:01:18. > :01:24.Good evening and welcome to Good evening and welcome to
:01:24. > :01:26.Newsnight, also being broadcast tonight on BBC world News. Five days
:01:26. > :01:30.ago global investors were pondering the possibility that the US
:01:30. > :01:34.government might default on its debt. Then they were told they could
:01:34. > :01:36.relax but instead they started to worry about the American recovery
:01:36. > :01:41.grinding to a halt and European governments hitting a brick wall
:01:41. > :01:46.their efforts to fix the single currency. Tonight, after the
:01:46. > :01:49.week for the Dow in more than two years, an US broadcaster is
:01:49. > :01:53.reporting that the key ratings agency, Standard & Poor's, is about
:01:53. > :01:57.to stop giving American government debt a Triple A rating.
:01:57. > :02:04.the end of another hair-raising day, here is Andrew Verity to explain how
:02:04. > :02:06.we all landed up in so much trouble again.
:02:06. > :02:07.There's no time like August for an There's no time like August for an
:02:07. > :02:08.There's no time like August for an international financial crisis. Two
:02:08. > :02:09.international financial crisis. Two international financial crisis. Two
:02:09. > :02:13.There's no time like weeks ago, markets across the
:02:13. > :02:17.had enough confidence in Europe's institutions to be convinced by
:02:17. > :02:20.leaders' assurances that they could deal and were dealing with the
:02:20. > :02:25.crisis in sovereign debt. This was the week that that confidence
:02:25. > :02:31.collapsed. Now it's as if Europe's leaders are giving up trying
:02:31. > :02:38.reassure the markets; instead, have taken to attacking them. The
:02:38. > :02:43.market unrest witnessed in the last few days is simply not justified
:02:43. > :02:51.the grounds of economic fundamentals. Such dramatic changes
:02:51. > :02:57.in the markets are from of view incomprehensible. On this,
:02:57. > :03:01.the busiest trading day of the year, shares in London dropped again by
:03:01. > :03:06.2.7%. Over the week the top companies have lost more than 10% of
:03:06. > :03:11.their value, around �150 billion, with similar drops across Asia and
:03:11. > :03:16.Europe. It has been the worst since the banking crisis. 2008,
:03:16. > :03:20.almost exactly four years credit crunch which caused that.
:03:20. > :03:23.What happened in the credit crunch of 2007 was that the banks became
:03:23. > :03:28.reluctant to lend money to each other. It was as if all of the
:03:28. > :03:32.here at Canary Wharf were looking each other, thinking:
:03:32. > :03:36.how many billions of pounds you have lost on these bad assets, I don't
:03:36. > :03:39.know even how many billions of pounds I've lost so I'm not sure I
:03:39. > :03:44.want to lend to you when I know if I will get it back.
:03:44. > :03:47.lend but only if you pay a fat rate of interest to compensate me for my
:03:47. > :03:52.risk. The question now is: same phenomenon happening again?
:03:52. > :03:56.What caused it back then was concern over the value of billions of
:03:56. > :03:59.dollars of assets. The same concern; different assets. Those who have
:03:59. > :04:04.lent money to eurozone countries by buying their government's bonds are
:04:04. > :04:10.worried they won't get all their money back. Here is how worried. If
:04:10. > :04:20.you bought a bond from the Spanish government the markets reckon
:04:20. > :04:24.
:04:24. > :04:27.will get back only 96%. .
:04:27. > :04:33.With that much uncertainty, there With that much uncertainty, there
:04:33. > :04:36.isn't a credit crunch now, but there may be soon. Well, at the moment the
:04:36. > :04:40.fundamental case is that a lot of European economies in common with
:04:40. > :04:43.the UK and US borrow from overseas investors. At the moment, overseas
:04:43. > :04:49.investors haven't got confidence in our domestic economy so they are
:04:49. > :04:53.more likely to wait before putting more money in, and that's what
:04:53. > :04:56.causes the shortage of funding which manifests itself as a credit crunch.
:04:57. > :04:59.These foreign investors need austerity measures, a degree of
:04:59. > :05:03.political consensus, and that will give them confidence
:05:03. > :05:07.safe to lend to these again. The way the credit crunch
:05:07. > :05:10.resolved four years ago was nanny came to the rescue in the
:05:10. > :05:14.shape of the state. It was governments and Central Banks that
:05:14. > :05:20.told the other banks: if you bad assets that no one else wants it
:05:20. > :05:24.buy, we will buy them from you. They told them: if you can't get funds
:05:24. > :05:28.from other banks, we to you. The question now is: who is
:05:28. > :05:34.willing to play the role of nanny? Not Angela Merkel, who has been
:05:34. > :05:37.very aware of just how far German voters aren't willing to go to
:05:37. > :05:39.out member states who lack fiscal discipline. Today she spoke
:05:39. > :05:43.telephone to Nicolas Sarkozy. They have to come up with
:05:43. > :05:46.what? The first thing that needs be done is that the European Central
:05:46. > :05:50.Bank should start buying Italian and Spanish bonds on the
:05:50. > :05:54.secondary market and therefore bringing the yields down. It
:05:54. > :05:58.to do that pretty quickly. yields have gone up significantly
:05:58. > :06:03.and that means for that the debt - not all the debt -
:06:03. > :06:06.portion of the debt, that has become very expensive. We are not
:06:06. > :06:09.suggesting it will be hugely expensive for the whole lot, but
:06:09. > :06:14.they need to calm markets nevertheless so that when countries
:06:14. > :06:17.go back to the markets again they can borrow at lower rates. Claiming
:06:17. > :06:21.Italy is under attack from speculators, Italian Prime Minister
:06:21. > :06:24.Silvio Berlusconi has called an emergency meeting of G7 finance
:06:24. > :06:28.ministers to take place within a few days. They must act or they will
:06:28. > :06:31.have a hectic holiday season. I think there needs to be a political
:06:31. > :06:34.consensus across Europe and that is nigh on impossible to
:06:34. > :06:40.the moment. I think therefore we have to wait until the crisis
:06:40. > :06:43.possibly looks worse and this game of brinkmanship comes to a head
:06:43. > :06:49.whereby European politicians realise there is no alternative but to all
:06:49. > :06:52.get together and act multilaterally. The banking system didn't stabilise
:06:52. > :06:58.itself in 2009 until global governments made it clear they
:06:58. > :07:04.defend the system no matter what. Now it's up to politicians to defend
:07:04. > :07:07.The markets are telling Europe's top The markets are telling Europe's top
:07:07. > :07:11.bankers and politicians that they are unconvinced by their assurances.
:07:11. > :07:16.They don't really believe them. But perhaps Europe's leaders can agree
:07:16. > :07:21.with the markets on one thing: they are not giving eurozone countries,
:07:21. > :07:24.institutions nor leaders much credit.
:07:24. > :07:24.Andrew Verity there. Anyone working Andrew Verity there. Anyone working
:07:24. > :07:25.Andrew Verity there. Anyone working in the financial markets will
:07:25. > :07:26.in the financial markets will in the financial markets will
:07:26. > :07:31.Andrew Verity there. probably just be glad that the
:07:31. > :07:38.weekend is final here. A huge of red ink has hit dealers' screens
:07:38. > :07:42.over the last two days and they had another seesaw ride. We
:07:42. > :07:45.asked three correspondents in key global financial centres to tell us
:07:45. > :07:49.what it has been like for them. First Lucy William
:07:49. > :07:54.First Lucy Williamson in Here in South Korea the sun has set
:07:54. > :07:57.on a very dark day for the markets. The index fell 3.7% today, the
:07:57. > :08:02.biggest in a series of losses over the past four days. It's now facing
:08:02. > :08:07.its steepest decline in almost three years. Government officials held
:08:07. > :08:14.emergency meeting today up to road - up the road here and are
:08:14. > :08:19.insisting there's no reason to panic. Korea's economy is being
:08:19. > :08:27.shaken but uncertainties in America and Europe but 70% of its trading
:08:27. > :08:33.partners are emerging countries. There's not much comfort elsewhere
:08:33. > :08:43.in Asia. The Nikkei fell 3.7%, Hang Seng in Hong Kong by more than
:08:43. > :08:44.
:08:45. > :08:47.The main stock market index here in The main stock market index here in
:08:48. > :08:55.Germany the Dax fell by 13% over the whole week. The main index in France
:08:55. > :08:58.fell by 11%. In Italy it was 12%. It's all part of a relentless slide,
:08:58. > :09:02.as stock markets start to realise that that deal apparently done less
:09:02. > :09:12.than a month ago to stabilise the euro may not now be the last word on
:09:12. > :09:14.
:09:14. > :09:18.the matter. At the Stock Exchange here you get the feeling activity
:09:18. > :09:22.goes on. Angela Merkel is apparently relaxing in the Alps but there's no
:09:22. > :09:26.doubt that that is short-lived. has been engaged in conference calls
:09:26. > :09:32.with other leaders of eurozone countries. Her big constraint
:09:32. > :09:37.public opinion here in Germany. The opinion polls indicate that people
:09:37. > :09:42.by and large want the euro. There is no great yearning to go back to the
:09:42. > :09:47.Deutschemark. But the polls also say that they are absolutely split down
:09:47. > :09:55.the middle on whether to pay more of their money, taxpayers' money, to
:09:55. > :09:57.keep that euro in its current form. .
:09:57. > :09:58.Here in New York, it has been one of Here in New York, it has been one of
:09:58. > :10:01.the more dramatic weeks for the the more dramatic weeks for the
:10:01. > :10:06.Here in New York, it has stock markets. On Thursday, the Dow
:10:06. > :10:10.Jones industrial suffered its worst one-day loss since 2008 falling 4%.
:10:10. > :10:14.The Standard & Poor's index didn't do much better. So what's behind
:10:14. > :10:18.this sea of red? Well, the is that the US economy is
:10:18. > :10:23.back into recession, and here is why. The week started with a debt
:10:23. > :10:27.deal that cut US government spending, putting the US on
:10:27. > :10:30.austerity path just when recovery appears to be faltering.
:10:30. > :10:35.Manufacturing and consumer spending data was also weaker than expected
:10:35. > :10:38.and today's jobs report simply offered only a tiny amount of
:10:38. > :10:42.relief, just showing that employment picture wasn't actually
:10:42. > :10:44.getting worse. .
:10:44. > :10:48.Well, all day we have been hearing Well, all day we have been hearing
:10:48. > :10:54.the comparisons with the dark days of autumn 2008, the credit crunch
:10:54. > :11:02.and the great banking crisis. say the parallels over the top, the
:11:02. > :11:07.banks for starters, are different; others say it's worse. With
:11:07. > :11:10.Baroness Vadera who had a ringside seat on the last crisis, working
:11:10. > :11:14.with Gordon Brown in the Treasury. You played a big part in writing
:11:14. > :11:18.that bank bail-out plan time many people credited with
:11:18. > :11:22.turning the situation around and taking the markets out of the sort
:11:22. > :11:28.of death spiral that they were in then. Does this feel similar to you,
:11:28. > :11:31.the last few days? I think it has similar feel. It feels as scary
:11:31. > :11:37.it is different and I am in the camp where I think it's
:11:37. > :11:40.potentially worse. The reason potentially worse is the governments
:11:40. > :11:44.stepped in all over the world saved the banking system in order to
:11:44. > :11:48.save their economies and now who is going to step in to save
:11:48. > :11:52.governments? Secondly, when we went into that crisis interest rates
:11:52. > :11:55.quite high so we did have policy to use as a tool and now we
:11:55. > :11:58.are at the outer limits of that. Lastly, we are currently facing
:11:58. > :12:02.quite a lot of inflationary pressures, particularly coming from
:12:02. > :12:07.commodities and emerging markets, so we've actually got a little bit of
:12:07. > :12:11.pressure on the other side, so our room for manoeuvre is a lot more
:12:11. > :12:16.limited. As someone who has been an insider for so long on
:12:16. > :12:20.of crises and you played a big part in the G20 meetings as well, if you
:12:20. > :12:23.were in the French Treasury tonight or if you were sitting at the ECB,
:12:23. > :12:27.what are the calls that are being made? What are they going to be
:12:27. > :12:31.thinking about over the next days? I think that the problem
:12:32. > :12:35.they have currently is they don't have a functional system for making
:12:35. > :12:39.decisions. They don't have institutional mechanism for making
:12:39. > :12:43.decisions in the way they need to be made. The crisis in the last few
:12:43. > :12:46.years has taught government some lessons. You have to act really
:12:46. > :12:50.fast. You actually probably have to act without the market expecting
:12:50. > :12:54.to. You have to overshoot market expectations. You have to be
:12:54. > :12:57.comprehensive and see off all of the avenues of attack and most of
:12:57. > :13:01.you have to communicate fighting with each other and so far
:13:01. > :13:04.the eurozone has not managed to single one of those things. So I
:13:04. > :13:09.think what they will be doing now is talking about liquidity for
:13:09. > :13:11.Italy and for Spain, and the only source of liquidity - Liquidity,
:13:11. > :13:16.giving them cash in some way or another? Giving them cash,
:13:16. > :13:20.not the same thing as risking putting in a huge amount of risk,
:13:20. > :13:26.the numbers are large, and the only source of ready cash is the ECB.
:13:26. > :13:30.Because they haven't really pre-committed to the EFSF, so this
:13:30. > :13:34.is the only source of funding and the ECB of course has a duty to
:13:34. > :13:37.financial stability, so has a duty to act, but they will be very
:13:37. > :13:41.reluctant to do so without reforms. But a lot of people
:13:41. > :13:45.has been a talk in the last weeks and months, people
:13:45. > :13:50.European leaders are kicking the down the road, even US governments
:13:50. > :13:53.maybe have been putting off difficult decisions, but isn't there
:13:53. > :13:57.an argument that says you guys put off all the difficult decisions
:13:57. > :14:01.well? You were faced with a crisis, a lot of debt sitting on
:14:01. > :14:06.balance sheets, ultimately a lot of the problematic debt in the bank
:14:06. > :14:08.sector didn't get written off as maybe it should have done, it got
:14:08. > :14:12.shifted on to the balance sheets governments and now we are dealing
:14:12. > :14:17.with the second leg of a crisis that you sort of left us with? Actually
:14:17. > :14:21.it's not true because the response at the time stopped essentially
:14:21. > :14:24.position that would have been a lot, lot worse. We would have been in a
:14:24. > :14:28.much worse position today if we hadn't done what we did all over the
:14:28. > :14:31.world. We would have been in depression and deflation. We did not
:14:32. > :14:36.assume the debts of the banking system. But a lot of these debts,
:14:36. > :14:40.if they were not going to be repaid, why were they not written off
:14:40. > :14:42.That is what people ask now. Yes, would have been difficult but aren't
:14:43. > :14:49.we just now dealing with that has been passed along for
:14:49. > :14:52.several years? I think that what did in the response in 2008 was to
:14:52. > :14:57.stop that debt spite, but it was always going to take - always
:14:57. > :15:01.to take a long period of time to deal with the overleveraging of
:15:01. > :15:05.whole system, whether in banks, governments or in households and it
:15:05. > :15:10.was always going to take a long time to deal with the level of toxic
:15:10. > :15:13.assets. We didn't assume - for example Ireland - we did not
:15:13. > :15:16.assume the debts of the sector. Briefly, you don't think
:15:16. > :15:19.you should have been tougher and gone further in dealing with the
:15:19. > :15:22.fundamental problem which is debt? I don't think it was
:15:22. > :15:26.at that time without actually tipping us over the edge
:15:26. > :15:29.gone further, but it was always going to be - some of these problems
:15:29. > :15:31.now are self-inflicted. The cost of dealing with them has increased
:15:31. > :15:36.because of the delays in dealing with them and that is the real
:15:36. > :15:40.problem of the eurozone crisis and in of course the US has also been
:15:40. > :15:43.self-inflicted. Baroness Vadera, thank you very much. Thank you. As
:15:43. > :15:51.we have been discussing there are deep economic problems lying beneath
:15:51. > :15:55.all of the yearses in the markets because - gyrations in the markets.
:15:55. > :15:59.But most worrying for some has been the politicians' inability to
:15:59. > :16:04.confront those issues. There is one big difference between now and
:16:04. > :16:09.Back then, the worries centred on the banks. Today they are in the
:16:09. > :16:12.frame, but the focus is on the paralysis of politicians on both
:16:12. > :16:16.sides of the Atlantic, whether it's American budget policy or the
:16:16. > :16:19.troubles of the eurozone, governments just don't
:16:19. > :16:26.able to confront the problems they face, but perhaps we shouldn't
:16:26. > :16:29.that so surprising. I think policy paralysis is actually a really big
:16:29. > :16:33.difficulty because politicians have to assume, have to be optimistic
:16:33. > :16:37.about the future. They assume that growth will somehow rebound. That's
:16:37. > :16:41.the experience we've had for the last 40 or 50 years. When things go
:16:41. > :16:45.wrong, they correct pretty quickly. This is really the
:16:45. > :16:48.first time when we've seen things going badly wrong and they haven't
:16:48. > :16:51.corrected particularly quickly. The consequence of that is that it
:16:51. > :16:56.forces politicians to have to consider and contemplate really,
:16:56. > :17:01.really tough decisions. Some say the problems go even deeper, that
:17:01. > :17:07.integrated global markets and national democracies just don't mix.
:17:07. > :17:11.To come together to fix global problems, countries need to
:17:11. > :17:18.some national sovereignty and that's not something that democratic states
:17:18. > :17:21.find easy to do. You see this in trouble the G20 leaders have had
:17:21. > :17:26.resolving imbalances in the economy and you surely see it in
:17:26. > :17:29.acute form in the struggles of eurozone. We have a policy crisis
:17:29. > :17:36.worldwide. Policy is deliver vision. We want to see,
:17:37. > :17:44.can America, how can euroland along with a perspective? How
:17:44. > :17:48.able to get the economic the table? Now we are not ready and
:17:48. > :17:51.not able obviously on a basis to solve these problems. The
:17:51. > :17:57.moment of truth in financial crises comes not when governments run
:17:57. > :18:01.of options but when they come out of politically possible ones, like when
:18:01. > :18:04.Norman Lamont raised interest rates to 15% to defend Britain's place
:18:04. > :18:07.the ERM in the middle of a recession. That was when the
:18:07. > :18:12.knew the game was up. After the events of the past few weeks,
:18:12. > :18:18.Europe's politicians must battle now to convince the doubters that they
:18:18. > :18:21.haven't exhausted the realms of the politically possible.
:18:21. > :18:26.With me now, Holger Schmeiding, With me now, Holger Schmeiding,
:18:26. > :18:31.chief economist at Berenberg Bank in London; David Riley,
:18:31. > :18:36.rating agency Fitch Fitch; the economist and author, Noreena Hertz,
:18:36. > :18:39.and fund manager Joanna Kryklund from Schroders. David Riley, can
:18:39. > :18:42.start with you, to pick up on something in my piece there,
:18:42. > :18:46.a sense that there's now with the euro. If they are going
:18:47. > :18:51.to hold it together, they have to take a big step towards fiscal union
:18:51. > :18:54.and yet it doesn't seem like anyone in Germany or in a lot of
:18:54. > :18:58.places is ready for that to Is that the basic fact that we are
:18:58. > :19:03.facing? That seems to be really what the market has been now
:19:03. > :19:08.concluding and demanding, which is either we have effectively a United
:19:08. > :19:12.States of Europe or the not viable and the euro will
:19:12. > :19:18.disappear, certainly in its form. I think what's
:19:18. > :19:21.that increasingly the market is pushing policy makers and Germany
:19:21. > :19:25.particular closer to the position where it's going to have to
:19:25. > :19:29.some of the policies which it has not wanted to do, which will take it
:19:29. > :19:34.closer to fiscal union, example I suspect they will start
:19:34. > :19:36.dusting off plans for a common euro bond, which will issue for
:19:36. > :19:43.everybody, will be joint and severally guaranteed. If
:19:43. > :19:46.increase the size of the fangs stability facility,
:19:46. > :19:48.essentially the rescue fund that, could ultimately become a sort of
:19:48. > :19:53.debt management agency if you like for Europe, so I think they are
:19:53. > :20:02.being pushed towards fiscal union but kicking and screaming
:20:02. > :20:09.way. Holger Schmeiding, two weeks ago the
:20:09. > :20:12.ago the Germans were not ready even for that kind of bond, does it just
:20:13. > :20:16.take every few weeks another market crisis to push Germany down
:20:16. > :20:22.road? There is something to that, yes. It takes one crisis sort of
:20:22. > :20:26.after the other to push the Germans towards that, but the Germans will
:20:26. > :20:30.always exact a price. What the Germans will always be asking for
:20:30. > :20:34.each stage is, if we the Germans have to issue stronger guarantees
:20:34. > :20:38.than you our partners, please subject yourselves to stronger
:20:38. > :20:43.fiscal surveillance. So it's a mutual process. If Italy is ready to
:20:43. > :20:47.put a balanced budget amendment into its constitution then the Germans
:20:47. > :20:51.are ready to grant more. So it's a mutual process of the two
:20:51. > :20:54.coming together. OK, but Noreena, we are talking about - when you talk
:20:54. > :20:57.about surveillance, you are talking about Germany getting more and more
:20:57. > :21:01.- in return for the money, Germany getting more and more control
:21:01. > :21:04.other countries' policies. Mmm. you think that can happen? Do you
:21:04. > :21:07.think that's something democratic that could happen? I think it's
:21:07. > :21:14.very worrying and I think in Germany in particular Angela Merkel
:21:14. > :21:18.having to walk a very tight line between what Europe needs and what
:21:18. > :21:23.her domestic electorate are wanting. We've got to remember that she had
:21:23. > :21:27.bad election in the federal elections, the CDU, and so for her
:21:27. > :21:30.to sell to the German people this plan and Germany bailing out
:21:30. > :21:35.essentially the rest of Europe is going to be problematic. Then,
:21:35. > :21:39.imposing in return austerity programmes potentially on countries
:21:39. > :21:46.that are barely coping is to be good for Europe. It's not
:21:46. > :21:51.going to be good for any of us. But that's a good point, do you think
:21:51. > :21:54.that countries are getting forced into policies that actually could be
:21:54. > :21:58.counterproductive for growth, for their economy, or as far as you are
:21:58. > :22:01.concerned you are managing billions of dollars worth of assets, you can
:22:01. > :22:05.never have too much fiscal austerity? How does it work? Well,
:22:05. > :22:10.no, unfortunately we do need the politicians to get ahead of the
:22:10. > :22:13.curve, to some extent they have to shock and awe the markets. What if
:22:14. > :22:17.they can't? The problem is the last few weeks we seem to be seeing
:22:17. > :22:20.they can't. What they will continue doing, I think, is
:22:20. > :22:23.buying themselves time so in short term the markets are going to
:22:23. > :22:26.have to keep on focusing on sort of news flow and the
:22:26. > :22:30.that we are not going to get sustained rise in equity prices
:22:30. > :22:34.while this situation is ongoing, and that's particularly while economic
:22:34. > :22:37.growth globally is weak. So I really for markets to enter
:22:37. > :22:41.sustained uptrend we need to the one hand a credible solution out of
:22:41. > :22:43.Europe. I think that will long time. On the other hand,
:22:43. > :22:46.something that maybe will come sooner is some kind of improvement
:22:46. > :22:50.in economic statistics which we not seeing at the moment. I am
:22:50. > :22:54.interested to ask you, it has mildly nauseating the last few days
:22:54. > :22:56.the way the Chancellor has sort of crowed here about how we
:22:56. > :22:59.haven and no one is worried about our commitment to cutting the
:22:59. > :23:03.deficit. I assume that you are piling into the UK in a big
:23:03. > :23:06.way with your fund? I wouldn't say that, but I think that certainly the
:23:06. > :23:09.UK has one major advantage relative to the eurozone and that
:23:09. > :23:12.to weaken their currency relative to some of the member states within the
:23:12. > :23:16.eurozone and I think that has huge advantage. I think that comes
:23:16. > :23:20.back to the point that you were asking me about earlier which is
:23:21. > :23:24.from the perspective of an is there any such thing as too
:23:24. > :23:27.austerity? Well, actually there is. Ultimately we want to see growth,
:23:27. > :23:31.especially if investing in the equity markets and the fact that
:23:31. > :23:35.there's this fundamental rigidity the eurozone and the countries
:23:35. > :23:40.are struggling can't devalue currencies, which is the way the
:23:40. > :23:43.Asian economies for example got of their crises, is a concern. So
:23:43. > :23:46.it's a careful line we are treading. On the one hand we want European
:23:46. > :23:50.policy makers to show they of the curve but at the same time we
:23:50. > :23:54.don't want measure measures that are too extreme because ultimately that
:23:54. > :23:59.means a lost decade for growth in Europe. Exactly, like the problem
:23:59. > :24:02.in Japan in 1996/97 when they did try and balance the budget far too
:24:02. > :24:06.quickly and ended up with this decade which we are now potentially
:24:06. > :24:08.facing in Europe. But there was political paralysis at the heart of
:24:08. > :24:13.that as well. That is why it's an example of what I was talking
:24:13. > :24:15.in the film, that the politicians were - but do we have the
:24:15. > :24:19.capability, capacity and leadership here in Europe to move
:24:19. > :24:23.out of a out of a state of paralysis? I'm not
:24:23. > :24:25.sure. There's a big difference to that, namely when we look at what is
:24:25. > :24:31.happening in Europe, look through the turmoil, we are actually
:24:31. > :24:35.a wave of structural reforms. We are seeing the labour market reforms,
:24:35. > :24:39.that is Europe beneath the surface, but Neath the noise is actually
:24:39. > :24:44.delivering all the the end will make the place better,
:24:44. > :24:48.which is if Europe manages to buy time, after that time is over,
:24:48. > :24:53.Continental Europe will be in a much better shape than it is today. But
:24:53. > :24:58.structural reforms, another way of putting it - And in that process, we
:24:58. > :25:01.are going to have millions more people unemployed, we are going to
:25:01. > :25:07.have consumer confidence David Riley, the point is, that is
:25:07. > :25:10.a worry, isn't it, say we assume that there's just going to be slow
:25:10. > :25:15.movements, Germany with a gun to its head, moving closer and closer to a
:25:15. > :25:20.fiscal union; doesn't that, the best of all worlds, doesn't it
:25:20. > :25:23.condemn large parts of Europe to very slow growth for years? It does
:25:23. > :25:27.potentially, but I actually don't think that's going to be a viable
:25:27. > :25:31.strategy. I think what actually needs to happen, the markets are not
:25:31. > :25:38.going to wait for structural reforms to transform Italy into a dynamic
:25:38. > :25:43.economy. Essentially, there was a real risk now of a self-fulfilling
:25:43. > :25:47.not just a self-fulfilling liquidity crisis but a self-fulfilling
:25:47. > :25:51.solvency crisis. Italy and Spain are solvent but if the market is saying
:25:51. > :25:56.we are only willing to lend at 7 or 8% over the medium term then
:25:56. > :25:59.will become insolvent so the ECB must intervene. But can the
:25:59. > :26:03.European Central Bank be a stop-gap in this? It hasn't got any -
:26:03. > :26:06.would say that was a fundamentally political act and it is
:26:06. > :26:10.independent institution; it's not supposed to be just doing the job of
:26:10. > :26:15.governments. The European Bank can do exactly what the Bank of
:26:15. > :26:19.England does, what the Yes. The European Central Bank is
:26:19. > :26:26.an extremely powerful institution. If they step up to the plate, which
:26:26. > :26:31.they reluctantly will likely do, they can defuse the crisis and if we
:26:31. > :26:35.again make these comparisons, always remember the eurozone has as a unit
:26:35. > :26:38.a fiscal deficit much smaller than that of the US and the UK which
:26:38. > :26:42.means if they want to they can get things under control. They just
:26:42. > :26:47.to be pushed to do it. Actually, we haven't very much longer and
:26:47. > :26:49.obviously this news about the US is quite important tonight, and I
:26:49. > :26:53.we have been talking about of politicians and we started
:26:53. > :26:56.week looking at rather paralysed American politicians. David,
:26:56. > :27:02.should get your reaction to the about Standard & Poor and them
:27:02. > :27:07.taking away the US Triple A rating. Yes, I think
:27:07. > :27:10.Poor's signalled their intent to downgrade the US. I don't think it
:27:10. > :27:18.will come as a surprise. Are we going to see a real market reaction
:27:18. > :27:22.to that on Monday? Is this the end of the world? Yonks, no. I suspect
:27:22. > :27:24.not. I think at the moment they care more about that than downgrades. I
:27:24. > :27:28.think at the moment we need stabilisation in the economic data
:27:28. > :27:31.because if growth improves that helps put some of the sovereign debt
:27:31. > :27:34.concerns on the backburner. With respect to the potential
:27:35. > :27:38.of the United States, the it is still one of the most highly
:27:38. > :27:43.rated economies so it won't a sell-off in US bonds necessarily.
:27:43. > :27:48.It might provoke a sell-off in lower rated bonds as people shuffle their
:27:48. > :27:56.portfolios. So basically the US stays top dog and everybody else
:27:56. > :28:01.loses their Triple A as well? don't know about that but it is
:28:01. > :28:05.still favourable for the US Treasury at the moment despite the downgrade.
:28:06. > :28:09.Do you see some of the same kind of paralysis in the US? Do you think we
:28:09. > :28:12.are being too kind to American politicians? I think we
:28:12. > :28:15.politicians? I think we actually are seeing worse paralysis in the
:28:15. > :28:19.US. In the eurozone we experience over the last 18 months.
:28:19. > :28:25.I disagree with that. There's a crisis, they always react and in the
:28:25. > :28:29.end they manage to defuse the crisis. In the you had we have this
:28:29. > :28:32.stupid situation, they cannot agree to borrow for a while so the
:28:32. > :28:36.eurozone has problems but it's not that dysfunctional, it just is
:28:36. > :28:39.rather noisy. You are saying noisy. I don't think anyone looking at the
:28:40. > :28:43.eurozone in the last few weeks recognise your description of them
:28:43. > :28:47.fixing the problem. No, not here, but once they react to problems
:28:47. > :28:50.now they have one and we will see on Monday how they react. I think
:28:50. > :28:54.that's a particularly toxic cocktail right now. On the one
:28:54. > :28:57.the US, very flat growth, flatlining, we have unemployment
:28:57. > :29:00.high there, yes the unemployment figures were a little better but
:29:00. > :29:04.still high, and this potential downgrade, and on the other
:29:04. > :29:08.have Europe with the eurozone now widening the crisis to Spain and
:29:08. > :29:13.Italy. One on its own would have been worrying. Two together, can the
:29:13. > :29:19.world cope? I'm not sure. I think double dip ahead. Is the answer,
:29:19. > :29:24.you are an investor, just to get of America and the US? Go to
:29:24. > :29:26.emerging markets? Certainly island avoid Europe for the time being,
:29:26. > :29:29.yes, but in the meantime I there are opportunities
:29:29. > :29:36.United States and emerging economies. Thank you very much to
:29:36. > :29:43.all of you. I just want to look at tomorrow's front pages. The FT
:29:43. > :29:47.predictably it's a big day: week echoes depths of 2008 crisis.
:29:47. > :29:52.On the Independent: where are you, On the Independent: where are you,
:29:52. > :29:56.EU? Britain takes �150 billion blow as debt chaos hits economy. So not
:29:56. > :30:03.such a safe haven according Times. And that story we've had
:30:03. > :30:09.today: the British team killed by polar bear in Norway. And the
:30:09. > :30:11.going its own way: Eton pupil killed by polar bear.
:30:11. > :30:14.That's all from Newsnight tonight, That's all from Newsnight tonight,
:30:14. > :30:18.we will leave you with the site of Nasa's Juno spacecraft
:30:18. > :30:21.Nasa's Juno spacecraft heading for Jupiter. It will fake five years to
:30:21. > :30:25.get there by which time if you are an optimist you might say this
:30:25. > :30:35.planet's economy might just have sorted itself out. Ignition, and
:30:35. > :30:35.
:30:35. > :31:15.Apology for the loss of subtitles for 40 seconds
:31:15. > :31:20.lift-off. MUSIC
:31:21. > :31:25.you have outdoor plans. The weather will keep us on our toes. A
:31:25. > :31:28.promising start for many. Showers will get going, and as you can see
:31:28. > :31:33.by the afternoon they will be fairly widespread much pretty heavy
:31:33. > :31:36.aisle-moving ones too - slow-moving ones.
:31:36. > :31:39.Some brighter spells and a lucky few Some brighter spells and a lucky few
:31:40. > :31:45.will stay dry through much of the day but showers never far away which
:31:45. > :31:50.will keep temperatures down. Feeling breezy around southwestern coasts so
:31:50. > :31:53.not ideal holiday making down Devon and Cornwall. Limited
:31:53. > :31:57.brightness with showers coming in the breeze. A similar story across
:31:57. > :32:00.Wales, a lot of cloud with from time to time. Northern Ireland
:32:00. > :32:06.seeing some sunshine, I think, but even that will not help temperatures
:32:06. > :32:10.much. 16C in Belfast and for Scotland some sunshine across more
:32:10. > :32:20.northern areas but shower building up and turning pretty wet
:32:20. > :32:23.
:32:23. > :32:27.into evening. and east of Scotland.