Brexit and the EU budget Contents

Chapter 5: Future relationships

161.The Government has made it clear that it wishes the UK to continue to have a close relationship with the EU following Brexit. The White Paper says that the UK will “forge a new strategic partnership with the EU, including a wide reaching, bold and ambitious free trade agreement.”173 In respect of the budget, the White Paper says: “As we will no longer be members of the Single Market, we will not be required to make vast contributions to the EU budget”, but it acknowledges that “There may be European programmes in which we might want to participate. If so, it is reasonable that we should make an appropriate contribution.”174 The White Paper does not expand upon what might constitute “vast contributions”, nor whether any form of payment in return for access to elements of the single market could be contemplated.

162.If the UK is to maintain cordial relations with the EU, then the tone of the negotiations, and their successful outcome in the form of a withdrawal agreement, will be crucial. But the preceding chapters have set out two stark alternatives: on the one hand a potential demand from the EU for tens of billions of euros; on the other, failure to reach agreement, in which case the UK could walk away from any further contributions to the budget. If the UK and the EU are to forge a new relationship, reaching an equitable agreement on the budget will be critical.

Sequencing

163.The Article 50 process is scheduled to take two years, at the end of which the aim is to reach a withdrawal agreement, while “taking account of the framework for [the withdrawing state’s] future relationship with the Union”.175 Negotiations on the budget will be central to the withdrawal agreement, but the extent to which they will be tied in to a wider agreement on a future relationship is disputed. The European Commission’s negotiator, Michel Barnier, has been quoted as saying that a comprehensive UK-EU trade deal would take longer than allowed for under Article 50, and was of a “different legal nature”. He added: “You cannot do everything in 15–18 months of negotiations; you have to take things in the right order.”176

164.The Government White Paper takes a different approach: “We want to have reached an agreement about our future partnership by the time the two year Article 50 process has concluded.”177 The sequencing is important: both sides will wish to use their strengths in the withdrawal process to secure not only a better withdrawal agreement, but also better terms for any new relationship. Disputes over the budget, even if they arise in summer 2017, could have long-term implications.

165.As well as reaching agreement on the terms of withdrawal, the Government has indicated that it wishes to negotiate a cooperative future relationship with the EU. The positions taken by both parties to the negotiation in respect of the budget will colour this wider negotiation. The Government has already indicated its willingness to pay for continued participation in specific EU programmes, but any budgetary contributions over and above these will need to be considered in the context of the wider negotiations on a future relationship.

Ongoing access to EU programmes

166.The White Paper mentions several programmes and agencies, although it does not indicate the extent to which the Government wishes the UK to remain involved with them. It mentions in particular the European Medicines Agency (EMA), the European Chemicals Agency (ECHA), the European Aviation Safety Agency (EASA), the European Food Safety Authority (EFSA) and the European (Financial Services) Supervisory Authorities (ESAs).178 It also draws attention to the Galileo and Copernicus space programmes, the European Space Agency and Horizon 2020.179 We note that the Government’s list is not comprehensive.

EU R&D funding: European Added Value?

167.Horizon 2020—the EU’s current research funding framework programme—is an example of an area of EU cooperation with apparent benefits for the UK. Horizon 2020 runs from 2014 to 2020 (although it is likely to be replaced by a successor programme in the next MFF) and has an overall budget of €74.8 billion, excluding Euratom.180 Grants under Horizon 2020 are awarded directly by the Commission to programme participants. The Commission’s November 2015 update stated that €1.4 billion, representing 15% of the total awarded at that time, had been awarded to UK organisations.181 The UK received around 18% of the funding provided by the predecessor programme which ran from 2007 to 2013.182 In other words, the UK has consistently received a proportionately greater share of Horizon funding than it has contributed to the EU budget.

168.European Added Value (EAV) is the concept that funding routed collaboratively through the EU can be used more effectively than the same amount being spent separately by Member States. In the case of R&D, EAV might arise if an EU funding model encouraged applicants to build up transnational networks, leading to cross-fertilisation of ideas and the sharing of best practice. Professor Begg described EAV as “in the eye of the beholder”,183 but in a 2011 report on the MFF we concluded that “EU R&D funding represents strong European added value and will support the EU’s economic recovery after the financial crisis”.184

169.For the purposes of this inquiry we have therefore considered research collaboration to be one area the UK might wish to continue to contribute to following Brexit. We have sought to ascertain the costs and implications of doing so.

170.Professor Begg noted that Norway, as an EEA member, contributed to the EU budget and took part in the research programme.185 Norway’s contribution is comprised of EEA grants to the 15 Member States covered by the cohesion programme (around €391 million per year between 2014 and 2021), and payments for participation in EU programmes (averaging €447 million per year between 2014 and 2020).186 The contribution to programmes (including, but not limited to, Horizon 2020) is calculated on the basis of the relative size of Norway’s GDP, compared to that of the EEA as a whole,187 which in 2014 was $498 billion.188 The UK’s GDP was $2,999 billion,189 so were the UK to contribute towards the same EU projects on the same basis, a very rough calculation would suggest a contribution of around €2.7 billion per annum.

171.Other factors might come into play. For instance, Dr Sánchez-Barrueco argued that Norway’s contributions were based on “an immaterial calculation of the benefits received by the EFTA countries because of their access to the internal market.” This arrangement also included the free movement of workers, and she pointed to the suspension of Switzerland’s participation in Horizon 2020 when it tightened its rules on free movement.190

172.Another possible model is that adopted by pre-accession countries and others, including Israel. Those countries pay into the EU budget (€946 million in total in 2015) in return for access to specific programmes, but do not get access to the single market. Dr Sánchez-Barrueco noted, within a framework such as Horizon 2020, that: “They pick and choose the projects. However they pay a fee that is established by the Union and is higher than the fee that Member States pay.” She thought that the UK would, accordingly, be asked to pay a higher fee for access than it currently pays through its contributions to the EU budget.191

173.Contributions to the EU budget are not hypothecated, so establishing a ‘fee’ for the UK’s current involvement in Horizon 2020 is impossible. However, the UK’s gross contribution to the budget in 2014 (after the rebate) was £14.4 billion (approximately €17.3 billion).192 Horizon 2020 expenditure that year was €6.5 billion, 4.7% of the total EU budget of €139 billion.193 A very rough estimate of the current ‘fee’ paid by the UK for Horizon 2020 participation could therefore be around €809 million.

174.Dr Jorge Núñez Ferrer thought that continued participation in Horizon 2020 and other programmes would be set against settlement of liabilities in the negotiations.194 He also argued that any fee for continued participation might be used to account for the settlement of liabilities: an agreement might be that “We will handle this pension issue on an annual basis” by including it in continued payment for access.195

175.Ingeborg Grässle MEP said that she would “welcome” continued UK participation in Horizon 2020, as it would promote excellence. However, she thought that it would not be “possible to have those kinds of ties to the European Union without access to the internal market and the four freedoms”. She argued that Switzerland’s exclusion from Horizon 2020 encouraged it to be “creative” in implementing its referendum result on freedom of movement in a way compatible with the four freedoms.196

176.Jonathan Arnott MEP thought that a deal for access would be possible, but added that “the price has to be right. If the access that we are offered comes at a price that affords value for money, there is a point at which it is reasonable for the United Kingdom to accept the deal that is on offer.” He considered research to be the area where there was the strongest case for continued collaboration. But he drew a distinction between the positions of Norway and Israel: “The requirements upon Israel are broadly speaking financial; the requirements upon Norway are political as well as financial.” He would not support a deal that undermined the return of sovereignty following Brexit.197

177.The Government has said that it wishes the UK to remain involved in certain EU programmes and would be willing to make an “appropriate contribution” to do so. It is not clear what this contribution might be, nor whether any agreement would allow such payments to be hypothecated in this way.

178.European research cooperation appears to be an area in which the UK could continue to participate. The UK currently benefits under the research funding framework and receives more in grants, proportionately, than it contributes to the EU budget. Any continued involvement after Brexit is likely, however, to require a higher payment, and may also require other political concessions, such as over free movement. The precise nature of such an agreement will be a matter for negotiation.

Purchasing market access

179.Norway’s payments go beyond those explicitly made for participation in EU programmes. Professor Begg described these payments, which go towards EU cohesion funds, as “hypothecated to economic development in central and eastern Europe”. They were “in effect their club membership fee. That is beyond the net gains that they will get from the research programme in which they are participants.”198 Underlying such payments was the “elephant in this room”, namely that “the single market is also about free movement” and the jurisdiction of the CJEU.199

180.Jens Geier MEP characterised Norway’s—and all Member States’—cohesion payments as inherent in preserving the fairness of the single market: “The weaker countries said, ‘Please give us the balance for not having the possibility any more to stop your goods and services by customs taxes, technical obstacles and so on’, and because of that Norway is paying.”200 Dr Sánchez-Barrueco concurred: “It is important to highlight that the underlying logic of budgeting in the European Union is of a redistributive nature.”201

181.Dr Zsolt Darvas, Senior Fellow, Bruegel, told us that he had obtained figures from the European Commission on the contributions of EEA countries to the EU budget. The figures, and corresponding figures for selected EU Member States are set out in Table 4.202

Table 4: Annual net financial contribution to the EU

% GDP

€ per capita

Iceland

-0.05%

-25

Switzerland

0.02

12

Liechtenstein

0.03

40

Norway

0.16

115

UK

0.25

79

Italy

0.29

79

France

0.32

100

Netherlands

0.36

140

Germany

0.39

131

Source: Calculations prepared by Dr Zsolt Darvas, based on European Commission data

182.Dr Darvas noted that Norway’s net contribution of €115 per capita per annum was significantly higher than the UK’s (though less as a proportion of GDP). Ms Grässle put the figure for Norway’s contribution slightly lower, at “€107 per capita to the Union budget, on average.203 Dr Darvas argued, however, that as the UK was not pursuing full EEA membership, “in the future I would expect lower payments for the UK than Norway’s current payments”. Nevertheless, there would be a price for single market access: “I still imagine that European Union countries would demand a significant contribution from the United Kingdom.”204

183.Richard Ashworth MEP reached similar conclusions:

“There would be an ongoing element of payment, voluntarily entered into, by which [the UK] would get benefit. There would be an ongoing element of payment, if [the UK] wished to have a special relationship with certain elements of the single market, and again, in the Prime Minister’s speech, she said quite clearly that she sought a special arrangement specifically for cars and trucks.”205

184.The alternative to making regular payments into the EU budget in return for access to elements of the single market would be to accept that tariffs will be charged on goods passing in either direction. Mr Ashworth argued that regular payments would be “cheaper than bit-part, drip-feed payment through tariffs … It is cheaper to pay an annual subscription to the golf club, rather than every time you go and play.”206 If the UK did not secure tariff-free access to the single market, “the amount of tariff that will be paid … seems to be a very, very substantial sum of money indeed. It would need to be greater than the contribution into the single market; otherwise it would not be worth doing. I do not think it has dawned on people yet quite how big that sum is going to be.”207

185.Access to parts of the single market will form a major element of the negotiations on a future relationship, and within these negotiations the balance between the bill for single market access (wherever it falls) and the cost of tariffs will play a part. The issues go much wider than we can cover in this report. Suffice to say, it is likely that, either directly or indirectly, the EU will seek budgetary contributions in return for single market access.

186.The example of Norway shows that access to the single market may come with a financial price. We note, however, that Norway’s contributions over and above its payments for participation in particular programmes are calculated to take account of its specific situation as a member of the EEA, an option that has been ruled out for the UK by the Government.

187.The question of whether the UK will be required to make a payment in return for market access will be a matter for negotiation, and is likely to involve trade-offs between the level of access sought, the structure and level of other payments and more general political considerations. If the UK refuses to accept free movement of persons or the jurisdiction of the CJEU, the price that it is asked to pay could be proportionately higher than that demanded of Norway. The Government will have to consider any proposals in the round, weighing any payment included in a wider trade deal against the economic benefits the UK stands to gain from continued market access.

The impact on the rest of the EU

188.The removal of UK contributions from EU revenues will substantially affect the EU’s ability to fulfil its planned spending until 2020, and will have an impact on the negotiations, due to start at the end of 2017, on the next MFF. The UK’s gross post-rebate contribution represents around 12% of EU revenue. If we assume that UK receipts will end at the same time as its contributions, the ‘hole’ in the budget would equate to its net contribution, or around 8%.

189.Professor Begg calculated that the UK’s gross contribution after the rebate was equivalent to the gross contribution of all 12 Member States that joined the EU in 2004 and 2007. When the UK leaves, something “of the order of 12% or 15% of the budget will be withdrawn”, but under the MFF, “there are commitments to those expenditure levels. That means that somebody else will have to pay up in the short term for the current Multiannual Financial Framework.” Germany would resist paying more, while other Member States would continue to seek their allotted receipts. Ultimately, “they will all curse the Brits, because they are the ones causing the problem of how you finance it.” Professor Begg argued that this had “the potential to be particularly toxic as a British legacy”, and suggested that withdrawing from the budget would be seen as a “hostile act”.208

190.Dr Darvas thought that a key priority for the EU would be to “preserve the integrity of the current Multiannual Financial Framework as far as possible”. Net recipients were keen to keep the current MFF as it was originally agreed, but he expected the budget to be scaled back if the UK did not agree to continue funding beyond 2019.209

191.Although Dr Darvas agreed with Dr Sánchez-Barrueco that the UK would not be under any legal obligation to contribute following Brexit, he noted that there was “a political dimension to it”, and “a very strong political interest from the United Kingdom to behave as a responsible partner”. As the UK had committed to the seven year MFF, he argued that “common sense” would suggest that “the UK should continue to pay its own net share—not the gross … to the current Multiannual Financial Framework”.210

192.Dr Núñez Ferrer has suggested in a published paper that UK withdrawal from the MFF, while not easy, would not be a “catastrophe”.211 The paper argues that a UK exit from the 2014 budget would have reduced it by €7 billion (the UK’s net contribution), but notes that, were UK payments to continue in return for access to the single market or particular programmes, this hole would be reduced. It would also be reduced by any UK contributions to reste à liquider. If the UK did not negotiate access to the single market, the shortfall, in his view, would be made up by tariffs on goods exported from the UK. Dr Núñez Ferrer (and his co-author David Rinaldi) calculated that a 2% tariff on annual UK exports to the EU of €255 billion would bring in around €4.6 billion for the EU budget, after collection fees.

193.Dr Benedetto agreed with this analysis, though Professor Begg doubted the final part of the argument. He argued that the tariffs would be borne by consumers in the EU, who would make up the shortfall irrespective of how the funds were routed: either they would pay tariffs on imports from the UK, or their taxes would fund increased GNI-based contributions to the budget.212 However, Professor Begg and Dr Benedetto agreed that there could be advantage to the UK in continuing to make payments until the current MFF ends in 2020: Dr Benedetto, for instance, thought that this would help with transition and would allow the UK to retain single market access until the end of 2020.213

194.Jonathan Arnott MEP described possible payments to the end of the MFF as “temporary”, covering a period of around 21 months. He thought that, if the EU offered something suitably attractive in return, “the United Kingdom might be prepared to make a concession with regard to this”. But he added that “you have to do so from the basis of stating that there is no legal obligation to do so, in order for it to be considered a concession in the first place.”214

195.The period between the expected date of Brexit—the end of March 2019—and the end of the MFF is 21 months. We calculated above that the cost to the UK of participating in the budget for those 21 months would be at least £12.4 billion, equivalent to its forecast net contribution for that period, plus the difference between envisaged EU expenditure in the UK and that guaranteed by the Government. This assumes that no extra liabilities will be incurred during that time.

196.Even though we consider that the UK will not be legally obliged to contribute to the current MFF after Brexit, we expect the issue of continuing payments to be a factor in withdrawal negotiations. The Government will have to set the financial and political costs of such payments against potential gains from other elements of the negotiations, such as continued market access for goods and services (without the imposition of tariffs or other barriers), smooth transitional arrangements, and good will in the wider negotiations.

Negotiating considerations

197.There are two plausible outcomes of the Article 50 negotiations: either the conclusion of a withdrawal agreement, or UK withdrawal without an agreement. The first option will bring with it the possibility of continued participation in EU projects, transitional arrangements and a cooperative future relationship. The latter would result in a complete parting of the ways between the UK and EU. The Government has said that it wishes to preserve cooperation with the EU following Brexit and that it is seeking a “smooth, orderly exit from the EU”.215 The Prime Minister has also said that “a deal—and a new strategic partnership between the UK and the EU—can be achieved,” but she has been equally clear that “no deal for Britain is better than a bad deal for Britain.”216

198.An agreement could entail the payment of an exit bill, but, as the Prime Minister has made clear, any such bill would need to be set within the wider context of an acceptable deal for the UK. Failure to reach agreement, and the cessation of payments to the EU, would be hugely damaging to both sides, but it is an option that remains conceivable and forms an important backstop to the negotiations.

199.Our witnesses generally urged that the two sides agree a deal, and, as we have seen, warned of dire consequences if no such deal were reached. Dr Sánchez-Barrueco hoped that a withdrawal agreement would resolve the budget, but warned that, in the absence of an agreement, “Brexit will thrust the UK and the EU into one of the worst scenarios for a legal scholar—that of legal uncertainty, or even legal void.”217 Rhodri Thompson QC warned of “significant international implications if the UK was not prepared to comply with international obligations”.218 Professor Begg, as we have seen, warned that a UK refusal to pay even its expected contribution to the MFF until the end of 2020 would be seen as a “hostile act”.219

200.MEPs emphasised the need for ‘fairness’ in the negotiations. Richard Ashworth considered that a UK refusal to pay funds to which it had committed politically would be a “breach of faith”.220 Ingeborg Grässle argued that “fair negotiations cannot mean picking what you would like to have and leaving the rest for others.”221 Jens Geier thought that, since the UK had “enjoyed all these positive things [emanating from EU membership], I do not think it is unfair that you take some burdens that result from being part of the club.”222

201.Jonathan Arnott MEP thought that a wider deal on tariff-free market access would be negotiated regardless of any UK promise to pay an ‘exit bill’, as it was in the interests of both the UK and the EU. While he considered that budget contributions could be part of the broader negotiation, he did not think that they would be needed specifically as a “bargaining chip” to gain market access. Instead, they could be used to “try to cash in on something that we are not already expecting to get”.223

202.Professor Tridimas put the situation starkly. The Article 50 process was “politically neutral. It simply crystallises the underlying bargaining power of each of the parties. It may work to the advantage of the EU or it may work to the disadvantage of the EU and, correspondingly, to the advantage of the withdrawing state.”224

203.An assessment of the negotiating strength of the parties to the forthcoming Article 50 process would be beyond the terms of this inquiry. However, it is worth noting that the budgetary implications, though important, may be subsumed into a broader trial of strength on economic and political grounds. Notwithstanding that assessment, the EU will wish to avoid an awkward reassessment of its spending plans, and the uncertainty of replacing revenues through other means such as tariffs. The UK, on the other hand, will be aware of the risk that its long-term relationship with the EU may be poisoned, with damaging consequences for the UK economy. There is also a wider reputational risk if the UK is perceived as having avoided its responsibilities. Both sides will wish to bear in mind their ability to work together in defending Europe’s internal and external security.

204.We hope that there is a desire on both sides to use the Article 50 process to reach an acceptable agreement on the terms of the UK’s withdrawal from the EU. Among a wide range of subjects for discussion in the negotiation, the issue of continued UK contributions to the EU budget will be an important factor.

205.But this is more than a negotiation on withdrawal, and more than a trial of strength. It is also a negotiation about establishing a stable, cooperative and amicable relationship between the UK and the EU, so as to promote the security, safety and well-being of all the peoples of Europe. Such a relationship is inconceivable without good will. The Government will need to approach the forthcoming negotiations in that spirit.


173 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, (February 2017), p 7: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/589191/The_United_Kingdoms_exit_from_and_partnership_with_the_EU_Web.pdf [accessed 27 February 2017]

174 Ibid.

176 ‘Barnier urges UK to be realistic about trade terms for Brexit’, Financial Times, 6 December 2016. https://www.ft.com/content/e3644d5e-bba9-11e6-8b45-b8b81dd5d080 [accessed 27 February 2017]

177 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, (February 2017), p 65: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/589191/The_United_Kingdoms_exit_from_and_partnership_with_the_EU_Web.pdf [accessed 27 February 2017]

178 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, (February 2017), p 45: https://www.gov.uk/government/publications/the-united-kingdoms-exit-from-and-new-partnership-with-the-european-union-white-paper/the-united-kingdoms-exit-from-and-new-partnership-with-the-european-union--2 [accessed 27 February 2017]

179 Ibid.

180 HM Treasury, European Union Finances 2015, Cm 9167, (December 2015), p 51: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/483344/EU_finances_2015_final_web_09122015.pdf [accessed 27 February 2017]

181 Ibid.

182 Written evidence from the Campaign for Science and Engineering to the Science and Technology Committee for its report A time for boldness: EU membership and UK science after the referendum (1st Report, 2016–17, HL Paper 85) (EUM0047) [accessed 27 February 2017]

184 European Union Select Committee, EU Financial Framework from 2014 (13th Report, 2010–12, HL Paper 125).

186 Norway Mission to the EU, Norway’s Financial Contribution, (10 August 2016): http://www.eu-norway.org/eu/Financial-contribution/#.WJ21rdKLRpi [accessed 27 February 2017]

187 Norway Mission to the EU, Norway’s participation in EU programmes and agencies: (10 August 2016]): http://www.eu-norway.org/eu/Coopperation-in-programmes-and-agencies/#.WJ22uNKLRpg [accessed 27 February 2017]

188 Trading Economics, ‘Norway GDP: 1960–2017’, (2017): http://www.tradingeconomics.com/norway/gdp [accessed 27 February 2017]

189 Trading Economics, ‘United Kingdom GDP 1960–2017’, (2017): http://www.tradingeconomics.com/united-kingdom/gdp [accessed 27 February 2017]

191 Ibid.

192 HM Treasury, European Union Finances 2015, Cm 9167, (December 2015), p 14: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/483344/EU_finances_2015_final_web_09122015.pdf [accessed 27 February 2017] Conversion to euros at £0.8337 to the euro, based on the exchange rate of 31 December 2013: European Commission, Consolidated annual accounts, 2014, (23 July 2015): http://ec.europa.eu/budget/library/biblio/documents/2014/2014%20EU%20Annual%20Accounts.pdf [accessed 28 February 2017]

193 Based on payments appropriations agreed for the 2014 EU budget: European Commission, Budget: annual budget, (16 October 2015), http://ec.europa.eu/budget/annual/index_en.cfm?year=2014 [accessed 28 February 2017]

196 Q 50. The ‘four freedoms’ are the free movement of capital, services, labour and goods.

199 Ibid.

202 The figures represent the average of 2008–2014 contributions for EU countries, 2014–15 for non-EU countries. This table is published in Zsolt Darvas, ‘Single market access from outside the EU: three key prerequisites’, Bruegel, (19 July 2016): http://bruegel.org/2016/07/single-market-access-from-outside-the-eu-three-key-prerequisites/ [accessed 27 February 2017]. These figures differ from those in Table 3 as they are from different sources.

207 Q 59. This figure has been calculated elsewhere as €4.6 billion per annum. Jorge Núñez Ferrer and David Rinaldi The Impact of Brexit on the EU Budget: A non-catastrophic event, CEPS Policy Brief No. 347, (7 September 2016): https://www.ceps.eu/publications/impact-brexit-eu-budget-non-catastrophic-event [accessed 27 February 2017]

211 Q 38. Jorge Núñez Ferrer and David Rinaldi The Impact of Brexit on the EU Budget: A non-catastrophic event, CEPS Policy Brief No. 347, (7 September 2016): https://www.ceps.eu/publications/impact-brexit-eu-budget-non-catastrophic-event [accessed 27 February 2017]

213 Ibid.

215 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, (February 2017), p 6: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/589191/The_United_Kingdoms_exit_from_and_partnership_with_the_EU_Web.pdf [accessed 27 February 2017]

216 Prime Minister Theresa May, Speech on The Government’s negotiating objectives for existing the EU, 17 January 2017: https://www.gov.uk/government/speeches/the-governments-negotiating-objectives-for-exiting-the-eu-pm-speech [accessed 27 February 2017]




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