The Political Economy Review 2017

19 th Edition



elcome to this year s edition of the Political Economy Review . We have had a rollercoaster ride of a year in politics and economics and our articles reflect that. With essays ranging from the stagnation of the Japanese economy, to ideological questions on free trade and austerity, and topical arguments related to Theresa May, Brexit and terrorism, we have an exciting batch of articles that members of the Remove have worked very hard to write. While this year continues to be dominated by Brexit, at least at home, it has been a strange but fascinating year in the realm of international politics and economics, with the US elections, the continued fallout of the 2008 financial crash, and the ever-deteriorating situation in Syria. Special mention must go to Conor Hughes, who has decided to tackle an extremely difficult question that is very close to Dulwich hearts on the charitable status of private schools, and to Jay Wong, whose excellent essay on the subsidising of job creation in the North of England is also being submitted to the Fitzwilliam College Cambridge Land Economy essay competition. The breadth and depth of this year’s articles only scratch the surface of the ability of the Dulwich Remove in the realm of politics and economics but represent an extremely high quality selection of powerful and interesting pieces. We are also proud of our continued support for the Dulwich College Bursary Appeal, to which all proceeds go. Enjoy reading!







Brexit… What next for Britain?

The impact of Brexit on FDI in the UK R ICHARD T RENEMAN / 11 How will Brexit affect UK Research and Innovation funding, and should we care? A LEX W ARING / 14


The long-run effects of Brexit on the UK economy

Should Theresa May resign as Prime Minister in the wake of the 2017 General Election?



Leaving the Customs Union: Two Possible Scenarios



Should Public Schools retain their charity statuses?


‘Free Trade is a necessary evil’


The Effects of the Drugs Trade on the Mexican Economy


Oriental Stagnation


Macron and the EU


Bursaries: An Economic Analysis


Only Economic Neo-Liberalism is the answer


The Future of Multinational Corporations


The Economics of Drug Consumption


Are Football Transfer Fees Still Justified?


Is the Age of Austerity Dead?


How recent terrorist acts have shaped the political climate in the UK

‘The best way to ensure affordable housing and a strong economy across the UK is to subsidise job creation in the North of England.’ Discuss. J AY W ONG / 43



2017 has so far been a turbulent year for both economics and politics.

Last year’s edition of the Political Economy Review was dominated by one topic – Brexit. This year, even though Article 50 has now been triggered and negotiations to leave the European Union have now begun, the articles submitted to this journal, rather refreshingly, show that there is more to the world of politics and economics than Brexit (although many boys did still choose to write about the subject). I am delighted that, through this journal, we are able to publish a wide variety of articles and essays which showcase the talents of the boys in the Remove. The majority of those submitting a piece to this journal will go on to study Economics or a related discipline at university; though it is also notable that many are applying for other subjects, and have still chosen to contribute out of their own academic interest. The major news story of this year to date (beyond the already-mentioned triggering of Article 50) is without doubt Theresa May’s failed election gamble. In an attempt to secure what polls had suggested might be an increased majority, a General Election was called for Thursday 8 th June. Three weeks down the line, and May is still in power, but now, in a result that few predicted, she is the head of only a minority government, having garnered only 318 seats in the House of Commons, short of the 326 needed for a majority. The Conservatives, having formed a minority government, with the support of the Democratic Unionist Party, now look shaky at best, but, for now at least, hang on, opposed by a re-invigorated Labour party led by Jeremy Corbyn. However, there is little public appetite for another election any time soon. Who knows whether May will still be in charge next year? Elsewhere, Donald Trump is now in the White House, having seen off Hillary Clinton in November 2016, and Emmanuel Macron, whose new party “En Marche!” won a record majority this month, is the now the French President. A passionate Europhile, Macron will look to espouse the continued relevance of the European Union during this crucial time in its history. Meanwhile, in Germany, Angela Merkel contests yet another election in September. In macroeconomic terms, Britain is yet to feel the full effects of Brexit. To date we are still experiencing positive economic growth, although inflation is approaching 3%, the MPC’s upper bound. Unemployment remains low at around 5%, yet real wage growth and labour productivity levels continue to stagnate. We continue to live in uncertain times!


The 2017 Political Economy Review offers a selection of articles written by the best of this year’s Remove economists. I hope that you enjoy reading…


My thanks go to Asher Laws, Ben Cudworth and Luke Walker Titley for their hard work in producing this publication.




Brexit… What next for Britain?

The most complex negotiations of modern times are underway, thanks to a decision made last June. Despite Brexiteers believing it is 'all over' and that the 16.1 million members of the 'liberal elite' should accept this, in reality, Brexit has only just begun. But what does this actually mean for Britain? I will make no secret of the fact that I believe Brexit is a totally unnecessary and disastrous decision, but I will seek to answer this question realistically, acknowledging the real challenges and opportunities (however limited) Brexit will bring; although, of course, this is only speculation. Firstly, some of the effects of Brexit have already been felt, which can help us predict longer-term consequences. Last June, pound sterling fell almost 15% against the dollar to a 31-year low, and this depreciation has persisted since. This, as shown by the almost over-night nature of the fall, was a direct result of the vote, as global financial markets feared for the future health of the UK economy. There has, in fact, been a

series of falls almost every step in the Brexit journey; when Theresa May decided to pull the UK out of the Single Market, the triggering of Article 50, and when her snap 'Brexit-election' went wrong and created further political chaos and economic uncertainty. The weak pound has also persisted because of the record-low 0.25% base interest rate, introduced by the Monetary Policy Committee immediately after the Brexit vote last June as a way of easing uncertainty and a predicted slump in demand. International investors have been discouraged from saving in Britain, thus a 'hot-money outflow' has contributed to this depreciation.

With this depreciation, came inflation - most notably cost-push inflation, caused by rising import prices pushing up prices along the supply-chain. This is a real concern as the UK is so heavily dependent on imported goods (one third of all finished goods in the UK are imported) and imported raw materials. UK inflation, according the CPI, now lies at 2.9% (Q3 2017), a massive rise from 0.6% this time last year, with many projections predicting 3.2% inflation for the fourth quarter of this year. This, of course, is a headache for the Bank of England as it is above the 2% inflation target and increasing, but more importantly, it significantly outstrips wage growth, which currently stands at 2.1%. This means that in terms of real incomes, on average, wages are falling by 0.8%, and if you work in the public sector (where the 1% pay cap still exists), wages are falling, on average, by 1.9% per annum. This should be compared to this time last year, when real wages were growing by nearly 2%, a huge shift. This, as Mark Carney confirmed in his Mansion House address on 20th June, is a direct result of the inflationary pressures caused by Brexit; hence, we should not be under the illusion that Brexit will not hurt ordinary working families. And this is set to worsen. Considering what has happened and the fact that the base interest rate is not set to rise in the immediate future, it is easy to predict that higher inflation and anaemic wage growth will continue to squeeze workers' pockets, increasingly so as higher prices continue to filter through supply chains to consumers. Brexiteers will be quick to mention that Brexit has, however, injected much-needed competitiveness in Britain's export market. Pound sterling has long been overvalued, hindering UK exports, and thus Brexit could go some way towards reducing the UK's massive current account deficit. In fact, many predict that the UK trade deficit will fall from 6% of nominal GDP to 3.5% by 2019. Brexiteers even suggest that this is an 'opportunity' to


rebalance the economy, with the re-birth of UK manufacturing. Firstly, this is very unlikely given the extent to which the economy relies on services, and secondly, this 'opportunity' can only occur, of course, if foreigners buy British goods and services. They most probably will until March 2019 (when Britain formally leaves the EU), however, after that, the future is uncertain. Assuming Britain no longer enjoys the benefits of the Single Market and must form a new comprehensive trade deal with the EU, they most probably won't to the same extent, if varying tariffs are added on top. Even if the UK boosted demand in the form of exports, let's not forget how much we import, and hence, how much inflationary pressure there is going to be. This contraction caused by inflationary pressure vastly outweighs the possible improvement in the trade balance, as shown by growth figures since last June. UK GDP growth has slowed since last June, and Britain hasn't even left yet. In 2016, despite the Brexit vote, the UK economy grew by 2%, but now 'project fear' is turning into 'project reality'. The CBI predicts 2017 growth at 1.6% and 2018 growth at 1.4% driven by a fall in consumption. In the event of no deal, many leading experts are convinced a recession would unfold. However, these numbers do not tell the full story. Firstly, as mentioned earlier, this slowdown is eased by a rise in exports, which doesn't necessarily affect the ordinary consumer who is suffering from negative real wage growth. Furthermore, given the falling rates of unemployment we have seen, the economy should be growing, but it is clear that as real wages are falling, ordinary working families (or those 'just about managing') will have to reign in their consumption. Further evidence of a Brexit slowdown is that Mark Carney stated in his Mansion House address that 'now is not yet the time' for a base rate rise (despite rapidly growing inflation), as the MPC remains scared about the 'Brexit squeeze' on consumption. Mr Carney also clearly implied in his address that Brexit would make the UK

economy poorer. Along with Philip Hammond, he predicts further 'price rises and job losses' as the UK leaves the EU. A further sign of the dismal times is that the target to balance the budget has been postponed until 2025, due to Brexit. This, however, is not so the Treasury can end austerity, but to pay for the cost of Brexit. Austerity and its painful consequences will be extended due to Brexit as the government will receive less in tax receipts in the coming years. Therefore, by looking at what has happened and what is predicted, workers will be hit not only by

poor wage growth but by strained public services.

Britain's negotiations with the EU will, of course, be uncertain. However, there is something we do know - they won't go well (and there will be a significant administrative cost). What the government has done over the last year is all the proof you need.


Primarily, the government has been deluding itself that Britain can have 'the exact same trading benefits outside the EU' to quote the Secretary of State for leaving the European Union, David Davis. This is simply not true, especially as the Prime Minister has ruled out staying in the world's largest trading bloc, not to mention the prospect of 'no deal'. Furthermore, the European Commission has made it clear that Britain won't enjoy the same benefits of being inside the Union once it has left, so it is clear that Mr Davis' vision won't go down well in negotiations. Secondly, Mrs May's mantra that 'no deal is better than a bad deal' is not only fiction but also very dangerous for the UK economy. As I will explain later, a 'cliff-edge' Brexit will mean a major economic shock for the UK economy, much worse than we have seen to date. Not only this; the cabinet itself seems confused about the consequences of 'no deal'. The Chancellor has recently warned of the dangers, stating 'no deal' would indeed be a 'very, very bad deal'. It appears to me rather contradictory that a 'very, very bad deal' is better than a 'bad deal'. Walking into the negotiations as the bully threatening to walk out doesn't seem to be the best way to secure a 'deep and special partnership between allies'. Furthermore, the government's version of megaphone diplomacy is not only outdated and arrogant, but not helpful in terms of the negotiations. Accusing Europe of interfering in the general election, characterising herself as a 'bloody difficult woman' and threatening to undercut her European partners by creating an unregulated tax-haven off the coast of Europe doesn't strengthen her hand but only antagonises already tough/emotion-driven negotiations. Moreover, I don't believe the Brexiteers' utopian 'Brexit deal' is at all plausible; it is clear that the UK has the weaker hand in the negotiations. On a simple level, there are 27 of them (including major global players - France, Germany, Italy etc.) and only 1 on the other side. In addition, the very nature of Article 50 of the Lisbon Treaty ensures that the leaving state is in a weak position. According to the former Italian Prime Minister Giuliano Amato who wrote it, it was intended to be a 'punishment mechanism' to discourage such a move; he also added that 'when it comes to the economy, they have to lose'. Article 50 is unrealistically restrictive and has no mention of a 'future relationship', so Britain will have to flirt its way to securing a deal upon which 27 member states will agree, which the UK government most certainly is not doing. Furthermore, one of the UK's greatest weaknesses is that, fundamentally, it lacks the manpower; there is a significant shortage of trade negotiators and analysts on the British side (the main reason being that Brussels has negotiated on Britain's behalf for nearly half a century and hence it has not needed its own negotiators). Recruited civil servants do not compare with Brussels' team of negotiators. Britain's weakness is greatly contrasted with the newly-found strength in the EU; some Eurocrats are predicting a more prosperous Europe post-Brexit. All 27 remaining member states unanimously backed the Commission to negotiate on their behalf in minutes (the most unified the Union has been in quite a while), the Eurozone's economy is back on track and the newly-elected French President Emmanuel Macron brings greater confidence in Brussels. Recent events have brought this contrast into sharp relief. Macron has secured a massive mandate for his pro-European stance with his landslide victory in the French parliamentary elections (securing 350 out of 577 seats), and indeed the UK general election, where there were no winners (except perhaps Michel Barnier and the Commission negotiating team), has resulted in the weak and wobbly Conservative Party scrambling to hold on to power. Theresa May is still (at time of writing) trying to secure a deal with 10 DUP members to ensure she has a workable majority in parliament. This is not only terrifying for the future of Northern Ireland (as I will explain later) and an embarrassment for the Tories, but a further weakness in Britain's negotiating position, as there is a real risk that Parliament could reject the Brexit bill in 2 years' time. Frankly, if she can't negotiate with Arlene Foster, how does she have any hope with the European Commission with a spring in its step? We also know that the 2-year deadline is totally unrealistic. The EU has never secured a trade deal in this timescale (on average, comprehensive free trade deals take 4-5 years to negotiate), let alone a deal this complex


which involves an administrative Brexit, a legal Brexit and finally a trade Brexit. Let's not forget that the countdown has started and that around 3 months was wasted with a general election and that the Germans will be pre-occupied later this year with their own election. In reality there is little more than a year for talks themselves. It seems inevitable that a transition arrangement will emerge, but under what terms? We do not know. Last June, the referendum asked the electorate whether Britain should remain or leave the EU, and hence there is a mandate to leave the EU. To quote Ian Dunt, 'the referendum settled a question. It did not shape the answer.' This is because it is not like leaving a golf-club. There are many different versions of Brexit: hard, soft, cliff- edge, fast, slow, open, and even 'red, white and blue', each with different consequences. The Tory government has selected the 'hard' option from this menu, extrapolating its own mandate from the referendum result. Apparently the government has a mandate to leave the Single Market and to prioritise hostile sentiment towards immigration over the economy. It doesn't; not only because this wasn't on the ballot paper, but also because 42% of leave-voters (according to YouGov) would like Britain to follow the Norwegian-style option, whereby Britain leaves the EU but remains in the Single Market. Even Mr. Farage has spent his career calling for us to be like Norway or Iceland. Hence, there is by no means majority support for a 'hard' Brexit, clarified by the election result where 57.6% rejected this vision. However, the approach doesn't seem to have changed. Theresa May's 'hard' Brexit means Britain leaving the Single Market and making UK families poorer. 45% of UK exports and 53% of imports depend on the Single Market, guaranteeing tariff-free and barrier-free trade at present. Clearly if Britain left, it could not enjoy the benefits of trading with 500 million consumers in the same way. The UK, depending on the new deal, could be subject to export tariffs as well as other non-tariff barriers/ regulations. It is also important to point out that once Britain leaves this market, it will lose the 56 free-trade deals which it had with the rest of the world as an EU member state. Therefore, the UK will have no free-trade deals until all these bi-lateral agreements have been negotiated, which each take years. This is estimated to cost the UK billions of pounds annually. Mrs May seeks to negotiate a free-trade deal with the EU (like the US and Canada have), to gain access to the Single Market, but to do this, the UK will need to accept a lot of red-tape dictated from Brussels, over which the UK would have no control. This also means accepting the authority of

the ECJ (European Court of Justice), which David Davis and his Brexiteer friends will not accept. Thus, there is a major issue in the government's 'hard' Brexit plans. Not only will it cost the UK billions (on top of the multi-billion divorce settlement), tightening the squeeze for consumers, but there is also a prospect of no deal i.e. 'cliff-edge' Brexit. This is the worst possible deal, meaning no co-operation between the UK and EU and the UK being subject to WTO tariffs on all trade to and from the EU. These include a 59% tariff on beef, 40% on cheese, and 10% on cars, pushing up prices drastically in the UK. Leaving the Customs Union would also create chaos in Ireland and make border controls more complex. Thus, even the possibility of 'no deal' is terrifying. Although the Brexit team seem to have ignored the election result, many leading members of the party and business

leaders are calling for more cross-party consensus about the approach to Brexit. They highlight the realities of a 'hard' Brexit and demand a 'soft'/'open' Brexit, whereby the UK joins the EEA (European Economic Area) -


outside the EU but inside the Single Market. This way, the UK economy can be put first, protecting jobs and livelihoods. This is essential to stop thousands of jobs being moved from the UK to the Continent (which has already started in London). This is the only way to ease the 'Brexit squeeze' on consumers and ensure the economy suffers minimal damage. It is, frankly, shameful and irresponsible that the government decided to take the best deal off the table before negotiations even began. Since the election and the somewhat desperate talks with the Democratic Unionist Party (DUP) started, it has all become even more complicated and difficult for the Tories. The DUP, despite having links to terrorists and rejecting climate change, may help us secure a 'softer' Brexit. They are adamant that Britain does not leave the Customs Union, for fear that a hard border will emerge with the Republic. Therefore, it is likely Parliament will reject a very hard Brexit. However, that is not to say the DUP deal is a good thing, especially for the 2 million people living in Northern Ireland. This arrangement with the government is certainly contrary to the Good Friday Agreement, as it is impossible for the government to stay neutral when it relies on the unionists for support. It seems as if direct rule from Westminster is now inevitable as the Stormont Assembly has totally collapsed, a catastrophe for the peace process and the people of Northern Ireland. In terms of Brexit, although both parties don't want a hard border, there may well have to be one if Britain leaves the Customs Union, to stop Ireland from being a back door into the UK for EU migrants. This would damage both economies and the livelihoods of those near the border, taking them back to an infamous era. There are numerous other ramifications to leaving the EU, many of which have been scarcely mentioned, yet need to be considered as they will significantly affect our lives. Firstly, a grave threat to our society, terrorism. The Schengen Information System Database provides invaluable information regarding the whereabouts of terror suspects across Europe, and is used by British security services 16 times a second. If the UK refuses to accept the jurisdiction of the ECJ (under which the system operates), this database may not be available. It is in both the UK's and the EU's interest to keep this operating, however, if hard-Brexiteers won't back down, Brexit could pose a significant threat to national security. There are numerous examples where the ECJ protects consumers' and workers' rights, including, of course, our human rights; if hard-Brexiteers don't back down, these may also drown in the English Channel. My final point is that Brexit will cause long-lasting ramifications, affecting those who were too young to vote, like me, but also the next generation. Although the US President and the newly powerful DUP dispute its existence, Brexit is a major distraction to tackling Climate Change. This was not mentioned once in the Article 50 letter, although 1,100 EU environmental regulations may be lost due to Brexit. Most notably, there is a possibility that the UK could leave the European Emissions Trading Scheme. The Erasmus programme, scientific research funding and even free data-roaming are all at risk of being axed in the negotiations while they squabble over trading relations, but will, of course, affect the opportunities for future generations. It seems that the referendum was taken as a popularity vote of the EU and its bureaucracy and not whether it was actually in Britain's best interests to leave the EU, two very different things. Since then, Theresa May has adopted her calamitous version of Brexit, taking the best deal off the table and opting for hate over sense; she is prioritising control on immigration (which boosts UK economic performance) instead of facing the reality. Working families are £500 poorer than last year, the Brexit squeeze is upon us and the negotiations are somewhat doomed before they have started. The Brexiteers say the economy is booming; it's not. They say they need us more than we need them; they don't (just look at the numbers - 45% of UK exports go into the EU and only 6% of EU exports go into the UK). They say countries are queuing up to sign trade deals, they're not, and even if they were, Britain can't start negotiating them until after 2019 (a simple fact of which David Davis was unaware when he took up the post of Brexit Secretary). They also say that a 'very, very bad deal' is better than a bad deal; it most certainly is not. The government wants to secure a 'deal like no other in history', assumingly


meaning a deal which will hurt the poorest in society and ignores the wishes of 48.1% of the electorate as well as future generations. I believe that for a decent negotiation to happen, the government needs to accept that it will have to pay a substantial divorce settlement, but the Commission also needs to accept that a 'future relationship' will need to be discussed alongside the divorce settlement. I believe that the Commission may wish to punish Britain but the European Council will be pragmatic in its approach; not a punishment but firm treatment. I believe the ‘coalition of chaos’ can reach a deal with a transitional period if hard-Brexiteers back down and accept the economic realities. However, any deal is worse than the deal we already have.



The impact of Brexit on FDI in the UK

The outcome of the June 2016 Brexit referendum defied all the polls, it was a result no one expected. As a direct consequence of the process of Brexit negotiations the UK has noticed a sharp fall in business confidence and rise in uncertainty with a significant effect on FDI (Foreign Direct Investment) in the UK. Whilst noting the limited time frame since Brexit, one can still determine the immediate impact of Brexit on FDI in the UK. To place matters in context, it is important to understand how FDI performed in the UK before the Brexit referendum. When the UK was a member of the EU, it was the most successful nation in the EU in attracting FDI, attracting 25% of all European Greenfield funds (projects in which companies builds the entirety of its operations in a foreign market starting from scratch). FDI projects since 2015 nearly equalled those of Germany and France combined. Moreover, from 2011 to April 2016 the UK managed to attract 22% of all FDI projects into the EU. Under EU membership FDI in the UK thrived. EU membership was a significant factor in attracting FDI because it provided foreign investors with access to the EU internal market. The single market had its structural advantages, flexible labour (freedom of movement for EU nationals) and product markets (free trade within EU). EU membership also meant that in the long run as the UK had become more integrated with the EU, it has strengthened its comparative advantage in many sectors, most notably the financial sector, in which it dominates. Despite all the uncertainty throughout the Brexit negotiations, one thing Theresa May made very clear from as early as her first Brexit speech is that the deal she would be pursuing “cannot mean membership of the single market”. Brexit would mean that businesses would lose the benefits derived from UK single market membership. One could therefore argue Brexit would have detrimental effects on FDI in the UK. Citing the example of Korean businesses: expert Young-Ho Seo, Chief Business Development Officer in Korea, reported that many Korean companies have invested in the UK in order to access the EU market and are extremely concerned about Brexit. He further highlighted that since July 2011 Korea has had a free trade agreement (FTA) with the EU, making the UK much less attractive until it can negotiate a FTA with Korea. Both these factors have resulted in companies such as LG Electronics, announcing plans in April 2016 to relocate its London HQ to a new office in Frankfurt. Additionally, coupled with the great uncertainty over Brexit negotiations, over issues such as the UK’s post Brexit immigration policy or access to the single market, companies may be less inclined to take big financial risks in M&A (Mergers and acquisitions, a general term referring to the consolidation of companies or assets)


or Greenfield investment. For example, according to expert Kavan Bhandary, Chief Business Development Officer in India, a man who has successfully worked with over 25 foreign governments supporting them to attract FDI from India, convincingly argues that FDI in the UK from India depends on “access to skills”. He states that Indian companies are largely focused on greenfield FDI in services and technology sectors, and as such, access to skills and talent pools are critical in the decision making of location for investment. Hence, it is likely that Brexit means that Indian investment into the UK may be cancelled, delayed or deferred.

The case of American investment following Brexit is illustrative. The UK’s largest source of FDI is from USA, and a study commissioned by the American Chamber of Commerce by the EU warned Theresa May, ahead of Brexit negotiations, that American investment in the UK, worth £487bn (2015), is largely based on EU membership and access to the single market. It states, “For decades, the UK has served as a strategic gateway to the European Union for UK firms and financial institutions. The primary motivation of many US companies to invest in the UK has not only been to serve only the UK market but to gain access to the much bigger EU single market”. The report then identifies the importance of access to single market through “passporting rights” provided through EU membership and warned that if the UK is unable to negotiate similar access for companies based in the UK that “many of these US firms will choose another entry

point to access single market in future”. It further argued that it would make a huge difference in London’s role as a financial hub and may “accelerate the rise of other European financial centres, for instance Frankfurt”. Overall, this report strongly highlights that unless successful negotiations are held granting firms similar access to the single market, FDI from the US in the long run is likely to be worse off. And, bearing in mind that the US are the country with the greatest share of FDI projects in the UK, a decline in FDI from the US would have a largely negative impact on the UK economy. Considering the cases of Korean, Indian and American investment following Brexit, there is a strong argument to be made that Brexit and leaving the single market poses a big risk to FDI in the UK. It comes as no surprise that the Centre for Economic Performance (CEP) expects that FDI in the UK will decline by 22% as a result of Brexit. However, one could conversely argue that Brexit won’t have quite as damaging effects on FDI in the UK. The UK remains Europe’s most attractive location for international investment. In fact, the UK secured its highest ever level of inward investment in 2016 beating Germany France and Spain, with FDI reaching an all-time high of £110946 million in Q4 2016. Therefore, it is fair to say; at least in the short run, Brexit has not had a negative impact on FDI, potentially even a positive one.


Furthermore, whilst noting that it is premature to draw concrete conclusions, one could highlight that some major investors have remained resilient despite the projected 1.7% Real GDP growth in 2017 by the Bank of England, and have planned major investments. Amazon has set aside $346.8 million to build a new warehouse employing 1500 people in Tilbury Essex and IKEA plans to create 1300 jobs by opening 3 new stores by the end of 2018. In the past 18 month’s particularly, UK fixed assets have looked cheap to foreign investors. One could further argue that, in the short run, Brexit has improved FDI, by attracting investment into land and property. The sudden drop in sterling immediately after the Brexit vote made UK land and property about 20% cheaper in dollar terms. This prompted investors from the US, China and even continental Europe to invest $9.9bn (more than 35% of total FDI) in the next 10 months, up from $7.9bn (18.6% of total FDI) in the same period 12 months earlier. However, one could argue that as Theresa May proceeds with Brexit discussions in Brussels, that at any one point in time sensitive information could be released causing the pound to either rise or fall. Should it appear that the UK is nearing an unfavourable deal or more uncertainty arises as a result of the negotiations, the pound is likely to fall and as a consequence, FDI too could fall as the UK becomes less attractive of a location for investment; the consequence of the prospect of uncertainty and low business confidence in the longer term. Investors and businesses may delay or defer investment decisions with the prospect of a further weakening of sterling. For some property there is also the possibility that the weaker pound may continue to attract high levels of FDI (these assets being cheaper - incentivising overseas investors). Yet, if clarity is achieved as to the outcome of UK’s Brexit negotiations, this may renew business confidence and will underpin the pound’s recovery and permit it to stabilize. Once stability is achieved the pound will be less attractive for these investors in land and property: a factor that has bolstered FDI in a period of great uncertainty. In the medium to long run the terms of the UK’s Brexit deal will be determined and uncertainty will no longer persist, and eventually, the UK should see a recovery in the pound and a consequent decline in FDI in property and land (it now being expensive relative to the dollar). The prosperity currently enjoyed in the UK, the result of significant foreign investment in property and land should only continue as a short run phenomenon. It is


inevitable in the longer run as uncertainty evaporates, that Brexit will have a negative impact on FDI, as the UK no longer offers the structural advantages it once had being a member of the EU.



How will Brexit affect UK Research and Innovation funding, and should we care?

The average John Dulwich might be forgiven for thinking the Brexit negotiations currently underway are irrelevant, and frankly as interesting, as a trade union dispute in Papua New Guinea. However, they are anything but irrelevant, especially to those of us looking to forge a career in science. The vote to leave the EU in 2016 has thrown funding research into uncertainty and raises serious financial medium-term challenges for universities and researchers, with a direct impact on opportunities for jobs and collaboration. For those of us expecting to graduate in 2021, the landscape we find ourselves in four years from now could be very different from the one we were in prior to the Referendum. Campaigners at The Institute of Physics have highlighted four areas of concern to UK scientists: funding, people, collaborations, and regulation. So let’s put these into perspective. Research grants directly or indirectly generated as a result of our membership of the EU contributed over €7bn to UK research projects from 2007-2013. In 2014/15 £836m was paid to UK

universities alone from EU bodies, generating more than 16% of all research-grant income for UK physics departments 1 . Additionally, a further £1.024bn was generated through secondary industry, contributing £1bn to the UK GDP 2 . This investment has helped underpin our ranking of 3rd in the World Innovation Index, a renowned benchmark ranking of the world’s leading economies in innovation capabilities and results, ahead of the USA (4th), Germany (10th), Japan (16th) and China (25th) 3 . Make no bones about it: innovation is a key driver for economic growth and prosperity and the UK sorely needs both of these. But innovation requires continuous and committed investment. Since the financial crisis in 2008, funding from Research Councils UK, the umbrella body for the UK’s 7 main grant-funding agencies, has flat-lined. Access to the European Research Council has, therefore, become a vital source of funding for UK researchers, receiving over 1500 awards out of a total of nearly 7000 grants awarded by The European Research Council from 2007-2017. The ERC was established by the European Commission to support research and technological development across fields as diverse as bio-nanotechnology and clean energy. As a supra-national body it has proved itself to be a more stable collaboration than other legal and political associations, beyond national and party politics, and with funding awarded strictly on the quality of the work regardless of the winds blowing in the geo-political landscape. Although not directly linked to our

1 Paul Hardaker, Chief Executive, IOP, January 2017 2 Economic Impact of EU Research Funding to UK Universities, Viewforth Consulting, May 2016 3 WIPO Global Innovation Index 2016 PR/2016/793


membership of the EU, there remain questions as to whether the UK will continue as a significant recipient of, as well as contributor of, ERC funding given the future uncertainty of UK economic growth. Euratom, the European Atomic Energy Community, is another key source of funding to UK physicists. Euratom comprises the 28 EU member states and is heavily involved in funding major projects such as ITER, the world’s largest international nuclear fusion megaproject. Euratom does collaborate with non-EU countries, although legal ties still link it to the EU, so there is significant uncertainty as to whether Britain may be forced to leave the Treaty when it leaves the Union. This means that Britain’s involvement may be reduced in the relatively newer and more recently established projects such as ITER and the JET nuclear fusion facility for the relative short term, and it may have to renegotiate in order to continue in collaboration. Both CERN and ESA (the European Space Agency) were also founded before the EU, and therefore British membership is expected to continue. In November 2016, following campaigning by the UK scientific community, the government announced a further £2bn of investment in R&D in science and technology each year, until 2020. However, now as a minority government and with demands from all sides for cessation, or at least reduction, of austerity measures and increased spending in other key areas such as the NHS and benefits, the Conservative party may find itself unwilling or unable to continue its commitment to such investment and unable to make up any drop in funding as a direct or indirect consequence of the UK’s withdrawal from the EU. Any change in government between now and 2020 could further put this earmarked funding in jeopardy. This would be extremely short-sighted. Funding in science and technology is vital to the re-structuring of the UK economy, if we see, as expected, a decline in other UK sectors including London’s role as the world’s leading financial centre. There is further uncertainty over the effect of Brexit on overseas students, and whether students will be included within the immigration cap figures potentially impacting tuition fee income, currently worth £1.1bn 4 , although some of any shortfall will be made up from the higher fees charged currently to non EU students but which will be charged to all international students after 2019. The status of scientists and technicians working in, and wishing to work in, the UK is another area of significant concern. If we are to ensure the UK’s status as a world leader in scientific innovation, we must ensure we have the staff to undertake, collaborate with, and support UK projects. UK universities currently employ over 31,000 non-EU academics and technicians; indeed 16% of all university workers, current and future staff are at threat of losing or being denied rights to live in the UK after Brexit. A commitment to allowing research staff to remain indefinitely is seen by the scientific and academic community as essential to ensuring the quality of UK science. But just as continued access to UK facilities by European colleagues is vital to the UK, so too is continued access to European facilities by British scientists. The UK hosts 6 pan-European research facilities, as well as 10 further facilities headquartered elsewhere Europe, but large-scale infrastructure is expensive, taking many years of planning and construction and requiring expertise from a wide range of industries as well as the scientific community. For this reason, large facilities such as the state of the art £700m Crick Institute, opened in London in 2016, are usually put together by international consortia, often supported by the EU and it is essential that free and unfettered access in both directions should continue after 2019. Reports by academics of exclusion from EU funded collaborations have been published, despite the fact that the UK remains a full member of the EU until at least 2019. In August 2016, the Head of Physics & Astronomy at the University of Sheffield published emails from the European Coordinator of an EU network collaboration



who felt that Brexit put UK counterparts in a “very awkward position” with the potential to “compromise the project” and decided that the UK team were to be excluded from the consortium because of “Brexit and all the incertitude it brings”. The consortium was being funded under the European Commission’s €79 billion Horizon 2020 funding programme, running from 2014-2020, and which is designed to fund world class European science projects 5 . Scientists are campaigning for the government to underwrite funding for researchers denied access to the Horizon 2020 programme to ensure ERC grant holders, our brightest and best researchers, do not look to transfer their grants elsewhere. For now, however, EU funding is assured until March 2019 when the UK is expected to formally leave the EU. Until then, it would seem, it is heads down and business as usual.



The long-run effects of Brexit on the UK economy

In the referendum held on June 23rd 2016, the United Kingdom voted to leave the European Union by a margin of 51.9 percent to 48.1 percent. Hours after the results had been released, the value of sterling collapsed from $1.50 to $1.33. The customs union between EU members means that all tariff barriers have been removed within the EU, allowing for free trade in goods and services. This means that being part of the EU has reduced trade costs between the UK and other parts of Europe. Furthermore, due to the single market within Europe, non-tariff barriers have been reduced. These types of economic barriers raise the cost of trade and consist of border controls, quotas, embargos and other restrictions that are used to restrict imports or exports of goods or services. As a result of these reductions in trade barriers, trade between the UK and the EU has increased significantly between 1973 and 2015. However, the higher trade benefits are likely to be lost when the UK leaves the European Union. Firstly, if the UK decides to leave the EU, trade barriers are likely to be implemented between the UK and EU countries. Both the volume of imports and exports are likely to be reduced and so consumers’ access to goods and services is likely to fall as output decreases and average prices are likely to rise within the economy due to a fall in the supply of all goods and services within the UK. These trade costs are likely to be larger if the UK leaves the single market and decides to trade under World Trade Organisation (WTO) rules which is portrayed as 'hard’ Brexit. In the 'hard’ Brexit scenario, we assume that trade between the United Kingdom and the European Union will be governed by WTO rules and so tariffs will be imposed on trade between the UK and the EU. The increase in trade costs will come from higher tariffs on imports and high non-tariff barriers to trade. In contrast, the 'soft’ Brexit scenario suggests that the increase in trade costs is much smaller and so the UK's volume of trade in goods and services will be reduced a smaller amount. In conclusion, the overall net cost to the UK will depend crucially on the final trading arrangements with Europe. So-called 'soft’ Brexit will have a lower cost than the potential 'hard’ Brexit as it will mean the United Kingdom will remain closely integrated with the European single market (similar to Norway). As Norway is a member of the European single market, it has accepted policies and regulations implemented to reduce non-

5 Paul Crowther, Head of Physics & Astronomy at University of Sheffield interviewed for Nature, August 2016


tariff barriers within the single market. Therefore, in the 'soft’ Brexit scenario, we assume that the UK and the European Union will continue to have access to the single market and so Brexit will not lead to any change in tariff barriers, preventing a loss in net welfare. However, I believe that because immigration controls were a major issue in the UK referendum, a ‘hard’ Brexit looks more likely and so the effects on the UK economy are likely to be maximised.


Should Theresa May resign as Prime Minister in the wake of the 2017 General Election? C HARLIE P RIFTI

On the 13th July 2016, Theresa May took over as Prime Minister from David Cameron after he resigned and she was voted to lead the party. Despite being in support of the Remain campaign Theresa May is fighting for a ‘hard’ Brexit in which Britain would leave the single market regaining the control of its borders and would not having to follow EU regulations. However, it does mean that Britain will lose the current free trade agreement it has with the EU member states. When Theresa May was running as a candidate to become the next Prime Minister in 2016 she promised that “there would be no general election until 2020”. Since then she has called a general election from a

position where she had a majority going into the Brexit negotiations, which began to take place just weeks after the election. However, she has lost that majority meaning the negotiations will be considerably more difficult. Many believe that the election should not have taken place before the Brexit negotiations and as Theresa May said herself in an interview the reason why she didn't appear on a TV debate is because she was focusing on a clear Brexit plan while also claiming that Corbyn should be doing this as well. Why did she even call the election in the first place? If she needed to spend all her time working on Brexit she shouldn’t have wasted time campaigning when she already had a majority. Theresa May was complacent and naïve in her campaigning and she appeared to believe that the Labour Party with Corbyn at the helm would self-destruct. She thought that she could sit back and would easily win an overall majority. She found out how wrong she was once the Conservative Party lost 13 seats, meaning the Conservatives only have 318 seats, which is short of the overall majority that she needed. Furthermore, the Grenfell Tower tragedy showed the apparent lack of compassion she has. Despite showing remorse for the victims of the fire and coming close to tears when visited by the survivors, she showed a lack of emotion in the public eye making her position ever weaker. Corbyn however, has been seen engaging with the victims and their families and is constantly strengthening his position. All of these reasons lead you to believe that she has not fulfilled her duties as Prime Minister and therefore should resign. However, Theresa May has proven she is a strong charismatic leader and has shown that she is prepared and ready to stand up and to tackle extremism in Britain. She is looking out for the British public’s safety and she


will do everything in her power to stop terrorism from spreading, including enacting tougher anti-terror legislation and increasing the number of armed police on the ground in cities. Also, she has a clearly thought out Brexit strategy and will fight in order to get Britain the best deal. She will not allow Britain to be walked over during the negotiations. She is fighting for a hard Brexit meaning the single market will be left behind but she will be doing her best in order to replace it with a new trade deal either with the single market once more or with members of the commonwealth.

One of the reasons Britain voted for Brexit was so that the British border could be secured better, due to it being able to control its borders once more. Secondly, it was so that Britain wouldn't have to comply with EU legislation anymore. If Corbyn or anyone else replaced Theresa May as Prime Minister and went for a soft Brexit, then Britain wouldn't get what it originally wanted when it voted to leave the EU. There was a reason why Britain voted to leave and Theresa May wants to respect that and is fighting for what the people have voted for. This is why Theresa May should not resign as Prime Minister of Britain. Overall, I do not think Theresa May should resign as she is currently a strong leader and I believe that she will do the best for Britain during the Brexit negotiations. She has the current backing of high profile politicians such as Boris Johnson and Michael Gove, giving her strength and support in making the best and the correct decisions for Britain.



Leaving the Customs Union: Two Possible Scenarios

The Brexit negotiations recently began on June 19, 2017 and if there is no formal extension to the talks then the UK is set to leave the European Union on March 29, 2019. Theresa May, David Davis and the rest of the negotiations team now effectively hold the future of the UK economy in the palms of their hands with there being many potential effects and outcomes which would influence the lives of all British citizens. The Conservative government declared recently that the UK will not remain a member of the EU Single Market due to the fact that one condition of membership is the free movement of people and the current government has repeatedly stressed that it wishes to reduce immigration numbers down to the ‘tens of thousands’, a target which they have repeatedly fallen short of. The Single Market ensures the “four freedoms” which include free movement of goods, services, capital and labour across the EU, which has 500 million potential customers. Leaving the Single Market could have a detrimental effect on the economy as – according to the Office of National Statistics - £220bn of the £510bn made from UK exports is generated from trade with the EU which makes up a substantial 44% of total exports. In leaving the Single Market, there are two main likely scenarios: a Free Trade Agreement scenario (FTA) and a World Trade Organisation scenario (WTO). It is a possible that the UK could create a FTA with the EU as numerous other nations such as Mexico, South Korea and South Africa have done. This would involve tariff-


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