With many internship and graduate role applications about to open, it's essential to keep updated with the key business and commercial stories. This week, we discuss the economists who see the Brexit positives, a historic Libor lawsuit, German's second airline declares bankruptcy, the profitability of nightclubs and much more.
Does a ‘hard’ Brexit offer £135bn annual boost?
Last week, a report from a group of pro-Brexit economists claimed that a ‘hard’ Brexit would be economically superior to a ‘soft’ Brexit, as removing all trade tariffs would generate an annual income boost of £135 billion to the UK economy. The Economists for Free Trade suggest free trade deals and a unilateral trade policy outside of the EU would deliver huge gains. Currently, the EU Customs Union imposes tariffs on goods coming from outside the EU. Leaving the Customs Union will allow Britain to make its own trade deals, which this report suggests would boost the economy over the coming years. Outside the EU, it’s also argued Britain would gain from deregulating the economy. However, not everyone agrees - the Open Britain campaign group argues that scrapping tariffs would flood Britain with imports, harming UK manufacturers and farmers. Economists have also suggested the report doesn’t take into account how free trade works in practice.
In other Brexit news, Secretary of State for Exiting the EU David Davis is pushing for the start of trade deal negotiations with the EU. Originally, the EU agreed they wouldn’t start these negotiations until the so-called ‘divorce bill’ was agreed. However, a deal doesn’t look forthcoming and he argues delaying trade negotiations harms both the EU and Britain.
Questions to ask yourself… What are the benefits of remaining in the Customs Union? Is a unilateral free trade policy going to benefit the UK?
Historic Libor lawsuit
The US Federal Deposit Insurance Corporation (FDIC) has filed a $400 billion lawsuit against European banks over their role in the Libor (the London interbank offered rate) scandal and how it played a part in the collapse of American banks. Filed in a London court, this would be the largest Libor scandal-related lawsuit to date. Libor is a calculated benchmark interest rate that banks charge to lend to other banks (find out more just here), and was found to have been artificially manipulated during the financial crisis. Since 2012, a number of investigations have led to banks being fined billions of pounds for their role in the scandal, as well as eight traders being prosecuted for their role in the scandal.
However, the new lawsuit isn’t about a few traders making marginal gains by having a slight impact on rates - this wouldn’t have an impact on the global economy. The claim is against banks, such as RBS and Barclays, colluding to hold down rates - a practice known as ‘lowballing’ - to give the markets a false belief in their financial health. If banks are willing to lend to each other at a low rate, they appear to have faith in their long-term prosperity and ability to pay back loans. Manipulating this can have an impact over the whole economy and the case argues failed American banks lost out when they entered derivative transactions or calculated interest based on Libor.
Last month, the Financial Conduct Authority (FCA) announced they are set to introduce reform in the way of calculating Libor by 2021. However, some analysts believe the new system will make manipulation less detectable.
Questions to ask yourself… Why is this case so significant in the banking industry? Does this lawsuit show there’s more need for regulation in banking?
Companies to watch
The second biggest German airline, Air Berlin, filed for self-managed bankruptcy last week. After many years of losses and a deteriorating financial situation, Gulf carrier Etihad (30% owner) withdrew financial backing, leading Air Berlin to file for bankruptcy. To avoid disruption, the German government stepped in with €150 million of emergency credit to allow the airline to fulfil its summer schedule. Germany's biggest airline Lufthansa look set to take over parts of the group, with easyJet also interested in the asset sell-off.
Irish budget airline, Ryanair has accused Lufthansa and the German government of a conspiracy to break up the assets, as part of a “manufactured insolvency”. They suggest the government is backing a Lufthansa led monopoly, which is in breach of EU competition law.
Fast-food company McDonald’s could face UK strike action, as workers at two restaurants voted for industrial action over concerns with working conditions and zero-hour contracts. The Bakers, Food and Allied Workers Union is demanding wages of at least £10 per hour and a greater number of guaranteed hours. If workers at more restaurants throw their support behind the action, this could lead to the first industrial action taken against the chain in Britain. This isn’t the first time McDonald’s workers have demanded high wages - a campaign in the US is demanding $15 (£11.65) per hour.
McDonald’s employs 85,000 people in the UK, so the initial ballot for strike action only represents a small minority of workers, but has the potential escalate. Zero-hour contracts have faced a lot of bad of publicity in recent years, and this latest vote brings the debate back into the spotlight.
London’s free newspaper Metro could soon be up for sale, as DMGT (owner of the Daily Mail) appointed an advisory firm to explore the future options for the newspaper. Commentators predict Metro could fetch up to £35 million if sold, but the paper has seen declining revenues in recent years. Consumers are moving away from reading print journalism and favouring using their mobile phones to stay updated. Declining readership has directly impacted on the free paper’s advertising revenues, which were down 9% last year. Despite this, the Metro still boasts a daily readership of two million people and has started to attract some potential buyers - including the i owner Johnston Press.
Questions to ask yourself… In what ways could Lufthansa’s purchase of Air Berlin be bad for competition? Should zero-hour contracts be outlawed in the UK?
And finally… Nightclub revenues down
Revenues for the UK’s biggest nightclub companies have fallen for the fourth consecutive year, as consumers increase their spend at bars and late-night pubs. According to figures from Ortus Secured Finance, turnover at the 100 top nightclubs in the UK has decreased 5% in the past year - a trend which doesn’t look likely to end. The decline has been directly attributed to the Licensing Act of 2005, which gave more bars late night licenses. Others have suggested a modern trend towards healthy living and a decline in drinking amongst young people has also had an impact.
Many nightclubs are struggling to stay in business, as costs associated with running them are high - rents are high due to the space required, as well as lighting, sound systems and interiors. Figures released back in 2015 show that half of the UK’s nightclubs close down within ten years of opening. Experts suggest this is just a change of trends which could well work in cycles - in recent years more people watch live music and DJs at festivals during the summer, rather than in nightclubs at the weekends.
Question to ask yourself… What can UK nightclubs do to boost revenues?