A: Reading and vocabulary
Read the Bank of England Inflation Report below, and answer all questions in Parts 1 and 2.
Euro Area: Time to Tackle the Tough Challenges
The euro area economy is still in a good place. Growth remains strong, broad-based, and job-friendly, even if there are signs that it has peaked. At the same time, risks are rising, including escalating trade tensions and policy complacency among euro area countries. Rebuilding fiscal buffers and addressing structural issues to improve resilience, and building support for euro area reforms is now even more urgent, says the latest economic IMF health check of the euro area.
Euro area growth appears to be levelling off from the very high levels of late last year, but is projected to remain solid.
However, risks are mounting. Trade tensions have risen with the recent U.S. imposition of tariffs on steel and aluminium imports.
Time is running out on the Brexit negotiations with the lack of progress raising the risk of a disruptive exit.
Policy inaction and political shocks are important domestic risks, especially with regard to rebuilding fiscal buffers in countries with high public debt and implementing structural reforms. Against this backdrop, strong policies are needed to buttress the euro area’s resilience.
- ECB should stay committed to low for long
Underlying inflation remains low, and is expected to converge only gradually to the ECB’s objective. The European Central Bank’s (ECB) commitment to keep policy rates at their current low levels, at least through next summer, is therefore vital. As quantitative easing is wound down, the importance of the ECB’s forward guidance on interest rates will grow even stronger.
- Much is needed at the national level
Despite strong growth, public debt loads have barely fallen in the high-debt countries, leaving insufficient fiscal space to respond to the next shock. High-debt countries should ramp up their fiscal efforts— reining in deficits and reducing debt—while conditions remain supportive.
In many countries, structural reforms must be stepped up to lift productivity and create job opportunities. Large net creditor countries with persistently excessive current account surpluses and ample fiscal space need to increase public investment in infrastructure, education, and innovation. This will lift potential growth and contribute to a necessary external rebalancing.
- Reforms to the architecture of the common currency area are long overdue
Now is also a good time to fill in the missing pieces of eurozone architecture so that the region is prepared for future shocks.
- Banking union
The recently completed Financial Sector Assessment Program (FSAP) for the euro area finds that euro area policymakers have made significant progress on this front. But more needs to be done.
Importantly, the lack of a common deposit insurance scheme and a shared fiscal backstop for the Single Resolution Fund could put these achievements in jeopardy. Completing the banking union will help weaken the links between banks and sovereigns that was at the heart of much of the crisis.
To make it work, all sides will need to show trust and accountability.
While substantial risk reduction has already been achieved, banks with high-levels of non-performing loans should commit to aggressively clean-up balance sheets. Banks can also use the current upswing to continue building capital and ensure they have the ability to absorb any future losses.
- Capital markets union
Progress on building a capital markets union is encouraging; for example, the measures taken to help small firms raise financing across borders. But further reforms are needed to deliver a genuinely single and integrated capital market.
In the near term, it is critical to ensure that regulatory and supervisory capacities are prepared for the influx of financial firms that will move to continental Europe as a result of Brexit.
Over the medium term, there will need to be greater harmonization of national insolvency regimes and securities regulations. Implementing all or even some of these proposals would develop capital markets and stimulate growth for the entire region.
- Fiscal risk-sharing
The euro area relies too much on monetary policy to stabilize the economy when hit by a shock. A recent IMF Staff Discussion Note proposes setting up a central fiscal capacity (CFC) for macroeconomic stabilization. Such a CFC would require countries to save in good times, by paying into the fund. Then, in a downturn, countries would receive transfers to help them offset budget shortfalls. The proposals cover strong safeguards, however, to ensure that countries maintain prudent fiscal policies and that there are no permanent cross-country transfers.
Source: IMF (2018)
Part 1: Note completion (30 marks: suggested time 35 minutes)
Use the text above to complete the following notes. Write NO MORE THAN FOUR WORDS for each answer (3 marks for each correct answer)
Growth in € economies seen as (a) ___ despite growing disagreements over (b) ____
Disputes over (c) _____ may mean that the UK leaves the EU in a chaotic way.
It is important for the ECB to keep inflation (d) ____ until (e) ____
It will be important for the ECB to control (f) _____ as monetary policy changes in the future.
Countries which have borrowed a lot of money should decrease their (g) ______. Countries which are owed money should increase (h) ______ in the public sector.
Banks are advised to take advantage of the current situation to increase their (i) _____ in order to survive future shocks.
To deal with future economic shock, the IMF has suggested creating a (j) _______
Part 2: Finance vocabulary definitions (15 marks: suggested time 20 minutes)
Identify the two-word finance terms in the text to match the definitions (3 marks for each correct answer).
The road in New York that represents the financial centre of the US
Answer: you would write
Wall Street .
- examination carried out to verify the financial or economic success or security of a company or country (section 1)
- Political and trade discussions about the UK leaving the European Union (section 1) ______ ______
- the introduction of new money into the money supply by a central bank, to stimulate the economy (section 2)
- The group of countries in Europe which use the same currency (section 5)
- Financial system which deals in shares, bonds, and other long-term investments (section 6)
You are working for Finnair as an independent consultant.
Write a report of between 350-500 words about Finnair’s operations, based on the case study below. Your report should include the following sections: Introduction, Analysis, Conclusion, and Recommendations as specified in class. The Analysis section should be organised by topic or business area.
Case Study: Finnair
Finnair is well known as one of the world’s best performing airlines, representing the Finnish culture as efficient, cost effective, reliable, punctual with very smooth and easy connections through its Helsinki hub. It is also one the world’s oldest and safest airlines.
Finnair is Finland’s flag carrier but also the largest in the country, it is a regular scheduled airline flying passengers and cargo from Europe to Asia through its hub in Helsinki Vantaa Airport. Finnair flies to 17 Asian destinations, 4 in the United States and to 70 in Europe. The airline is a member of the Oneworld alliance (along with American Airlines, British Airways).
Its strategy: it aims to compete with the ‘gulf carriers’ such as Emirates / Qatar Airways / Etihad to fly its customers through its Helsinki hub while travelling from Europe to Asia and vice versa as it claims to be the shortest route between the two continents. Flight connections are also made easily at Helsinki Vantaa’s Airport in only 35 to 40-minute due to the small size of the airport terminal and its convenient transfer arrangements.
The airline aims to double its Asian traffic from 2010 to 2020. It keeps on going while recruiting staff and acquiring new fuel-efficient aircraft such as the Airbus A350 Wide Body Airplane.
Finnair has been growing rapidly in recent years. The corporation has invested largely in new Airbus 350 airplanes. They have also increased their routes around the world. Even though the company is growing and making good progress in their highly competitive market they are facing problems.
Acquisition of the Airbus 350 airplanes has been the major reason behind Finnair’s problems. Each time a new plane arrives the company must introduce a new education program for the pilots. Finnair faced a situation where they had to start educating their pilots for the new planes. At the same time, their increase of routes meant that they had more flights to cover but fewer pilots to fly the planes. Finnair used agency-hired labour to ease the situation that continued to expand. Even though they hired 15 pilots via agency Finnair were forced to cancel all their flights to Miami U.S between May 2017 and September 2017. In January 2017, the company also ceased all flights to Chongqing, China for four months.
The company explained that preparation for this situation was complicated because Airbus 350 is a totally new plane model. The training period for one Airbus 350 pilot takes eight days. Part of the training must be done by simulator. This causes a problem because the number of simulators for the new model is very low. Finnair had to send their pilots to France to use the simulator at Airbus’s own factory. New routes and new planes caused together major problems that has compromised the company’s reliability.
Finnair has also been struggling with another major problem. The increase of low-cost carriers in domestic markets has resulted in a decrease in customers. The increase of competition has resulted in employee cooperation negotiations that led to lay-offs. The consequences of these events called into question Finnair’s ability to sustain their place in the markets. The company’s brand image took also a major hit because of these lay-offs. Their employees started strikes after the news of lay-offs and this caused flight cancellations. Once again Finnair’s reliability was damaged.
The company has also suffered from indirect strikes. In March 2017, these indirect strikes forced Finnair to cancel 90 flights. This affected a total of 8000 passengers and Finnair had to arrange substitute flight plans for the passengers. Even though the company was not part of the reasons behind the strike they suffered losses and passengers focused their frustration on the company.
Finnair has also faced some smaller problems. For the last decade, it has been as its competitors the ‘victim’ of the same actors such as the 9/11 Terrorist attacks. Even though the Airline doesn’t serve many routes in the US, people were all in fear to fly. The Gulf Carriers provide luxury passenger experience at a very low price as they benefit from very low fuel prices and advantageous labour conditions. In addition, the 2008 economic crisis and the rise of fuel prices forced the airline to raise its fare prices, forcing customers to go with low cost airlines and as a result from that Finnair had to adapt a low-cost model to reduce its costs such as charging for meals, checked bags, drinks.
‘Finnair flight and service experience has deteriorated over the years. It almost feels like that they have crammed the previously available space on economy seats to fit in economy comfort into the same carriers.’ Priyanka B. (Helsinki to Delhi)
‘Finnair happily delays your flight halfway with more than 30 hours, without prior notice. No support. No service.’ Loekvan Kooten (Fukuoka-Helsinki)
‘They temporarily readopted dirty and outdated A330 aircrafts instead of modern and comfortable A350 one’s due to training pilots in winter. What annoyed me the most, was the chaotic boarding order. I had the right of priority boarding but so many economy passengers already occupied the priority line.’ Steven Lili
‘The A350 Finnair have a horrible configuration, probably Finnair wanna put there too much people and so…. the seat is uncomfortable, tight and narrow. No compare with the other Airline Company (Cathay, Qatar….)’ Lucas PG
‘The A 350 used for this flight is a lovely, quiet airplane. Unfortunately, no other aspect of the journey with Finnair is up to international standard.’ John P.
‘The flight wasn’t A350 as they kept advertising.’ Cyrus W.
‘A350 looking nice but there were in the cabin lot of broken parts fixed with tape. Maybe too cheap materials.’ Lassi Laukkanen