – Conclusions

For the ten Contributor countries of the EU28, their net payments amount to a massive transfer of funds to the poorer states of the EU. This transfer amounts to an equivalent of the re-unification costs that Germany spent on re-building East Germany after 1989. These costs will massively increase upon the accession of the aspirant nations of Turkey, the Balkan states, Ukraine and Georgia. The allocation of those increased costs are likely to fall very heavily upon the UK taxpayer.

This process is being carried out gradually, even by stealth, and so it is being done without consultation with the taxpayers of any nation, never mind the UK. In effect, this transfer can be thought of as an extension to our overseas aid budget. The difference is that we have handed the administration of our money over to the European Commission. As such, the UK taxpayer has absolutely no democratic control over the destination, purpose or efficiency of that spending. In some cases, that transfer of money may actually result in activities which are harmful to the people of the UK. There are instances where this has already happened, such as the EU money lent to Ford and Peugeot who have re-located assembly plants from Southampton and Ryton, to Turkey.

The sums of money are huge.The opportunity cost of these taxes is enormous and the damage which they are likely to do to the people of the United Kingdom are incalculable. In the coming referendum, we have an opportunity to exercise our democratic rights and regain the proper destiny of these islands.

4.0 – Introduction

The ‘Remain’ campaign is challenging the Brexiteers to say what life would be like outside the EU. Behind this challenge is the implicit inference that the EU is the fount of all stability in our lives. But the idea that the EU is stable is perhaps the greatest piece of dishonesty perpetrated by the Remain campaign. In fact the EU is anything but stable. The following is short list of some of the major sources of instability within the EU.

• The Euro crisis – as exemplified by the apparently endless Greek tragedy portrayed by Greece itself – along with Spain, Portugal and increasingly, Italy. 50% youth unemployment for the foreseeable future suggests that the EU is content to lose the productivity of an entire generation in southern Europe.
• The Italian banking crisis – this is one that is hardly noticed in the UK, except in the more complicated of the business pages of the broadsheet newspapers. There is an estimated €200 Billion black hole of bad debt waiting for someone to pick up the bill. Bitter experience should tell us that it is the taxpayer who will pick up the tab for this somewhere along the line. Experience also tells us that whenever a crisis hits the Eurozone, the British taxpayer will inevitably get some of the fallout.
• Ever Closer Union – Whenever the EU suffers a crisis, their response is to find ways of hammering disparate nations even closer together to achieve control. The Euro is part of this process. By remaining outside the Eurozone, the UK will inevitably cause a ‘two speed EU’ to happen and this will mean that we have even less control over those who dictate our destiny.
• The EU Army – This has been  categorically denied by Nick Clegg among others, but it is happening nevertheless. Like everything else in the EU, the ambition is achieved gradually so that the taxpayer does not notice it happening. The emergence of an EU Border Force is a step in this direction.
•  Mass immigration – The financial and social costs of heightened security, terrorism and civil unrest will bite deep into the social and political structure of the whole of Europe over the next decade.
• Immigration (again) – the costs of education and health services being overburdened is already being felt in the UK, but not admitted by the Establishment.
• Democratic deficit – This is becoming more apparent across most EU countries and is the driver of Euroscepticism. It is growing in the countries which have strong democratic traditions, not just the UK. In addition, many former members of the Soviet Bloc are beginning to question the wisdom of handing over their newly won democracies to an unelected elite.

All of these problems are extremely dynamic. Their development is dependent upon many events which may or may not actually happen. It is impossible to say how each of these separate crises will play out and how long it will take, never mind what negative impact they will have. The only outcome we can predict with any certainty at all is that the peoples of the whole of Europe will be subjected to enormous political, social, religious and economic upheaval. Others have looked at history and suggested that the political construct of the European Union is approaching the end of its lifespan and will, like the Soviet Union, collapse.

But there is one additional cost that is barely mentioned in the Brexit debate so far. That is the direct cost to the taxpayer of EU expansion into Turkey and the Balkan states. As well as these states, which are expressing an interest or well on their way to joining, are the former Soviet Republics of Ukraine, Georgia and Moldova which have all registered their interest and have proceeded part of the way along accession route. The reason for their interest in joining the EU (whilst we and others are considering leaving it) is entirely in their own economic interests. When a poor country joins the EU, they immediately benefit from huge injections of cash. The expansion of the EU has taken its lead from the re-unification of Germany from 1989 onwards. The costs of re-building East Germany has been enormous. It seems that the EU considers that it can do the same for all countries up to the Russian border.

5.0 – Methods and Results

5.1 – Principal Assumptions

1. That the cost of payments to accession states would be in proportion to existing receipts of poorer EU28 countries.
2. That this cost would be apportioned in an equitable fashion to the ten richest EU states.
3. That the EU will remain stable and ambitious for expansion for the next five to twenty years.
4. That political, economic and human rights aspects of some potential accession states (e.g. Turkey and Ukraine) will be either solved (i.e. reduced to tolerable levels) or completely ignored in the interests of EU expansion.
5. That payments will continue at their current level for at least 14 years to 2030.
6. Luxembourg has been excluded because its GDP/Capita is more than twice as high as Germany’s. It is inflated because it operates as a highly successful offshore tax haven for large multinational companies such as Amazon. It therefore shows up on any graph as an extreme outlier.

5.2 – Calculation of accession state receipts

To calculate the potential cost of this exercise in EU aggrandisement and to reach a minimum figure for the likely impact upon the UK taxpayer, it is necessary to look first at the winners and losers from the current EU budget:

Figure 1 – Net EU payments and receipts, by country.

[Source: EUStat]

From this EU chart, it can be seen that the UK is one of ten countries (all below the line) which are net payers into the EU budget, whilst the rest are net recipients of EU money. The way in which payments and receipts are calculated is subject to negotiation by each country and not at all transparent.

The net payers are clearly the most prosperous in the EU, but it is not immediately apparent how to calculate that prosperity and work back to net payments for each country.   EU statistics for GDP/Capita are given by an index, calculated from the average of the EU28 countries, where 100 is the average. This gives a number (an indicator of wealth generated by each person) which allows comparisons to be made between one member state and another, without needing to convert into a common currency such as US$ or Euros.

The statistics for this study have been taken from EUstat here ; UNdata and OECD statistics for 2014.

To arrive at an estimated figure for the net receipts a new accession country will receive (or have to pay) the starting point is to calculate the net payments or receipts on a per capita basis for each existing member state. These are then compared with each of three possible proxies for wealth: GDP/capita; population size and overall GDP for each country. Whilst the most obvious measure of wealth is GDP/Capita, the other two may also be of interest. All three were subjected to tests of correlation to give the following results:

 

Correlation (the degree of association) is given as any figure between 0 and 1 where 1 is totally correlated and 0 is no correlation. The minus number in column 1 gives the direction of correlation. The P-values are an assessment of the probability that the results are not due to chance – the smaller the number, the better. The R² value is the degree of association between the data points and the regression line drawn through them. Values go from 0 to 1, the higher figure indicating close association.

In the case of Table 1, although all P-values are less than 0.05 and are therefore usually described as ‘significant’ or ‘highly significant’, we can draw little of any use from these. However, the correlation coefficient and R² values for the first option of comparing  receipts/capita vs GDP/capita are both closer to 1. For that reason, the first model was chosen to give the following figure:

Figure 2 – Net EU receipts/contributions plotted against net EU receipts per capita.

The regression line gives the formula for calculation of the per capita receipts if the GDP/capita is known. The R² value is as already noted in line 1 of Table 1.

5.3 – Stage 1 Accession States

The GDP/Capita indices were given in the EUstat tables for each of the aspirant countries which are at advanced stages of negotiation for entry into the EU. This allows the above regression formula to be used to calculate a likely annual net receipt (per capita) from the EU once they have successfully negotiated entry. This gives Table 2:

Multiplying the net receipt per capita by the population gives the gross amount each country will receive per annum. The total is €43.4 Billion.

This money has to come from somewhere. If it is assumed that the EU28 countries already in net receipt of EU funding are too poor to contribute, then the countries which will pay are the richest nations. These are the ten net contributors shown in Figure 1 above. The allocation for the €43.4 Billion between those countries will vary with their size in population and their relative wealth. The relationship between the existing EU contributions and population of each contributor country is as follows:

Figure 3 – Relationship between Total EU contributions and population

On this graph, Germany is the point at the top right hand side; and moving left is UK, France and Italy. It would therefore be expected that the biggest countries would pay more, perhaps in proportion to their populations. This graph has an R² of 0.68 indicating that population gives a close fit to the regression line.

However, some EU countries are taxed more than others. It seems unreasonable to ask a country that is already very highly taxed to pay much more. The following table gives the taxation rates for each of the ten contributor countries.

[Source: OECD]

This is re-presented in a visual form as:

Figure 4 – Bar chart of taxes as % of GDP and GDP/Capita.

From this it is clear that Denmark has by far the highest taxation rate of all these countries, and that the UK and the Netherlands have the lowest. At nearly 60% taxation, it would be grossly unfair to expect the long-suffering Danes to accept even more taxes to pay for the accession of Turkey and the Balkan countries.

This gives the rationale for distributing the total accession state costs in proportion to the taxation levels of each of the contributor countries, giving the following:

When this is converted into a chart, it looks like this:

Figure 5 – Apportionment of annual costs of Turkish and Balkans accession.

This shows that the biggest contributor is the UK. Denmark does not contribute any more as the limit of its taxation has been reached. Germany and France have both contributed less because their taxation rates are far higher than the UK. The Netherlands has also taken a larger share because their taxation rates are similar to those of the UK.

5.4 – Stage 2 Accession States

The second stage of EU expansion is likely to take in Ukraine, Moldova and Georgia. Using the same methods as the first stage, this gives a likely set of accession costs as follows:

Moldova cannot be calculated because the figures cannot be found in the EU database, so for the purposes of this exercise have been ignored. The timetable for this expansion is currently unknown, although all these countries have registered expression of interest. If this expansion was to occur, the costs could be allocated as shown in Table 6. Here, this second stage is allocated purely in proportion to the populations of the contributor countries, meaning that Denmark has now taken a proportional amount, despite its taxation levels.

This gives a revised contribution bar chart:

Figure 6 – Effect of Stage 1 and 2 accession costs allocated to contributor countries annually.

5.6 – The Cumulative Effect

Figure 6 gives the effect for each of the ten contributor countries on an annual basis. However, tax is paid every year and so has a cumulative effect upon the taxpayer. The calculations for assessing this cumulative effect have to start with a reasonable timetable as to when each of the potential accession states is likely to join the EU. These negotiations are very long-winded and take time because the accession of a new state has to be agreed by all existing states. However, Turkey seems very advanced. The political pressure for them to join is growing – David Cameron has expressed his enthusiasm more than once, and Angela Merkel has already arranged for €3 Billion to go to Turkey to help with the migrant crisis. The UK has stumped up £500,000 as our share of this.

A reasonable timetable for the various aspiring states to achieve accession to the EU might be as follows:

• Balkan states accession by by 2021.
• Turkey reaching full accession by 2020, but with ‘feed-in’ costs of €3 Billion for 2016; €6 Billion for 2017 and 2017; and €10 Billion for 2019.
• Ukraine and Georgia reaching full accession by 2026, but with ‘feed-in’ costs of €10 Billion for 2020 – 2022; and €15 Billion for 20123 – 2025.

In this scenario, the ‘feed-in’ costs are the kind of payments already being made to Turkey to deal with the migrant crisis, EU loans to set up car factories and so on. Within the logic of the EU, these all help to build the economies of poorer countries in preparation for the convergence necessary to achieve EU accession standards. When all of these additional costs of expansion are calculated for each year until 2030, the effect upon the UK taxpayer is as follows:

Figure 7: Annual cost to UK taxpayers – current EU costs + expansion.

However, these are annual costs. When they are accumulated to 2030, the costs look like this:

Figure 8: Cumulative cost to UK taxpayers – current EU costs + expansion.

Here it can be seen that the costs of expansion overtake the current baseline costs by about 2021 – in five years time. By 2030 the total costs of EU donations to the UK taxpayer will be approximately €226.3 Billion. Divided by the number of households in the UK and converted into Sterling, this gives a figure of approximately £6,600 per household. There will be a margin of error on this figure, but anywhere between £5,000 and £8,000 per household looks reasonable.

When this same calculation is conducted for the whole of the EU, the effect upon the contributor countries has a very similar shape, but the numbers are much bigger:

Figure 9: Cumulative costs to EU Contributor taxpayers – current EU costs + expansion

Once again, the expansion costs have outstripped the current baseline costs because the ultimate costs of expansion exceed the current baseline costs. By 2030, the cumulative cost  of expansion into Turkey, the Balkans, Ukraine and Georgia will be in the order of €1.4 Trillion. This figure seems not unreasonable, as it is in the same order of magnitude as the re-unification costs of Germany up to about 2010. These costs are still on-going.

6.0 – Discussion

1. It is possible that expansion/accession costs would be spread differently from the model proposed above. For instance, these additional costs could be spread amongst the existing EU28, including those countries which are already net recipients. This would spread the burden a little, but is fraught with political sensitivities and will boil down to a horse deal, for which the EU is famous. Given the apparent weakness of David Cameron’s recent attempts at negotiating permission from other EU countries for permission to alter UK social security rules, it is unlikely that the UK will do much better than indicated by this model.
2. The UK’s negotiating strength has been progressively weakened with each new accession. We currently have a putative voting power of 3.6%, or 1/28th. When Turkey  and the Balkan states enter the EU, this will decline still further to 2.9%, or 1/34th.
3. There is a limit to taxation in a free society. It could be said that Denmark has reached this limit, with a taxation rate of nearly 60%. It is very likely that ever higher taxation inhibits economic activity in society as a whole – analogous to the Laffer curve for the decline of tax revenue when tax rates become ever higher.
4. The other side of the same coin concerns the taxation rates of poorer countries which all have a much lower taxation rates than the richer countries. There is an obvious point to be made that one cannot pay tax if one doesn’t have any to start with.
5. There is a further discussion about how wealth is transferred in order to build countries which are at the bottom of the heap. The EU model is socialist in its thinking insofar as it uses taxation and government re-distribution as the sole mechanism for lifting poor countries out of poverty. The alternative model is provided by the ‘Trade not Aid’ school of thought. This brief study does not address this problem.