Published on 16 July 2019

Jeremy Warner published an article in the Daily Telegraph on 9th July, taking issue with our Global Britain paper “Why the Eurozone’s fate makes an immediate Brexit vital”.

The title of Jeremy’s article was “Claims that Britain could face a EUR200bn EU bailout bill if it fails to execute a clean, no deal Brexit are alarmist and unwarranted”.

We sent this response on 11th July but the Daily Telegraph refused to publish it.

Interestingly Jeremy did not contest the existence of the €1trn black hole within the Eurozone financial system or the creative accounting used to obscure it. His attack was on the size of the UK’s possible bill and the likelihood of the UK not having a safeguard against paying it.

Jeremy argued that safeguard mechanisms are contemplated but his wording confirmed that they are not in place now: “if we stayed in, these ‘mechanisms’ would presumably be established, and we would not be liable”. Presumptions are not given.

The mechanism would only apply to future examples of “Union financial assistance” (“Ufa”). They have not been put in place retrospectively regarding the European Financial Stability Mechanism, the €60bn fund which is the sole example of Ufa within the €207bn mobilised amount of the Commitments Appropriation of the EU Budget. No safeguard mechanism is contemplated for the €147bn mobilised up to now in other ways than Ufa, nor for any of the €234bn still available to be mobilised under the current Multiannual Financial Framework (“MFF”) if it is mobilised in other ways than Ufa.

We do not even know what the wording of the safeguard mechanism would be. We do know that it would be in the form of an indemnity: non-euro Member States would remain as risk-absorbing parties in the front rank. They would be indemnified by euro Member States, who would include the ones whose insolvency gave rise to the claim in the first place. This is like having a car insurance policy and discovering its underwriter is the uninsured driver who just took your front wing off.

We need to stop being a member and ensure that our liability cannot be escalated during the transition phase, up to a maximum possible loss of €481bn[1] under the current MFF, or by even more if we still have ties into the next MFF.

This is not alarmism, but a statement of facts.

Ufa as the way of managing the Eurozone re-set is implausible anyway as it does not deliver enough money. There is only headroom for further €234bn of Ufa under the current MFF. Add the uncalled capital of the EIB and ECB and you have a maximum capacity across all Member States of €491bn[2], set against a much larger black hole of at least €1trn.

The UK’s maximum possible loss is close to the capacity across all Member States combined because the liability through the EU Budget is the largest component and is joint-and-several, meaning the last man standing pays everything, and each Member State could be asked to pay the €441bn under that heading. The variables between the liabilities of different Member States are their shareholdings in the EIB and ECB.

We did not posit that the UK would be the last man standing, but one of nine, together with Germany, France, Belgium, Denmark, Sweden, Finland, the Netherlands and Austria. The €1trn would have to be drawn from this group, to reduce the debt burden of others.

We believe the ECB will be the first option as the platform the re-set. Using the re-based ECB Capital Keys applied to the €1trn quantum, the UK’s contribution would come out as €230bn. Again, that is arithmetic, not alarmism.

Using the ECB has the advantage that capital increases can be agreed by a qualified majority of the ECB Governing Council, upon which the non-euro Member State national central banks have no seat.

If all else fails, the EU authorities can fall back on Article 352 of the Lisbon Treaty, an emergency powers clause over which they have sole jurisdiction.

There have been several events since our paper’s publication that prove main lines in its argumentation.

Firstly Jeremy Warner, in an article published later on the same day that he sought to downplay our paper, criticised asset bubbles caused by central banks and referenced as we did that the ECB intends to print more money: https://www.telegraph.co.uk/business/2019/07/09/central-banks-starring-role-biggest-potentially-dangerous-asset/.

Secondly Annegret Kramp-Karrenbauer, leader of Germany’s Christian Democrats criticised the ECB’s low interest rate policy and its impact on savers: https://www.theguardian.pe.ca/business/ecb-should-mull-curbing-low-interest-period-merkel-heir-apparent-330666/

Thirdly the German government issued a 10-year bond with no annual interest coupon at all, and at a price of 103% of face value. The investor pays and loses the 3%, and enjoys no income. This destroys the time value of money and, in due course, destroys the currency itself: https://www.ft.com/content/7591b908-a2ea-11e9-974c-ad1c6ab5efd1.

Fourthly, we have the announcement of a transaction between UniCredit SpA and the EIF arm of the European Investment Bank as a perfect example of the EIB providing large loans through commercial banks of questionable quality: https://www.unicreditgroup.eu/en/press-media/press-releases/2019/unicredit-e-fei–50-milioni-di-euro-a-sostegno-dell-imprenditori.html.

Lastly Deutsche Bank intends to set up a “bad bank” into which it will transfer €74bn of risk-weighted business. “Risk-weighted” means after the portfolio has been put through the bank’s Advanced Internal Risk-Based methodology and duly shrunk from its nominal value into this much smaller “risk-weighted” value. Even this is 136% of the bank’s Capital & Reserves of €54.6bn: https://www.reuters.com/article/us-deutsche-bank-strategy/deutsche-bank-to-cut-18000-jobs-in-7-4-billion-euro-overhaul-idUSKCN1U20J2.

The UK simply needs now to leave the EU and its institutions and to have no further linkage into these matters, which is what was voted for three years ago.

[1] Composed of €441bn through the Commitments Appropriation (not the Payments Appropriation) of the EU Budget, €39bn through the European Investment Bank and €2bn through the European Central Bank. €3bn of this has already been paid in, mainly as EIB capital with a very small amount of ECB capital, so the maximum call for new money is €478bn.

[2] Composed of €234bn through the Commitments Appropriation (where the Member State liability is joint-and-several), plus €221bn in uncalled capital of the EIB, and €3bn in uncalled capital of the ECB (where the Member State liability in both cases is several-but-not-joint).