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Theresa May’s foolhardy strategy to destabilise the European Investment Bank

Summary:
Divorce proceedings are about to begin and everything’s up for grabs: the CDs, the pictures, the accumulated profits of the European Investment Bank:Theresa May will call on Brussels to hand back £9bn of UK assets held by an EU bank when she fires the Brexit starting gun — dramatically cutting Britain’s final bill.Senior government sources say that when the prime minister triggers article 50, she will point out that Britain is entitled to the return of funds held by the European Investment Bank (EIB).Legal advice circulating in Whitehall — seen by The Sunday Times — says that not only is the government not legally obliged to pay Brussels a penny, but the EU should pay Britain for its share of the funds in the EIB.That’s from The Sunday Times yesterday, referencing a document drawn up by

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Divorce proceedings are about to begin and everything’s up for grabs: the CDs, the pictures, the accumulated profits of the European Investment Bank:

Theresa May will call on Brussels to hand back £9bn of UK assets held by an EU bank when she fires the Brexit starting gun — dramatically cutting Britain’s final bill.

Senior government sources say that when the prime minister triggers article 50, she will point out that Britain is entitled to the return of funds held by the European Investment Bank (EIB).

Legal advice circulating in Whitehall — seen by The Sunday Times — says that not only is the government not legally obliged to pay Brussels a penny, but the EU should pay Britain for its share of the funds in the EIB.

That’s from The Sunday Times yesterday, referencing a document drawn up by Martin Howe QC of ‘Lawyers for Britain’, a pro-Brexit group. According to “a senior government source” quoted by the newspaper, Theresa May thinks the UK’s withdrawal from the European Investment Bank will give it leverage in Brexit negotiations.

“Their infrastructure investments are predicated on our contribution,” a Whitehall source said. “That’s one of the things they are worried about.”

That may be so, but it’s hard to believe she will get very far on this issue.

The European Investment Bank is basically what it sounds like. It funds projects across the European Union and is owned by EU member states. The UK has been a member since 1973 and receives billions in funding from the EIB each year.

Most of the bank’s money comes from borrowing. So, for example, the amount of equity the UK has had to put in is €3.5bn, but it was granted €7.8bn of loans in 2015 alone.

That’s merely a function of the bank being leveraged rather than the UK receiving an outsized proportion of the funds. In fact, it’s the other way around. Britain’s shareholding is 16 per cent of the bank, but we got 10 per cent of its loans in 2015.

The tricky thing with the UK’s exit from the European Union is that the statutes of EIB specifically say that its shareholders “shall be the Member States” of the EU. As per Martin Howe QC’s document:

It would appear to follow in the absence of some special agreement that the UK will automatically cease to be a member of the EIB when it withdraws from the EU. This then raises the question of what happens to the UK’s subscribed and paid-up share capital in the EIB. In view of the formal subscription of capital to this commercial or at least quasi-commercial organisation, there is a much stronger argument in this instance for “cashing up” of the assets and liabilities of the EIB upon the UK’s exit from the EU than in relation to the EU’s general assets and liabilities.

According to the EIB’s 2015 Financial Statements, the EIB’s reserves consist of paid-up capital from Member States of €21.7bn, plus a further €41.6bn of accumulated profits, i.e. total “own funds” of €63.3bn. The UK’s share of this, according to the proportion of capital it has subscribed, is 16.1% of this, or €10.20bn. While it is clear that the UK owns this capital invested in the EIB, it does not necessarily mean that the UK is entitled either legally or as a matter of practice to immediate cash payment, so stripping the EIB of a big chunk of its working capital. In practice the UK would need to ask for payment of this sum over time, while the EIB procures substitute core capital from elsewhere, or alternatively the UK could remain an EIB investing member after leaving the EU under a special agreement.

None of that seems unfounded — if the UK was forced to sell its shareholding, then it would be reasonable for it to ask for a proportional slice of the money.

But the obvious point here is that a proportional slice of the EIB’s funds is far smaller than the cash the UK would receive over the years by remaining a member. A one off payment in return for losing billions of yearly funding.

And as Howe notes, the UK might not be entitled to an immediate cash payment, thus reducing the destabilising effect of such a move, which seems to be where the UK government hopes to get leverage. In any case, credit agency Moody’s believes “the withdrawal of the UK (Aa1 negative) from the EU (Aaa stable) — and its potential exit as one of the four largest EIB shareholders — is unlikely to fundamentally change the EIB’s strong credit metrics.”

The way to make May’s foolhardy strategy begin to make sense would be for the UK to set up its own development bank, as a reader suggested last year.

Absent that, it would seem smarter for her to negotiate to remain a shareholder in the EIB, or to keep receiving its funds when it leaves.

Related links:
Brexit Britain will miss cheap EU funds for infrastructure — FT.com
May ‘will ask EU to pay back our £9bn’ — The Sunday Times
The risk to UK startup funding after Brexit — FT Alphaville

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Kadhim Shubber
Kadhim Shubber is a freelance journalist who first bought bitcoins so that he could buy a beer at The Pembury Tavern, Hackney’s bitcoin pub. He has reported for Slate, Wired, The Daily Telegraph, The Sunday Times and Ampp3d. He is currently studying for a Masters in Journalism at City University London.