[as published in the Daily Express on 13 July 2022]
Red alerts are flashing all over the Whitehall radar screen. The Prime Minister has been deposed and the country is leaderless for the summer. Living standards are plummeting under the impact of soaring inflation. Russia’s savagery tortures Ukraine and threatens our security.
It is easy to take your eye off the ball as one crisis eclipses another. Yet there is one nasty blip on the screen that could yet turn out to be a full-scale horror – the collapse of the Eurozone.
So what, you might think. Britain has steered well clear of the euro and left the European Union. A Eurozone implosion would be catastrophic for its members but far less painful for the UK.
Not so. An alarming but little known fact is that despite Brexit, our potential liability if the Eurozone implodes is £200 billion – one tenth of national output and more than the annual budget of the NHS.
And that, of course, does not include the knock-on effects of turmoil among our closest neighbours and main trading partner.
Let’s start with the markets.
A renewed euro crisis has become a real possibility. The yields on Italian government bonds have risen from one per cent to four per cent – three per cent more than Germany pays, proving the euro is not a ‘single currency’ if different forms of its ‘central bank money’ attract such divergent returns.
The balance sheet of the European System of Central Banks (the ‘Eurosystem’) is bigger than the entire economy and inflation is eight to noen per cent, while official interest rates remain at zero.
The European Central Bank (the ‘ECB’), coordinator of the Eurosystem, has a range of options, all equally disastrous: (i) to follow the Federal Reserve’s lead by raising interest rates and reducing the Eurosystem balance sheet, and wreck member state budgets; or (ii) to make only minimal increases in interest rates and to re-start major bond buying into its existing programmes (the Asset Purchase Programme and the Pandemic Emergency Purchase Programme) or even to start a new one (Outright Monetary Transactions), and undermine the credibility of the euro project.
So UK is far from being a disinterested onlooker. The Withdrawal Agreement has not distanced the UK from financial problems in the Eurozone.
The UK remains a shareholder in the ECB and the European Investment Bank (the ‘EIB’), and can have extra capital called up for the next ten years at least: €1.5 billion into the ECB and €35.7 billion into the EIB.
We could also lose the paid-in shareholdings in the ECB of €100 million and €3.5 billion in the EIB. That makes a potential maximum loss across the ECB and EIB of €37.1 billion.
The UK agreed to remain responsible for all of the EU’s funds, facilities and guarantees established whilst the UK was a member.
The applicable terms are adverse. Firstly, losses at the EU level are the responsibility of member states on a joint-and-several liability basis, meaning that, if one member fails to pay, the payments of others are raised until the ‘last man standing’ pays everything.
While the UK’s payments would normally be in the region of 12 per cent of the whole – the relationship of the UK’s Gross National Income (‘GNI’) to the EU’s GNI – they could escalate to 100 per cent if no other country could pay.
Secondly, the UK’s liability only ceases when the transactions underlying its liability have paid off. The liability has no end date where a transaction tracks back to an investment in equity, and ‘evergreen’ facilities can be redrawn over and over again.
There are three ‘evergreen’ facilities: The Balance of Payments Facility with a ceiling of €12 billion and nothing drawn at present.
Then the Macro Financial Assistance which appears to have no ceiling as it is a way of the EU joining in IMF bailout programmes for non-EU countries; about €6 billion appears to be outstanding, with €3 billion of that lent out in 2020 and 2021 alone.
Then there is the first Eurozone bailout facility, the European Financial Stabilisation Mechanism or EFSM: Ireland owes €15.6 billion and Portugal €14.25 billion out to 2042. €30.15 billion of the €60 billion ceiling remains available to be redrawn. The maximum loss on ‘evergreens’ is at least €78 billion, with no end date.
Next are the EU’s first-loss guarantees to the EIB. Firstly for its loans outside the EU made before 2021, where the guarantee is for €61.7 billion and the loans against it €60.8 billion, running off around 2036.
Secondly the €16 billion first-loss guarantee for the InvestEU programme, where the total financed amount is over €600 billion and containing equity investments with no end date of over €16 billion. The maximum loss here is €77 billion, with €16 billion having no end date.
There is one fixed loan facility: Euratom, with a ceiling of €4 billion of which €3.67 billion is drawn and €0.33 billion must soon be drawn or expire, and loans can have a maturity out to 2031.
That is a total of potential liabilities through the EU of €159 billion, of which the UK’s normal share, at 12 per cent, would be €19 billion.
If one adds the potential losses through the shareholdings in the ECB and EIB of €37.1 billion, the range of losses is from €56.1 billion if all other member states can pay, up to €196.1 billion if none of them can.
These amounts are over and above the Brexit ‘divorce bill’, recently estimated as £40 billion and payable out to 2057.
We can look forward to confirmation of the avenues through which the UK will share the pain of a renewed euro crisis, as well as emphatic and empty denials that the current government was apprised of these avenues before it decided to sign the Withdrawal Agreement on Theresa May’s terms in this area.
Our new Prime Minister, who ever that is, would be well advised to take a close look at these terrifying future liabilities and seek to wind them down.