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Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by a bevy of colleagues. We've got my two trusty co-hosts, Marissa DiNatale and Chris Dorides. Hi, guys. Hey, Mark. Morning, Mark. And how are things in Southern California, Marissa? Are you doing a little bit better there this week compared to last? Yeah, definitely. It seems to be under control for now, so. That's good news. Thank you for asking. I knew you had guests last week. Are they...

They went home. Yeah, their house ended up being okay. So they left on Sunday. Oh, good. Yeah, they're back in their home. Good, good, good to hear that. And we got Gaurav Ganguly. Hey, Gaurav, how are you? I'm good. Thank you, Mark. It's great and chilly in London.

where I'm based. Is it always great? Well, maybe not for a couple of weeks in July, but otherwise mostly, yes. And of course, Gaurav is the head of our research in EMEA, Europe, Middle East, and Africa. And Gaurav, I'm trying to think, when's the last time you were on Inside? It's been a while since you've been on Inside. It's been a while. Nothing interesting has been happening in Europe, clearly. They've been keeping you really busy there. Yeah.

Yeah. Well, thank you for joining in. And Matt Collier. Matt, how are you? I'm doing well. Nice to see everybody. Matt's Mr. CPI, PCE, PPI, anything inflation related. And we've got the CPI this week. So we want to hear from Matt. Good news, Matt, right? I'd say so. Yeah. Okay. Markets are rallying. And we have Cosimo Pacciani. Pacciani. I love that Italian name. All these Italian names. What's going on?

It's good to see you, Kazimo. Thank you, Matt. Kazimo is head of research. I asked him what title I should use. He said head of research or chief economist.

And he settled on head of research. But I kind of like chief economist, too. That's my title, Cosimo. Thank you. Thank you for having me today. Yeah, so good to have you. And you're the head of research for Post Italiano. And I want you to explain all this. And it's good to have you on. You were so kind to me when I was out in Rome visiting Europe just after the election.

And, you know, I'll tell you, Cosimo, those were days that are just the opposite of what you get in London. They were like, I don't know if you remember, but those were two beautiful days in November. Just gorgeous. Yeah, no, I can confirm that is still the case. We still have a 7th of Celsius and over in Rome. So usually winter in Rome will last only one week.

and it's really gone. If you want, I can tell a bit more about Poste Italiano briefly before. Yeah, we'd love to learn that and kind of your, a bit about your career, how you got to be chief economist, head of research at Poste Italiano. Well, interesting enough, this is my first job in Italy. I moved back to Italy three years ago.

And I spent all the rest of my career since 1994 abroad. I worked for Montepaschi in London. Then I moved to Credit Suisse, First Boston, an investment banking division. And then for a few years, then I spent 11 years working for Royal Bank of Scotland, where I was the head of risk for Europe. And then I became the head of risk and compliance for the rescue of the bank.

And then I spent six years working as a Chief Risk Officer for the European Stability Mechanism in Luxembourg. So I have behind me a path of financial destruction in terms of names. In reality, most of my jobs were about fixing things, especially at ESM. I was part of the team dealing with the third Greek program as well and the Cyprus program. So...

And four years ago, I decided, two years ago, I decided to come back to Italy to Rome for this job in Poste Italiane. And the reason mainly was because I was offered the opportunity to create a research hub. Poste Italiane is a huge financial and logistic conglomerate. It's a company providing any kind of postal, banking, assurance, life insurance services to people.

25 million clients in Italy. We have 13,000 offices. I think he's the biggest employer in Italy. How many did you say? 130,000. Oh my gosh. And we have 13,000 offices in the country.

Well, post-Francés they have 24,000, but it's a bigger country. No comparisons there. But I think the attractiveness was to work for a company that under the current management is really transforming into a modern financial logistic conglomerate. I think it's a very exciting company to work with.

And then we have data. A lot of data information is helping us also to inform our research and analysis because we have, let's say, a primer

We are maybe the biggest dealers in Italian BTP. We have big portfolios. We manage pretty much the savings of, yeah. Italian bonds, sovereign bonds, the BTP. Italian sovereign bonds, yes. Bread and butter, although we have other investments. And so this was the main attractiveness to build this research function. And we're doing well. So very happy about it.

So no destruction there in post-Italiano. I said Italiano. It's Italiani. Post-Italiani. Post-Italiani. Post-Italiani. Okay. All right, Chris, say it fast. Go ahead. Post-Italiani. He knows what he's talking about. He knows what he's talking about. Casimo, I should tell you, Chris is a bocce ball champion, global champion, at least in his own mind. I haven't seen the actual...

you know, metals or anything, but he talks about it all the time. All of the time. Somebody talks about it all the time. Oh yeah. I love, I have fun teasing him. But well, it's great to have you on Kazimo and good to have Gaurav here as well. Cause I, we do want to talk about Europe, what's going on in Europe, a lot going on.

And of course, when I was visiting, that was right after the presidential election. And of course, there was a lot of discussion around what that might mean. And so I want to turn and have a conversation with you about how Europe, Italy, Europe more broadly is thinking about the new American president and what that might mean for Europe.

But before we go there, let me... Can I just break in? Can I just break in? Yeah, sure. Because I'd like to just state for the record that I'm not a champion at any ball games. Who's not? Me? I'm not. You're not. I'm not.

I'm not a champion at any ball games. I'm just putting it out there. Well, wait a second. No cricket. In my own, in Zandy's imagination, I'm sure you're going to be a champion of something before this podcast. Before this podcast is out. That's why I thought I'd get in there earlier. Everyone deserves a medal, a big medal or, you know, some, some accolade, but I'm sure we're going to find, you know, what, what, what you're good at winning at, at some point here. Yeah.

But before we go to our discussion around Europe, let me bring in Matt, Matt Collier. Matt, let's talk about inflation a little bit. Good news, as I mentioned, on the CPI. You want to give us a bit of context around that? Yeah. So you mentioned it's good. It's good after it hasn't been good in a little while. Not terrible, but at the end of 2024, inflation is

was stickier. I mean, you had nothing that was specifically alarming, but the progress that we saw throughout 2024 seemed to have at least run aground. And you see that in Fed projections, you see that in bond yields, but I'm sure we can get more specific to that topic. So headline CPI rose 0.4% in December, so from November to December.

That's the consumer price index that was a little stronger than expected. It lifted the year-over-year rate from 2.7% to 2.9%. Recently, as of September, the year-over-year rate for CPI was 2.4%. If you just take that snapshot, that's superficially not a great report, you would think, but

Really, the forces under that headline reading was energy. Energy had a big jump in December, 2.6% monthly increase. Haven't gotten that kind of contribution from energy since the middle of 2023. Responsible for about 40% of the overall increase in CPI and GDP.

We'll get to core CPI. There's a reason that aggregate exists to cut out energy because it's volatile. It doesn't tell a lot about price trends, underlying price growth. So it's not going to rattle the Fed, especially since energy prices have been sustained, kind of a subdued price transfer for years.

Most of 2024, back in 2023, average price of gas is still just over $3 per gallon. That's cheap. Let's get to the good news, Matt. Where's the good news? Give me the good news. I mean, because the markets rally. The stock market's up. The bond yields are high, but back in on the CPI. So where's the good news? So no more building suspense. Core CPI rose 0.23%. That's lower than expected. Core CPI excludes food and energy, as we just discussed.

alluded to that's lower than expected. Everyone was up 0.3%. I say everybody, us, other professional forecasters expect a little bit stronger rise. So it lowered the year over year rate from 3.3% to 3.2%. Been stuck at 3.3% for a while. Yeah, encouraging news there. Underlying components, everything was pretty tame. Shelter is what we focused the most on. And there we got another encouraging month.

Shelter disinflation has been slow, stubborn, but it is happening and it is downshifting and it's allowing core CPI to slowly come in a bit. And I think we're going to see a lot more of that in the next couple of months as we

base effects, the year-over-year comparisons start to roll over and look a little bit better. So I think December was maybe an earlier step than we thought to start to see the mood change a bit. Good news, and we'll see. So the year-over-year on the core CPI, and of course we look at that because that abstracts from the volatility in energy and food prices and gets closer to the underlying trend and is a good...

generally a good forecast for future inflation, is 3.3, I believe, or 3.2? 3.2 now. I'm stuck at 3.3 for a few months. And to be consistent with the Fed's target on the CPI, it would probably be about 2.5%. It's 2% on the consumer expenditure deflator, but by construction, the CPI is going to be a little bit higher, 2.5. Are we ever going to get back to 2.5, Matt, here, anytime in the near future? No.

I think we see that in April, May, June. I think that's the area where- Okay. Let's mark that down, April, May, June. And that's before the tariff increases and any other economic policy effects on inflation. That's what you're saying? Absolutely. Yeah. Okay. And what does this all imply for the PCE deflator, the consumer expenditure deflator? That's, of course, the measure of inflation the Fed is looking at, the 2% target. What does that mean? So-

They meshed up a little bit differently. Generally, I just say move in the same direction. So for headline PCE, now that we have both the CPI and PPI data, we expect 0.2% growth in the headline PCE. That will lift the year-over-year rate from 2.4% to 2.5%.

Again, energy at play a little bit there. And then the core PCE deflator we expect also rises 0.2%. And that will keep the year over year rate at 2.8%. So still above the Fed's 2% target. Still above the Fed's 2% target. But again, I think- Yeah, headed in the right direction. Yeah. Another thing that I find so amazing. So I think the consensus on the CPI, core CPI was up 0.3 and it came in 0.2.

But it rounded down to 0.2. It was really 0.23. If it had been 0.26, it would have been rounded up and I suspect markets wouldn't have reacted. So a few hundred basis, a few, one or two basis points seems to make all the difference in the world in terms of sentiment in financial markets. Is that your sense of things?

Yeah, I do think people are focused on shelter as they should be. And if it was 0.26, got rounded up, but we still had another good month of shelter inflation, not great, but moving in the right direction, I think...

sober heads would prevail. And I think bond yields still would have fallen, maybe not by the 15 basis points that the US, the 10-year treasury did drop following this data release on Wednesday. But yeah, that is the kind of- Pretty amazing. Razor's edge, yeah. Hey, Marissa, you heard his forecast back to Fed's target April, May, June. You

Like a good economist, he didn't give us one month. He gave us three months. I go May. I've been saying spring. Spring. That's even better. Anything to add on that inflation report or on the inflation more broadly? No. I mean, I think it was overall a good report, right? I mean, we're eyes on shelter, inflation, and that's been encouraging now. So that's kind of what I'm focused on. I mean, energy is going to whipsaw us here, I think, for the next few months. But-

Going forward, I think just the comparison to a year ago is going to be favorable going into the spring. So I think we'll get there pretty soon. Chris, any pushback there, April, May, June? I would take the other end, maybe closer to June. I think everything looks good, but there's certainly some troubling signs of potential inflation building up. Independent of economic policy, you're saying?

Yeah, well, even within the report, there are concerns about insurance costs or some of the other components that could... Even as shelters coming in, you have some other factors that could speed up.

I'm not expecting things to run away, but it may take longer, maybe a little stickier still to get back all the way. Yeah, I'm just going to make one quick intrepid forecast here. I'm beginning to think we're never going to get there. Really? Yeah, because economic policy is going to kick in here and forestall everything.

Getting back fully to target. It won't be until down the road here a year or two or three before we get back back to target. I suspect we're not going to get there. Hey, Cosimo, let me turn this back to you here in the U.S. Inflation's come in quite substantively over the past, obviously, a couple of years. But it's still, as we say, sticky. It's not quite come all the way into where the Federal Reserve wants to see it.

similar kind of pattern in Europe, the same kind of dynamics? - Yeah, I would say there's a similar dynamic in terms of number because the targets that the central bank, the European Central Bank is flagging is still pretty much, and already told us in one of the last meetings that it will be above target for pretty much all the rest, the famous 2%, this kind of meeting of 2%.

And the target is still kind of not away a lot. The trend is right, but we expect, we're just reviewing at the moment our scenario, we expect this to remain higher than expectations. Mostly because it's driven in Europe by energy prices. Because as you know,

We are back in some kind of lighter, much lighter than the first Ukrainian crisis. We're back in some kind of supply shock in terms of energy. We are seeing that filtering through now. And I think it's the level of consumption didn't come down as expected. So I think we still see a bit of resilience on the inflation side.

It's not substantive to lead the ECB to say that they will not go through a potential round of cuts in the first quarter of this year. But if you see the consensus, that maybe it may be delayed a bit to see what happens. I think in the UK, the last numbers are pretty much going on the opposite direction. So we expect Europe potentially to see some numbers change.

We do some kind of now casting on the inflation numbers in Europe. And to be frank, we see the risk of a higher than expected inflation in the coming months. Looking at most of Europe, the Eurozone, not completely Europe, but we see this number. And

And these net or any implication from what's going to happen in the U.S. from Monday, I think is a big point of attention and focus, because this could trigger another wave of inflation, especially if the policy of the new Trump government will go in a direction imposed by

You're talking about the tariff, potential tariffs. Yeah. We'll come back to that. These are NATO tariffs. Yeah. We'll come back to that. But I did want to ask this. Here in the US, it looks like inflation, in the previously high inflation that we were suffering back a couple, three years ago,

really played a very large role in the election that that, you know, people, American voters really haven't been able to psychologically get beyond the big increases in prices, particularly for groceries, food and and rent and to a lesser degree, energy prices.

And no matter what's going on in the economy, unemployment is very low, lots of jobs, stock market at a record high, housing values at a record high. Despite all of that, people just think the economy stinks and therefore voted for former President Trump, who's now days away from his second term. And this seems to be a dynamic, this effect of inflation on kind of

people's perceptions and on their voting patterns something that's going on in other parts of the world you could see it in Canada Justin Trudeau the prime minister just resigned and for lots of reasons but I think that was a big part of the same dynamic there in uh in Europe as inflation played the same kind of had the same kind of impact on the collective psyche and on the political process

There is an element, I think it's something that belongs maybe more to 2024, because as you know in 2024 there was a general long wave of elections in Europe.

And this played a role somehow on the decision, obviously because I think even the same Giorgia Meloni, when she was elected, she has a program who's also trying... She's now the prime minister of Italy. She's prime minister. The levels are obviously... Inflation started going down. This played a role in some of the elections. I think the concerns...

I would say there is some difficulty to, especially for central banks and government, to transmit some kind of good narratives of full employment and economy, not being, apart from Germany, not being in recession and still kind of running hotter to the general public. And inflation remains an argument on which, especially the populist party, they're using to show that something has to be fixed.

But I think there's much more in Europe, there's much more understanding that the last wave of inflation was mostly supply driven by energy prices. So there's much more understanding that this triggered a substantial increase in prices. This kind of cause for people, you know, and now that's the kind of shock that's

started to vein, to disappear, also inflation came down. So there's also kind of narrative that central banks and government can have.

I think now we're going to have German elections in a month, so it's going to be a first test to see. But there, the debate in Germany is not, I think, it's about inflation. It's more about infrastructure investments and industrial development and immigration, mostly. I see. Interesting. Gaurav, what's your perspective on this? Did you think inflation played a big role? Because the UK had a big election, a big

shift in direction there. Important there as well? Yeah, I think as Cosimo said, it's a factor. I think of three factors that contributed to the political volatility that we are seeing in Europe. It's been ongoing for a while. It's the cost of living crisis and perhaps an insufficient government response. I think households across Europe, depending on where you go, have been

to a greater or lesser extent, dissatisfied with the government's various government's approaches to dealing with the cost of living crisis. So that speaks to the inflationary pressures. Then there is a widespread dissatisfaction across many countries in Europe around the way in which industrial policy is progressing across Europe. And the fact that this is and the fear that this is leading to potentially a hollowing out of European industry, potential loss of jobs and a potential loss of future prospects.

And the third, I think, and this is really becoming quite a big vote winner, it's populist politics around immigration. That's been played to the hilt by many populist parties across European countries. And as Cosimo pointed out, it is quite an important feature of election campaigns.

In Germany, you know, Scholz of the SPD, Scholz, who was the chancellor of Germany and head of the SPD party, which is a center liberal party, lost a no confidence vote around a bunch of factors to do with

industrial policy to do with dissatisfaction around the German economy. It's hard to disentangle the extent to which prices played a role in that. There was a whole lot of issues around that, but certainly dissatisfaction with the economy was key there and allied with then that immigration issue, which was played up by the far right parties and also the very far left parties.

Yeah, I think that sounds very familiar to the U.S. experience, right? You said the cost of living. I said inflation. Yeah, same thing. Yeah, that's the same sort of thing. Yeah, immigration, you know, obviously top of mind here in the U.S. as well. Industrial policy, a little bit less so, but the U.S. economy has been performing well. So, I mean, in terms of jobs and unemployment, growth has been strong. So I guess...

A little less of an issue here, but sounds very familiar. Maybe heterogeneous across Europe too. If you go to Germany, there's a lot of interest, a lot of concern around industrial policy, much less concern in Spain, for instance, right? Yeah, where the growth is stronger, right? I think maybe if I may add two little elements to what is added to the mix. One,

One is the changes on welfare policy. As you know, European countries have had very strong welfare. And now we are witnessing in France

Italy, Germany and other countries to reduction of the support by the government in terms of health, education, and wealth support, etc. We also come from the pandemic period in which pretty much there was a lot of emphasis on wealth and income support in most European countries, UK included.

And this now is going down, so this has an impact. And the other one is a general reform on pensions across Europe, because in Italy it's trying to reduce one. In France, as you know, the big debacle of the previous prime minister was down to what they were trying to do in terms of the pensions.

and the role of the state that is changing across. I'll give an example. There's a very interesting research paper in which they analyze that the extreme populist parties in France, they had much better results in area where postal offices were closed. Oh, interesting. March was the last element of presence of the state in some little rural communities. And this is where Le Pen, Marie Le Pen had better votes or more votes than in other areas.

Just a little example of how also this European Council, the welfare state, the state is there to help me. And it's changing for a series of reasons, cost-cutting, et cetera, is having an impact also on a political landscape. But just so I understand, you're saying the study showed that in communities where they lost their post office, that's where people voted against the incumbent party, more likely. Yes, the votes swung to the right.

That's fascinating. Makes sense. It makes sense. But yeah, it makes sense. If you round that list off, I think Cosimo's absolutely right about the role of voters' perceptions of the role of the European welfare state and how that's progressing and the fact that the European states are not able to provide the level of welfare that voters might want or think they should get. And if you round off that list, I think there's also growing Euroscepticism

around the European Union in some parts of Europe. And that's quite an interesting trend to observe. So let's turn to the new American president, President Trump, who's going to be inaugurated here in a few days. Cosimo, what's—and this may be hard to do because I'm sure there's many different opinions and views—

Because I think Prime Minister Melania of Italy is much more in sync with kind of President Trump's policies, but a lot of variability. But broadly speaking, what's the general perspective on the election and how are people in Europe thinking about the new president here in the U.S.?

I would say there is a lot of concern on one part of the population, mostly the business side. Everybody's waiting to see what kind of executive orders they will sign, if whatever is threatening.

then it will become, let's say, either a single strategy, tariffs for everybody, whatever you produce, or if he's using this one as a power game in which Europe, in Europe, in Italy, we believe there's still a bit of chance to manage the process, meaning China will be harder, in Europe we can try and find ways to either buy more American, as what Lagarde said recently in an interview, buy more American stuff, or to negotiate.

In Italy, in the general consensus that we see ourselves be more on a balancing act because of Meloni, the good relationship he has with Trump. You see recently there was a case of this Italian journalist freed up in Iran in which apparently she flew to Mar-a-Lago to meet Trump and a few days after this journalist she was freed. So there's a sense that she's very close to the president

President Trump. At the same time, Meloni, she's very close to some of the governments in Europe that are a bit more Eurosceptic, meaning Hungary at the moment, Bulgaria. So it looks like she's more, she could be a, she has a very strong

balancing and negotiating power than any other Italian Prime Minister had for some time. Maybe even more than Draghi because she's sitting in the middle between the US and some of the Euro-sceptic countries and also shares a good relationship with Le Pen in France, whatever will happen there and also in Germany. So there's a lot of expectation, a lot of concern. At the same time,

There's this idea that maybe Europe, because of the nature of what we are doing, could pretty much escape with just a renegotiation of some of the trade terms.

But my personal view, and obviously everything I'm saying is my personal view, my personal view is that we may be in for a surprise. I still don't know if negative or positive, I have to say. But I like to think positive. At the same time, recent declarations about Greenland and Canada and Panama, they're not budding well for the kind of policy we're going to see.

Right. I guess that's the one thing we can say with certainty is that there's going to be a lot of uncertainty here. Yeah, that's for sure. Gaurav, does that sound about right to you? I mean, how nervous or not are Europeans now?

about U.S. trade policy, tariff policy. I mean, it's hard to know what President Trump has in mind, although we're going to learn pretty quickly, apparently. I mean, he can change tariff policy through executive order. He doesn't need Congress or in most cases. And I think we're going to learn pretty fast what he has in mind here.

and the direction he's headed. What's the level of angst with regard to these policies? I think it's, as you said, the one thing that's certain is that the world is going to be pretty uncertain. Yeah. So that's my starting point with all of this. If I...

Break it down and look at the path where Europe manages to negotiate something in between the pressures, sort of not the center of attention because China is the center of attention. Well, things could actually be relatively easy, though. I'm thinking here about what is it that Europe can buy more of from America? And the immediate answer is natural gas. Actually, Europe needs to buy a lot more natural gas. So gas reserves this year, at this point in time this year, are lower than they were at this point in time last year.

And Europe needs more gas and simply needs more LNG. So it's an easy win. It's pretty low hanging fruit to go out and buy more gas from the US. And that could be a way of reducing that pretty sizable trade surplus that the EU runs with the US.

So, yeah, I mean, if that happens, it's possible that Europe gets escapes lightly. But on the other hand, there's a fairly sizable trade surplus when it comes to automotives, for instance, or some of the other chemicals, etc. Pharmaceuticals been doing really well with weight loss drugs and so on. So, you know, there's scope here for for the Trump administration to squeeze Europe.

Now, if, again… So you're saying Europe can send more Ozempic over here to the U.S.? Yeah, exactly. That may solve the problem. Is that what you're saying? That could be. Well, yeah, maybe that could solve the problem. I don't know. It may very well. It may very well. That could solve some other problems, yeah. Yeah.

Yeah. Yeah. I mean, it depends on how this all plays out. If it is an opportunistic transactional sort of interchange where you

Europe buys more from America and gets away without having to worry, without having tariffs. Actually, I got that wrong. I got that backwards. You got that backwards. I got that backwards. You don't want to tell me. That's what I said. No amount of natural gas we're going to be able to sell you to make up for all the Ozempic we're going to be consuming over here. That's why I said I'll sell some other problems. You're doomed. You're doomed is the point.

Yeah, so I think there is a way forward here. But I can also see that the Trump administration might be really quite interested in focusing on certain industry sectors, like pharma and autos. And that's quite negative for Europe, autos in particular. I mean, Europe has slipped behind China in terms of being the world's leading global producer of automotives. China produces more

has really ramped up its production of cars in the last few years. And European car production is still roughly, I think, if I got my numbers right, about 12% below pre-pandemic levels. So it's still struggling with automotive production. And it's losing ground to China in terms of producing electric vehicles. And one big reason for that is also simply that China controls so much of battery manufacturing and batteries make up such a significant chunk of the cost of an EV. Very hard for Europe to close that gap.

So then losing out, it's losing out in sales of cars to China because China is simply replacing its internal combustion engine fleet with its own EVs. But it's managing to sell cars to the US. If it then stops selling cars to the US, well, you know what's going to happen there. That's a pretty big sector. It's about 8% of employment in the manufacturing sector. So that's a

big risk here for this particular sector. It's also a big part of Germany and a very big part of certain other European countries. So you're looking at a big de-industrialization risk if the Trump administration goes after European automotives. And of course, if I know that that's a weakness, then you can be sure that the Trump administration knows that that's a weakness, right?

So, I'm not going to put that out and squeeze Europe. There's a deep irony in the idea that the U.S. would ship more natural gas to Europe, and that is natural gas prices here in the U.S., which are low, are going to go up. They're going to go up, yes. They're going to go up. And I don't think that's what he has in mind, but that's exactly what's going to happen. But, Cosmo, the other thing I kind of channeled through which I heard, or I've heard some hand-wringing about from various European circles, is...

Even if the U.S. doesn't impose high tariffs across a broad array of products that are produced in Europe, more likely he's going to do that on China. And of course, then the Chinese companies are going to try to look for markets to sell their product. They can't sell into the U.S.,

without a tariff, they might turn and divert that trade. And Europe is an obvious place to look. And over the years, China has become better at producing products and services that compete head on with the products that are produced in Europe. So therefore, it's not only the tariffs on Europe that matters, the tariffs on China and the rest of the world that matter. Does that resonate with you, that concern?

Yeah, I think there are two things that may happen in Europe. One is what people define as an expression of vibe shift. A lot of member states in Europe, they may decide that maybe Trump is less of the two evils, or maybe China is less of the two evils. So the vibe shift, to some extent, moving away from what we called in Italy, Atlantismos, this idea, this kind of holy alliance between Europe and the US.

And depending on how Trump will behave, this could be some idea that could have a, let's call it precisely a vibe shift, that maybe China could become a partner. Even because of what we were saying before, if you think about the Italian small and medium enterprises, they have already close ties with China. Though the spare parts, machine parts, textiles, fashion,

is not only a market for us, but it's also an area where goods are produced. There was a substantial relocation, especially in the 90s, and this kind of relocation back to Europe still is kind of close ties. So that could be something that may happen, and Europe decides to look towards east, skipping Russia, towards east rather than looking west.

There are some signs. If you remember, one of the previous Italian governments, one of the previous ones, we have so many, they signed an agreement with China for the Silk Road Agreement. And if you remember, there was all the other European countries who were against that. But interestingly enough, it looks like that could be something that some European countries may want to revisit.

especially in terms of export and import, both in terms of trade, both in terms of having Chinese companies relocating to Europe on their production that we so badly need, because in Europe we have this technological gap against China and the US that needs to be fixed. Mostly the Draghi report is all about that, how to win back some kind of production.

position in some leading industries. You kind of jested about the changeover in governments in Italy over the years, but I think it's fair to say the Italian government is probably the most stable in Europe at the moment, isn't it? Yes. Just take a look around. I mean, I don't know what that means exactly, but I think that's true.

Well, it helps our financial markets, helps the BTP and the spread because it helps a bit of stability. We are not used to that, let's put it this way. Right.

But it seems to work. And the popularity of Meloni is still very high in Italy. I think her personally, still very popular. There's another feature, usually it's odd in Italy. After two years, your popularity will wane, where she's still going strong. Hang on in there. Hey, we're going to play the statistics game. And I know, Cosimo, you have a chart you want to throw into the mix. I can't wait to see that.

And then I do want to talk about, you've brought up the Draghi report a couple of times. Draghi, Mario Draghi, former head of the ECB was commissioned by the European, was asked by the European commission to take a look at why European growth has been so weak and it's long-term prospects so diminished and what could be done about it. And I want to come back to that. But one last thing about president Trump that in his policies that I want to just explore with you is,

Is Ukraine Russia right? I mean, it does appear that President Trump is going to be less supportive of the Ukrainian war effort and put pressure on the Ukrainians to come to some kind of deal with.

And some concern about that, at least when I was there, I heard that this was going to put this addition. This is going to make Russia more likely to be emboldened.

start to put pressure on the Baltics and other parts of Eastern Europe. And that will force Europe more broadly, including Western Europe, to have to invest more in its own defense and national security, making it more difficult for them to engage in industrial policies like Draghi has proposed. Is that a what do you think about that concern? Is that a something that's top of mind or is that just in my own mind?

I think it is because I always use the expression that Europe is surrounded by, at the moment, by a ring of fire because you had war in Ukraine, you had the crisis, still a crisis in Syria, then you have Israel and Palestine, then you have the Northern African side. And for Europe resolving the Ukraine crisis,

is important. But at the same time, it all boils down to what kind of agreement Russia and Ukraine will have. Because for me, the stalemate is that obviously Putin doesn't want to give the impression he's giving away stuff. So I don't think there is any way in which he will not give away any of the territories occupied. At the same time, I think Ukraine is trying to use that to

become, let's say, to start being a European Union protectorate and then to become a member of NATO and European Union, etc. So it's all down really to what Putin is able to accept for himself more than what... Because Ukraine, obviously, they are an occupied territory. Where also the last news from Russia that also, for example, agricultural production is having problems, the currency is having problems. So...

Let's say at the moment it's really down to the ego of Putin and how maybe Trump is able to convince him to give a deal that is not looking internally poor punishing for him, but at the same time can live with, you know, with honor, let's put it this way. Got it. Europe is completely still back in Ukraine, especially because of the Baltics, because of Bulgaria, because of Poland, especially because we know that.

If Ukraine goes, then the next one may be Poland or the Baltics. So any chance that Europe writ large fills the void left by the Trump administration? If the Trump administration isn't providing the defense support, could Europe step into that void?

uh yeah but uh we don't still have uh enough for this yeah right capacity let's put this away right okay all right let's play the game the stats game we each put forward a stat uh the rest of the group tries to figure that out with clues questions stuck to reasoning the best stats one that's not so easy we get it immediately one that's not so hard we never get it and if it's apropos to the topic at hand all the better

And as tradition has it, we start with Dr. Dina Talley. Is it doctor? I can't remember. I don't have a PhD, but you can call me. Oh, sorry. Sorry, sorry. No, no. Start with you, Marissa. You're up.

Okay. My statistic is 18.7 billion euros in November. This is a trade number. It is a trade number. It is a trade number. Seasonally adjusted, Eurozone trade surplus in November? This is not seasonally adjusted. This is not seasonally adjusted. I'll claim that. So it's the US trade deficit, monthly trade deficit with Europe?

That's right. Other way around. So this is the trade surplus with the Euro areas, trade surplus with the US. I'm looking at it through the US prism. He's looking at it through the European prism. Well, I said it was in Euros.

So yes, I'm looking at it from the European side. Very good. Very good. Yeah. So this is the, the, the, the trade balance with the euros trade balance with the United States, 18.7 billion euros as of November. It's quite high. I mean, we know the dollar is very strong. The euro is weak in comparison. That's, that's helped this number. There also may be some speculation. I don't know if we have a lot of data to prove this, but some buying, um,

by the US, a lot more importing right now ahead of predicted tariffs, right, that may go into effect later this year or very soon, actually. And the US is the Eurozone's largest trade partner by a long shot, actually. So we'll be keeping a very close eye on how this unfolds over the next...

few months here. The US is the Eurozone's largest export partner. That's right. That's right. Yes. Imports, most of the imports come from China. More imports come from China. US would be second in terms of imports. But in terms of exports, the US is the largest partner. That's right. And interestingly, the November trade balance, the deficit with China, the Eurozone deficit with China narrowed a bit. A trend or just a...

Who knows? Who knows? Who knows? Yeah. Just a factoid. He's showing off now. He's showing off. That's what he's doing. He comes up with this erroneous, extraneous fact. We're kind of like, oh, how did he know that? Yeah.

Yeah. Because he's looking at the same table I am, I think. I know your game. I know your game. Yeah. He's trying to psych us out is what he's trying to do. He's like, I know everything about those trade statistics, so don't try that one on me again. No, we just are at the same trade table. I am F, I think, isn't it? So, Marissa, do you have an Italian...

thing you buy that adds to the US trade deficit with Europe and Italy? Oh, yeah. I'm sure a lot of food that I buy comes from Italy. Yeah. And wine. Yeah, wine. That's my favorite. Hey, Cosimo, you want to go next? Yeah, very happy to do it. It's a table. It's a graph. I hope you can see it.

We'll describe it. It's also we're on YouTube. So is a blind is a blind table or shows a

We can't see it though. We can't see it. Can you see it? Oh, just a second. Sorry. Oh, I like this multimedia stats game. Okay. So this is a relation between, I don't want to spoil it, but it's a relation between two market variables. Are these yields on 10-year treasury bonds? No. No.

Yields on Italian bonds? No. No. Are they interest rates? No, but we are getting closer. It's a rate. It is a rate. Okay. It's a financial market. No. Oh, it's an unemployment rate. It's not an interest rate. It's not interest, but still a financial market's rate. Oh, it is a financial market. Okay. Is it a price earnings multiple? No. No.

It's not an interest rate. It's not- It's the same rate taken to different period of time because we had this- Oh. We found out this interesting correlation. So one, if you want, I can help you. Inflation rate. It's an inflation rate. No. No. Inflation expectations. It's very easy. It's very easy, but it's very interesting. Okay.

It's the period of 2016 and 2024. Is it the value of a currency? Precisely, yes. It's the Euro-dollar trade. And what we did, we had this kind of, if Wanda can reveal it, we had this curiosity to check what happened on FX rates from the day of the elections of Trump going forward. And then we found out this very interesting parallel trend.

between 2016 and January and 2024 from election day to today. And recently...

We found it very interesting because we are playing with the idea with my team that financial markets, especially effects markets, they have some kind of collective memory. It's like the brain. When you have pain or pleasure, you react in the same way. So we found interesting is that given the same circumstances, election of Trump in the kind of similar period in terms of market economic variables,

If you see the Eurodollar behave precisely along the same lines. This is so cool. So just to describe it for folks, and we will put, this is on YouTube and it's also going to, we'll post it, if you don't mind, Cosimo, to our notes, to the podcast. You're showing the Eurodollar exchange rate over two periods of time, 2016, that's the blue line, and then 2024. And they-

Those are two election years, obviously, presidential election years, and they have a very similar path with the euro falling in value pretty consistently throughout the period, except in the immediate lead up to the election. And you're saying markets are behaving differently.

You called it kind of a collective memory, or a memory, and are behaving in the same way. And do you think it's because, in this case, they're anticipating tariffs, which would... It's possible, yeah. I think an element is that anticipation of tariffs, in addition to pretty much, let's say, a relative weakness of the euro if compared to the European economy compared to the U.S. one.

But what we found interesting was really the parallel behavior, because when we started doing this analysis, just to see, okay, let's see what happened last time, and we started plotting the numbers of the actual number 2024, the correlation remained stable. It didn't go in different directions or completely different direction, remained completely parallel that we found fascinating.

Yeah, I guess tariffs would imply a stronger dollar, weaker euro, right? So tariffs in general will result in a stronger currency for the country that's imposing the tariff. And that's exactly kind of sort of what you're seeing here, that kind of dynamic play out. Very interesting, fascinating. Have you seen this kind of collective memory working in other markets as well?

no this is this is what we started we looked at the period the year before elections we didn't see right this we couldn't find anything as fascinating as this we found something fascinating yeah

Yeah, very interesting. Well, that's a good one. This is the first time, the first stats game we played with a graph. Maybe we should- That's fun. That's fun. I would pick that up. Yeah. Let's do one more before we move on. And Gaurav, I think we should go to you. What's your stat? How about an easy one? 2.4. Is that German bun yield? No. No.

Is it the Euro inflation rate? It's a rate. You're right. It's a rate. Is it inflation? Yep. European Eurozone inflation? Eurozone December inflation, yes. December inflation. That's not a good stat. I'm just saying. What's that? Rob, I hear this all the time. It's a fine stat. That's so boring. That's so boring. He tells us that it's not a good stat, but there's no backing reasoning behind it.

It's my judgment, my judgment as moderator. If I had guessed it right away, it would have been an excellent stat. Yes, exactly. If you hadn't embarrassed me. That's the criterion. Yeah, right. Anyway, so you want to explain? Do I want to explain? Well, I think some of it Cosimo's already talked about in that headline inflation fell in the Eurozone back below 2% in 2020.

sort of end of the third quarter of last year. And now it's bumped up again a bit. Now, the big reason for that is what's been happening in energy prices. Also, to some extent, the high shipping costs earlier in the year have been feeding through into manufactured goods prices. It's not really a cause for concern because you sort of think,

that the underlying forces abstracting from energy are still there and hopefully working in the right direction. I mean, big force for keeping inflation above target has been core inflation, particularly services. There's a question mark around how rapidly that will moderate, but it looks set to continue to moderate over the course of this year, taking inflation back down to target, hopefully by early 2026.

There are positive signs in terms of tracking wages, et cetera, across the Eurozone, which suggests that wages are moderating. There's been a big force in service sector inflation. There are some one-off negative signs, things like insurance premium and airline fares, which these are one-offs that suddenly come in and hit the data and spike up service sector inflation. But overall, I'd say...

There's nothing here that derails the story that inflation gradually settles down towards the target, except, and as Cosimo pointed out, it's Trump. That's the wild card. Okay, I take it back. I think that was a good stat, because it was apropos to Europe and inflation, which is what we've been talking about. I pulled it all together in the end. Yeah, you pulled it all together for us. That was very good. Okay, let's end the conversation with the Draghi report. And I should say,

I highly recommend the report, but the way I read it was I put it into Notebook LM and had a podcast. Tell me what he said, because it's a long report. It's a tome, but very, very important. Cosmo, do you want to just give us a thumbnail sketch of what Prime Minister Draghi was trying to say in the report in terms of

European growth prospects and we can also turn to the solutions as well. Yeah, I would say the Dragon Report highlights what we discussed before, the substantial growth

investment technological gap that we are seeing more and more in Europe. It's the multidimensional automotive before that, so the lack of R&D or development of new technologies and also the difficulty to adjust the

the competitive capacity of Europe in a world in which we've seen a different kind of acceleration of China, we also have India, we have US with IRA. And well, in Europe, the recovery plan was mostly to fix the issues created by COVID and then we had the Ukrainian war.

So, to support and bring back some level of function in European economy. There is another matter is about how to bring back European economy to functioning, to be more productive, and to move into the kind of industries where we need to be. So, in Draghi Report, we talk a lot about technological development and semiconductor, all the kind of industries where Europe needs to be back and have the capacity.

So I think the report is mostly the idea to say how we can rebuild this European competitiveness. So my take was, just to make sure, just to repeat what you said, but just to say it again for the listener, is that he's focused on, he was asked by the European Commission, what's going on here? We can't seem to kick into gear. We're not growing anywhere.

you know, the big German economies, the poster child, but all of Europe is struggling to some degree. Italy a little less so, but, you know, compared to historical performance, but nonetheless. And he found lots of things going on, but most fundamentally, uh,

The European Europe doesn't have a technology sector of consequence. And, you know, all of the kind of basic research and development is still being done by the automakers who got their own set of issues. There's there's no big, large scale tech companies like we have in the US and China. And we need that. If we don't get that, we're not going to be able to grow at the pace that we like. Is that is that did I get that roughly right?

Yeah, yeah, he's right. And drag is used in the world of champions. We need to have champions in each industry. And we need to abandon the idea that automotive is the only sector we need to grow. He's talking about defense industry, because as well, you know, one of the potential...

terms of negotiation with Trump will be if you buy more defense goods from the US. And it's about kind of rebuilding the research development capacity that we need to have in order to compete. And so champions is a key word. At the same time, well, before this report a few years ago, Draghi prepared with other people report about zombie companies.

So the idea that in Europe we have a quite substantial small and medium amount of small and medium enterprises that are suffering from lack of competitiveness. They need to be revamped, modernized, digitalized. At the same time, there's a huge demographic or generational shift because all the old owners that pass in the business to the kids, to their son or daughter, etc.,

And to give an example, in Italy we expect at least one million small and medium enterprises will have to pass hands in the next five years. Wow, really? Wow. This includes taxi drivers. Never said that because it's considered a small and medium enterprise. Yeah.

But still, it's part of the connective elements of European economy. It's the same in Spain, same in Portugal. In France, let's understand that there are bigger corporates. But in Europe, you don't have big corporates, or we have only a few of them, and especially global players. So we need to build that. And how you build that? Well, there's another magic number of dragging the 800 billion of Euro's investments per year.

Per annum. Per annum. Per annum, yeah. So there's quite a big discussion on how we will get to that amount of money. So my take is, he says, okay, we got to solve this. We got to build these champions up, particularly in the technology sector. And to do that, we need industrial, using Graf's term, industrial policy, which

uh which comes the cost to the tune of 800 billion euro per year which is that's that's consequential that's the just for context the u.s defense budget's about a trillion a year so it's like saying i need to have a something along that scale so does that what do you think cosimo is that even remotely possible i mean is that how do you think about that

I think it's, well, the only way out is, well, there is another report, the report of Enrico Letta about the completion of European unions, the banking union, capital markets, etc. And I think the two reports are consequential. Even Draghi said the first one in the reforms, we need to complete the unions, then we can move into redesigning how we finance unions.

Either these investments or the European public goods, how we define them, etc. So this implies, I think, is inevitable European public debt in the form of Euro bonds or European Commission budget bonds, you name it.

There's an excellent paper on this topic by Bruegel that was signed, by the way, also by Klaus Regling, the former managing director of DSM, and Marco Butti. I really invite you to read it because he's really trying to address the point, how do we finance this need? Do we finance through a mix of EIB, ESM, commission money? We tap into the European savings system.

Interesting enough, the current commission, Von der Leyen, she designed a commissioner for European Savings and Capital Market Union. They used the word savings for the first time to design the commission. They would have to deal with how to tap and use European savings. It's quite a lot. If you see the number of savings in Europe, they keep going up. So we have quite a lot of money there.

And at the same time, it's to finalize the capital markets union to create a proper

to trade those European assets in a proper way. So what you're saying is, look, we got $800 billion nut we need to finance. Let's finance that with European-wide debt bonds that puts everyone on the hook collectively, as opposed to each country adding up, issuing their own debt, adding up. Yeah. Because then that's not going to happen. Well, the fiscal... Well, things have changed. It all depends on the German elections, politics,

obviously and the french elections as well at the same time we can see that the wind is kind of changing also recently uh the the bundesbank governor maybe one of the first first few times which is open up to the idea that maybe this could be possible to talk about mutual bond and also to try to find a solution because i don't think there are any other ways out

uh yeah and i think that kind of satisfies something draghi's always wanted to do and that has had a european-wide capital market right uh a deeper market that's one of the strengths of the us it's got a very

large, deep capital market that provides multiple sources of financing for these kinds of endeavors. And I think that's what he's angling for. So he's basically solving two problems at the same time. I need tech, I need big tech companies, and I need a deeper, more liquid, fungible kind of capital market.

Yeah, and we had it in London once upon a time. Yeah, right. What do you think, Rob? What's your view on this? Is this feasible? I mean, even directionally, is it feasible? Directionally, to some extent, it's feasible. But let me just say the one thing that's not been said in this discussion. This has been a really rich discussion. Okay. And I like the way you said, Mark, that, yeah, that's the one thing you have in the U.S. It's a very deep capital market. And I think this is one thing that needs to be said in very simple terms. Europe ain't a country.

Yeah, right. This is the sticking point. This is really the sticking point in all of this. And that makes me also, I want to say something else after that, which is that in my mind, I am differentiating between what I call the old European and the new upcoming European. The old European believes in the European project.

this memory that goes back to the end of the Second World War in the European coal area, and then the European trade areas, the European Union, all of that, and this need to have this European project. The new upcoming European is much more sceptical. And you can see that in the way in which European politics is working out. And then there is this balance between the old European and the new year upcoming European as to which way Europe veers.

The more skepticism you have, the more challenges there will be to implementing these kinds of endeavors, because at the end of the day, these are all political projects. Hey, we're running out of time, Kazim. I want to thank you for joining. But before I let you go, one thing that's really top of mind at the moment is this run-up in long-term interest rates. In the U.S., the U.S. 10-year Treasury bond, the benchmark bond, is up

Even with the rally in the last couple of days, it's up 100 basis points, a full percentage point from where it was about four months ago. And I haven't looked across the world, but it feels like yields are rising everywhere. And I know they are in the UK, and I haven't looked at Italy. Same kind of dynamic playing out there in Europe? Are you seeing higher long-term yields?

Yeah, I think it's a similar dynamic. I think it's down to uncertainty, relative strength of the relative perception about European economy, or maybe Italy. I think there are two things happening. We are seeing an increase in yields because also there are certainties around mostly some of the bigger economies. At the same time, we are seeing...

a shrinking of the spread across European European European bonds so interesting enough you know I always don't joke it looks like the risk free is disappearing from the market or everything is becoming risk free because everything is kind of lining up if you look at the

For example, the differences between French and Greek or French or Portugal, France or Portugal, also Italy and France is really reducing over time. Body health is increasing because I think there's a sense of heightened health.

uncertainty also in respect to the next moves of the central bank. So you're saying it's not because Greece is getting any more creditworthy, it's just that France is getting less creditworthy? Well, you can read them both ways. Yeah, right. I like to think that Greece put the books in order. At the same time, there's also France and Germany that discounted a higher rate.

When Italy is not, but Italy is still linked to other factors. We have a high indebtedness, although well managed, we have lower rating than others and much less fiscal space. Preston Pysh: Did you know this, and we're going to end it this way, I guess, that CDS, these are credit default swap, you can buy insurance against a bond default if you look at the CDS on sovereign debt.

The CDS spread, so the wider the spread, the greater perceived risk of investors not getting paid on time by the sovereign is now higher on 10-year treasury bonds than on most European bonds, except for the French. The French long-term bonds have a higher CDS. Does that surprise you guys? I just saw that. Gaurav, would that surprise you if I told you that that would be the case?

You don't look surprised. I don't look. Yeah. I never look surprised. It's just his face. I'm just saying. In fact, that was going to be my, my stat. And we'll tell you, it was a lot better than 2.4%. I'm telling it. Yeah. Well, we're going to call this a podcast. I think a Kaiser Mo thanks so much for participating. Really appreciate it. Thanks for your hospitality and your, your great support.

Really appreciate that. Uh, Gaurav, uh, thank you, Chris. I, I kind of completely locked you out of this conversation. So I apologize for that, but I'll make up for it next time. Yeah, you definitely will. And, uh,

Marissa's hanging there. Matt, a couple, three months ago, all we could do is talk about the inflation statistics. I think it might be a good thing that we're talking less about them. Wouldn't that be, I'd consider that to be a good thing. I would agree. Yeah, absolutely. We're looking at third, fourth decimal points before. It's definitely toned down. Yeah, right, down to two. Now we're down to the second decimal point. Yeah, it's nice. All right. With that, dear listener, we are going to call this a podcast. Talk to you next week.