No, we aren’t referring to President Trump’s inauguration. But we do chat about the implications of President Trump’s economic policies for Europe with Cosimo Pacciani, Head of Research for Poste Italiane and Moody’s Analytics own Gaurav Ganguly, chief EMEA economist. Inflation and interest rates were also top of mind. If, after listening to the podcast, you know what we are referring to, let us know. The first person who gets back to us with the correct answer will win a cowbell.
No, we aren’t referring to President Trump’s inauguration. But we do chat about the implications of President Trump’s economic policies for Europe with Cosimo Pacciani, Head of Research for Poste Italiane and Moody’s Analytics own Gaurav Ganguly, chief EMEA economist. Inflation and interest rates were also top of mind. If, after listening to the podcast, you know what we are referring to, let us know. The first person who gets back to us with the correct answer will win a cowbell.
Guests: Cosimo Pacciani - Head of Research for Poste Italiane, Matt Colyar - Assistant Director economics of Moody's Analytics, Guarav Ganguly - Chief EMEA economist, Moody's
Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s Analytics
Follow Mark Zandi on 'X' and BlueSky @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn
Mark Zandi: 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 trustee co-hosts, Marisa DiNatale, and Cris deRitis. Hi, guys.
Cris deRitis: Hey, Mark.
Marisa DiNatale: Morning, Mark.
Mark Zandi: And how are things in Southern California? Marisa, doing a little bit better there this week compared to last?
Marisa DiNatale: Yeah, definitely. It seems to be under control for now.
Mark Zandi: That's good news.
Marisa DiNatale: Thank you for asking.
Mark Zandi: I knew you had guests last week. Are they-?
Marisa DiNatale: They went home. Yeah, their house ended up being okay, so they left on Sunday.
Mark Zandi: Oh good.
Marisa DiNatale: Yeah, they're back, back in their home.
Mark Zandi: Good, good. Good to hear that. And we got Gaurav, Gaurav Guanguly. Hey, Gaurav, how are you?
Gaurav Guanguly: I'm good. Thank you, Mark. It's gray and chilly in London where I'm based.
Mark Zandi: Is it always gray and chilly in-?
Gaurav Guanguly: Well, maybe not for a couple of weeks in July, but otherwise mostly, yes.
Mark Zandi: And of course, Gaurav, is 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 Insider? It's been a while since you've been on Insider.
Gaurav Guanguly: It's been a while. Nothing interesting has been happening in Europe clearly.
Mark Zandi: They've been keeping you really busy there.
Gaurav Guanguly: Yeah.
Mark Zandi: Yeah. Well, thank you for joining. And Matt Colyar Colyar. Matt Colyar, how are you?
Matt Colyar: I'm doing well. Nice to see everybody.
Mark Zandi: Matt Colyar's Mr. CPI, PCE, PPI, anything inflation-related. And we got the CPI this week, so we want to hear from Matt Colyar. Good news, Matt Colyar, right?
Matt Colyar: I'd say so, yeah.
Mark Zandi: 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, Cosimo.
Cosimo Pacciani: Thank you, Matt Colyar, for inviting me.
Mark Zandi: Cosimo 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.
Cosimo Pacciani: Good enough. Thank you. I thank you for having me today.
Mark Zandi: Yeah, so good to have you. And you're the head of research for Poste Italiano and I want you to explain all this. 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 I have to 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.
Cosimo Pacciani: Yeah, no, I can confirm that is still the case. We still have a Celsius and over in Rome, so usually winter in Rome will only one week and it is really gone. If you want, I can tell a bit more about Poste Italiane briefly before-
Mark Zandi: Yeah, we'd love to learn that, a bit about your career, how you got to be Chief Economist Head of Research at Poste Italiane.
Cosimo Pacciani: 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 Monte dei Paschi in London, then I moved to Credit Suisse First Boston Investment Banking Division 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, the 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. And 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, is a company providing any kind of postal, banking, assurance, life insurance services to 25 million clients in Italy. We have 13,000 offices. I think it's the biggest employer in Italy.
Mark Zandi: How many did you say? How many offices?
Cosimo Pacciani: 130,000.
Mark Zandi: Oh my gosh.
Cosimo Pacciani: And we have 13,000 offices in our country. Well, Poste France says 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 modern financial logistic conglomerate. I think it is 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-
Mark Zandi: Italian bonds, sovereign bonds, the BTP?
Cosimo Pacciani: Italian sovereign bonds. Yes.
Mark Zandi: Yep, right.
Cosimo Pacciani: Our bread and butter, although we have other investments. And so this was the main attractiveness, to build this research function and we are doing well. So very happy about it.
Mark Zandi: So no destruction there in... I said Italiano, it's Italiane.
Cosimo Pacciani: Poste Italiane.
Mark Zandi: Post Italiane. Say it fast. Go ahead.
Cris deRitis: Post Italiane.
Mark Zandi: He knows what he's talking about. He knows what he's talking about. Cosimo, I should tell you, Cris is a bocce ball champion, global champion. At least in his own mind. I haven't seen the actual medals or anything, but he talks about it all the time.
Cris deRitis: All the time.
Marisa DiNatale: Somebody talks about it all the time.
Mark Zandi: Yeah, I have fun teasing him. Well, it's great to have you on, Cosimo, and good to have Gaurav here as well because 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 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 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-
Gaurav Guanguly: Can I just break in? Can I just break in-?
Mark Zandi: Yeah, sure, Gaurav.
Gaurav Guanguly: Because I'd like to just state for the record, I'm not a champion at any ball games.
Mark Zandi: Who's not? Me?
Gaurav Guanguly: I'm not.
Mark Zandi: You're not?
Gaurav Guanguly: I'm not a champion at any ball games. I'm just putting it out there.
Mark Zandi: Well, wait a second.
Marisa DiNatale: No cricket?
Mark Zandi: In Danny's imagination, I'm sure you're going to be a champion of something before this podcast-
Gaurav Guanguly: Before this podcast is out. That's why I thought I'd get in there early and say-
Mark Zandi: Everyone deserves a medal, a big medal or some accolade. But I'm sure we're going to find what you're good at winning at at some point here. But before we go to our discussion around Europe, let me bring in Matt Colyar, Matt Colyar Colyar. Matt Colyar, let's talk about inflation a little bit. Good news, as I mentioned on the CPI. You want to give us a bit of a context around that?
Matt Colyar: 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 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 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 we will 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 trends for most of 2024, back in 2023. Average price of gas is still just over $3 per gallon. That's cheap.
Mark Zandi: Let's get to the good news, Matt Colyar. Where's the good news? Give me the good news because the markets rally, the stock market is up, the bond yields are high, but back in on the CPI, so where's the good news?
Matt Colyar: No more building suspense. Core CPI rose 0.23%. That's lower than expected. Core CPI excludes food and energy as we just alluded to. That's lower than expected. Everyone's at 0.3%. When I say everybody, us, other professional forecasters expected 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, but encouraging news there. Underlying components, everything was pretty tame. Shelter is what we focused the most on. And there we've 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 months as base effects and 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-
Mark Zandi: 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 generally a good forecast for future inflation is 3.3, I believe, or 3.2?
Matt Colyar: 3.2 now.
Mark Zandi: 3.2.
Matt Colyar: Been stuck at 3.3 for a few months now.
Mark Zandi: 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 player, 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 Colyar, here anytime in the near future?
Matt Colyar: I think we see that in... April, May, June, I think that's the area where-
Mark Zandi: Okay, let's mark that down, April, May, June. And is that's before the tariff increases and any other economic policy effects on inflation? That's what you're saying?
Matt Colyar: Absolutely, yeah.
Mark Zandi: Okay. 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 a 2% target. What does that mean?
Matt Colyar: So they are measured 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%.
Mark Zandi: So still above the Fed's 2% target?
Matt Colyar: Still above the Fed's 2% target. But again, I think that's-
Mark Zandi: Headed in the right direction.
Matt Colyar: Yeah.
Mark Zandi: One 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've been rounded up and I suspect markets wouldn't have reacted. So a few hundred basis... 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?
Matt Colyar: Yeah, I do think people are focused on shelter as they should be.
Mark Zandi: Shelter.
Matt Colyar: 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've fallen, maybe not by the 15 basis points that the 10-year Treasury did drop following this data release on Wednesday. But yeah, that is the kind of-
Mark Zandi: Pretty amazing.
Matt Colyar: Razor's edge. Yeah.
Mark Zandi: Hey, Marisa, you heard his forecast. Back to Fed's target, April, May, June. Like a good economist, he didn't give us one month, he gave us three months, but-
Matt Colyar: I go may.
Marisa DiNatale: I've been saying spring.
Mark Zandi: Spring. That's even better.
Matt Colyar: It's better, yes.
Mark Zandi: Anything to add on that inflation report or on the inflation more broadly?
Marisa DiNatale: No, I mean I think it was overall a good report. 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 whip sauce 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.
Mark Zandi: Cris, any pushback there? April, May, June or are you-?
Cris deRitis: 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.
Mark Zandi: Independent of economic policy you're saying?
Cris deRitis: Yeah. Well, even within the report there are concerns about insurance costs or some of the other components that could... Even as shelter's coming in, you have some other factors that could speed up. So I'm not expecting things to run away, but it may take longer, it may be a little stickier still to get back all the way to the-
Mark Zandi: Yeah, I'm just going to make one quick intrepid forecast here.
Cris deRitis: Yeah.
Mark Zandi: I'm beginning to think we're never going to get there.
Cris deRitis: Really?
Mark Zandi: Yeah, because the economic policy is going to kick in here and forestall getting back fully to target and it won't be until down the road here, a year or two or three, before we get back to target. I suspect we're not going to get there. Hey, Cosimo, let me turn this back to you. Here in the US, inflation has 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, same kind of dynamics?
Cosimo Pacciani: Yeah, I would say there's a similar dynamic in terms of number because the targets that the European Central Bank is flagging is still pretty much... And they already told us in one of the last meetings that we will be above target for pretty much all the rest... The famous 2%, it is kind of meeting 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 these 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 a supply shock in terms of energy. We are seeing this filtering through now and I think 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 is not substantive to lead the ECB to say that they will not go through a potential another round of cuts in the first quarter of this year. But if you see the consensus, that maybe may be delayed a bit to see what happens. I think in UK the last numbers are pretty much going in the opposite direction. So we expect Europe potentially to see some numbers rising. We do some kind of now casting on inflation numbers in Europe. And to be frank, we see the risk of a higher than expected inflation in the coming months. Looking at mostly the Eurozone, not completely Europe, but we see this number. And these net are an implication from what's going to happen in US from Monday and I think is the 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 on a direction to impose-
Mark Zandi: You're talking about the tariff, potential tariffs.
Cosimo Pacciani: Yeah, yeah.
Mark Zandi: Well, we'll come back to that-
Cosimo Pacciani: These are NATO tariffs.
Mark Zandi: Yeah, we'll come back to that. But I did want to ask this. Here in the US, it looks like the previously high inflation that we were suffering back a couple three years ago really played a very large role in the election, that people, American voters really haven't been able to psychologically get beyond the big increases in prices particularly for groceries, food, and rent and to a lesser degree, energy prices. And no Matt Colyar what's going on in the economy, unemployment money 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 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 for lots of reasons, but I think that was a big part of it. Same dynamic there in Europe... Has inflation had the same kind of impact on the collective psyche and on the political process?
Cosimo Pacciani: There is an element, especially... 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 Georgia Meloni when she was elected, she has a program who was also trying-
Mark Zandi: She's now the prime minister of Italy.
Cosimo Pacciani: 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's some difficulty to... Especially for central banks of government to transmit some kind of good narratives of full employment and the economy not being... Apart from Germany, not being in recession and still kind of running hot to the general public. And inflation remains an argument which especially the populist party, they're using to show that to some extent, something has to be fixed. But I think in Europe, there is much more understanding that the last wave of inflation was mostly supply driven by energy prices.
Mark Zandi: Okay.
Cosimo Pacciani: So this means more understanding that this triggered a substantial increase in prices. This kind of consoles the people. And now that the kind of shock started to vane, to disappear, also inflation came down. So this is also kind of narrative that central banks, the government can have. I think now we're going to have general elections in a month, so it's going to be a first test to see. But the debate in Germany is not... I don't think it's about inflation, it's more about infrastructure, investments, and industrial development and immigration mostly.
Mark Zandi: I see. Interesting. Gaurav, what's your perspective on this? Did you think inflation played a big role in the...? Because UK had a big election, a big shift in direction there. Important there as well?
Gaurav Guanguly: Yeah, I think as Cosimo said, it's a factor.
Mark Zandi: A factor.
Gaurav Guanguly: 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 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 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, is 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, Scholz of the SPD, Scholz who was the chancellor of Germany and head of the SPD party, which is a center and 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 is played up by the far right parties and also the very far left parties.
Mark Zandi: I think that sounds very familiar to the US experience. You say the cost of living, I said inflation, the same thing.
Gaurav Guanguly: Yeah, that's the same sort of thing.
Mark Zandi: Yeah. Immigration obviously top of mind here in the US as well. Industrial policy a little bit less so, but the US 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.
Gaurav Guanguly: 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.
Mark Zandi: Yeah. Where the growth is stronger.
Cosimo Pacciani: I think maybe if I may add two little elements to what is added to the mix. One is the changes on welfare policy. As you know, European countries have very strong welfare and now we are witnessing in France, Italy, Germany, and other countries reduction of the support by the government in terms of health, education, and wealth support, et cetera. We are also coming 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. The other one is a general reform on pensions across Europe because Italy is trying to reduce one. And France, as you know, one of 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 is a very interesting research paper in which they analyzed that the extreme populist parties in France, they had much better results in area where postal offices were closed.
Mark Zandi: Oh, interesting.
Cosimo Pacciani: March was the last element of presence of the state in some little rural communities. And this is where Marine Le Pen had better votes or more votes than in other areas. Just a little example on how also this... European calls to the welfare state, the state is there to help me is changing for the series of reasons. Cost-cutting, et cetera, is having an impact also on the political landscape.
Mark Zandi: 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 to vote?
Cosimo Pacciani: Yes. The votes swung to the right.
Mark Zandi: That's fascinating. Makes sense. It makes sense. Yeah, it makes sense.
Gaurav Guanguly: I suppose if you round that that list off, I think Cosimo is right, absolutely right about 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.
Mark Zandi: So let's turn to the new American president, President Trump who's going to be inaugurated here in a few days. Cosimo, and this may be hard to do because I'm sure there's many different opinions, point of views, because I think Prime Minister Meloni of Italy is much more in sync with 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 US?
Cosimo Pacciani: I would say there is a lot of concern on one part of, ow do I say, of the population. Mostly I'll say the business side, everybody's waiting to see what kind of executive orders he 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 as a power game, in Europe, in Italy, we believe there's still a bit of chance to manage the process, meaning China will be hit harder. In Europe, we can try and find ways to either buy more American as... Well, like I 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 she 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 few days after, this journalist, she was freed.
So there's a sense that she's very close to the President Trump. At the same time, Meloni, she's very close to some of the governments in Europe, they're bit more eurosceptic, meaning Hungary at the moment, Bulgaria. So it looks like 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 eurosceptic countries and also shares a good relationship with the 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, this idea that maybe Europe because of the nature of what we are doing could pretty much escape with just a renegotiation 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 boding well for the kind of policy we are going to see.
Mark Zandi: Right.
Cosimo Pacciani: I still hope for-
Mark Zandi: I guess that's one thing we can say with certainty is that there's going to be a lot of uncertainty here.
Cosimo Pacciani: Yeah.
Mark Zandi: That's for sure. Yeah. Gaurav, does that sound about right to you? How nervous or not are Europeans about US trade policy, tariff policy? I mean 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 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?
Gaurav Guanguly: I think it's as you said. The one thing that's certain is that the world is going to be pretty uncertain.
Mark Zandi: Yeah.
Gaurav Guanguly: 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 pressure is... 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. And 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 it 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 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, et cetera. Pharmaceuticals has been doing really well with weight loss drugs and so on. So there is scope here for the Trump administration to squeeze Europe. Now, if again-
Mark Zandi: So you're saying Europe can send more Ozempic over here to the US?
Gaurav Guanguly: Exactly.
Mark Zandi: That may solve the problem. That's what you're saying,
Gaurav Guanguly: Yeah, maybe that could solve the problem. I don't know.
Mark Zandi: It may very well. It may very well.
Gaurav Guanguly: That could solve some other problems, yeah.
Mark Zandi: Yeah.
Gaurav Guanguly: I mean it depends on how this all plays out. If it is a opportunistic, transactional sort of interchange where Europe buys more from America and gets away without having to-
Mark Zandi: Actually I got that wrong. I got that backwards.
Gaurav Guanguly: You got that backwards.
Mark Zandi: I got that backwards. You didn't want to tell me.
Gaurav Guanguly: That's what I said.
Mark Zandi: 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.
Gaurav Guanguly: Yeah, that's why I said it'll solve some other problems.
Mark Zandi: You're doomed. You're doomed.
Gaurav Guanguly: Ozempic could solve the trade problem. 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. Europe has slipped behind China in terms of being the world's leading... As a 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, if I know, 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. It is 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 industrial 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. It's a natural point to squeeze Europe.
Mark Zandi: There's a deep irony in the idea that US would ship more natural gas to Europe and that is natural gas prices here in the US which are low are going to go up.
Gaurav Guanguly: Are going to go up, yes.
Mark Zandi: Go up. And I don't think that's what he has in mind, but that's exactly what's going to happen.
Gaurav Guanguly: Yeah.
Mark Zandi: But Cosimo, the other thing I channeled through or I've heard some hand wringing about from various European circles is even if the US 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. If they can't sell into the US without a tariff, they might turn and divert that trade and Europe is an obvious place to look. And over the years, China's 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 Matt Colyar, the tariffs on China and the rest of the world that Matt Colyar. Does that resonate with you, that concern?
Cosimo Pacciani: Yeah, I think there are two things that may happen in Europe. One is what people define as the expression "vibe shift." A lot of member states in Europe, they may decide that maybe Trump is the 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 a holy alliance between Europe and US. And depending on how Trump would behave, this could be some idea that could have... Let's call it precisely a vibe shift. And 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, the spare parts, machine parts, textiles, fashion. It is not only a market for us, but it's also a scenario where goods are produced with substantial relocation, especially in the '90s.
With this kind of a relocation back to Europe, still there is kind of close ties. So that could be something that may happen. Europe decides to look towards East, skipping Russia, towards East rather than keeping looking at 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, all the other European countries were against that. But interestingly enough, it looks like there could be something that some European countries may want to revisit, especially in terms of export-import, but also in terms of trade, but also in terms of Chinese companies relocating to Europe's on the production that we so badly need because Europe, we have this technological gap against China and US that needs to be fixed. The Draghi Report is all about that, how to win back some kind of a position in some leading industries.
Mark Zandi: 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 probably is the most stable in Europe at the moment, isn't it?
Cosimo Pacciani: Yes.
Mark Zandi: Just take a look around.
Cosimo Pacciani: I mean-
Mark Zandi: I don't know what that means exactly, but I think that's true.
Cosimo Pacciani: Well, it helps our financial markets, it helps the BTP and the spread because... It helps. A bit of stability, it helps. We are not used to that, let's put it this way, but it seems to work. And the popularity of Meloni is still very high in Italy I think. And her personally, still very popular. Another feature is usually in Italy, after two years here, your popularity will vane where she's still going strong.
Mark Zandi: Hanging 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, so I can't wait to see that. And then I do want to talk about... You've brought up the Draghi Report a couple times. Draghi, Mario Draghi, former head of the ECB was asked by the European Commission to take a look at why European growth has been so weak and its 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 and his policies that I want to just explore with you is Ukraine-Russia.
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 Russia and some concern about that... At least when I was there I heard that 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. What do you think about that concern? Is that something that's top of mind or is that just in my own mind?
Cosimo Pacciani: Well, I think it is because I always use the expression that Europe is surrounded at the moment by a ring of fire. Because you had war in Ukraine, you had the crisis, still a crisis in Syria, and then you have Israel and Palestine, then you have the northern Africa 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 is given away stuff. So I don't think there is any way in which he would give away any of the territories occupied. At the same time, I think Ukraine is trying to use that to try, let's say, to start being a European Union protectorate and then to become member of NATO and European Union, etc.
So it is all down really to what Putin is able to accept for himself more than what, because Ukraine, obviously they are an occupied territory. Also the last news from Russia that also, for example, agricultural production is having problems. So the economy is having problems. So let's say at the moment it's really down to the ego of Putin and the how maybe Trump is able to convince him to give a deal that's not looking internally punishing for him, but at the same time he can leave with harm, let's put this way, this war.
Mark Zandi: Got it.
Cosimo Pacciani: Europe is completely still back in Ukraine, especially because of the Baltics, because of Bulgaria, because all the... Poland especially because we know that if Ukraine goes, then the next one may be Poland or the Baltics.
Mark Zandi: 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?
Cosimo Pacciani: Yeah, but we don't still don't have enough capacity, let's put it this way.
Mark Zandi: Right. Okay. All right, let's play the game, the stats game. We each put forward a stat. 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. DiNatale? Is it doctor? I can't remember.
Marisa DiNatale: I don't have a PhD, but you can call me-
Mark Zandi: Oh, sorry, sorry, sorry.
Marisa DiNatale: No, no. You can call me-
Mark Zandi: We'll start with you. Marisa, you're up.
Marisa DiNatale: Okay. My statistic is 18.7 billion Euros in November.
Gaurav Guanguly: Is this is a trade number?
Marisa DiNatale: It is a trade number.
Gaurav Guanguly: It is a trade number. Seasonally adjusted Eurozone trade surplus in November?
Marisa DiNatale: This is a not seasonally adjusted.
Gaurav Guanguly: This is not seasonally adjusted.
Marisa DiNatale: Yeah.
Gaurav Guanguly: I'll claim that.
Mark Zandi: So it's the US monthly trade deficit with Europe? No?
Gaurav Guanguly: Marisa, go ahead.
Marisa DiNatale: That's right. Other way around. So this is the trade surplus with... The Euro area's trade surplus with the US. Yeah.
Mark Zandi: I'm looking at it through the US prism, he's looking at it through the European prism.
Marisa DiNatale: Well, I said it was in Euros, so yes, I'm looking at it from the European side.
Mark Zandi: Very good, very good.
Marisa DiNatale: Yeah. So this is the trade balance, 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 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 by the US, a lot more importing right now ahead of predicted tariffs 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 will be keeping a very close eye on how this unfolds over the next few months here.
Gaurav Guanguly: The US is the Eurozone's largest export partner.
Marisa DiNatale: That's right. That's right. Yes. 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.
Gaurav Guanguly: And interestingly, that November trade balance, the deficit with China, the Eurozone deficit with China narrowed a bit.
Mark Zandi: A trend or just a, "Who knows?"
Gaurav Guanguly: Who knows?
Mark Zandi: Exactly. Just a factoid. He's showing off now. He's showing off. That's what he's doing.
Gaurav Guanguly: I'm just looking at the numbers.
Mark Zandi: Erroneous, extraneous fact. We're kind of like, "Ooh, how did he know that?"
Marisa DiNatale: Because he's looking at the same table I am, I think.
Gaurav Guanguly: Exactly.
Mark Zandi: 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.
Gaurav Guanguly: No, we just read the same trade table.
Cris deRitis: It's MF... I think, isn't it there?
Mark Zandi: So Marisa, do you have an Italian thing you buy that adds to the US trade deficit with Europe and Italy?
Marisa DiNatale: Oh yeah. I'm sure a lot of food that I buy comes from Italy. Yeah. And wine.
Mark Zandi: Wine. That's my favorite. Yeah. Cosimo, you want to go next?
Cosimo Pacciani: Yeah, very happy to.
Mark Zandi: Did you get the hang of it?
Cosimo Pacciani: It is a table. It is a graph. I hope you can see it.
Mark Zandi: We'll describe it. Also we're on YouTube.
Cosimo Pacciani: It is a blind table that shows a pattern.
Mark Zandi: We can't see it though. We can't see it.
Cosimo Pacciani: Can you see it? Oh, just a second. Sorry.
Marisa DiNatale: Oh, I like this multimedia stats game.
Cosimo Pacciani: Okay, so this is a relation between, I don't want to spoil it, but it is the relation between two market variables.
Cris deRitis: Are these yields on ten year treasury bonds?
Cosimo Pacciani: No.
Cris deRitis: No.
Mark Zandi: Yields on Italian bonds?
Cosimo Pacciani: No.
Mark Zandi: No.
Cosimo Pacciani: No.
Marisa DiNatale: Are they interest rates?
Cosimo Pacciani: No, but we are getting closer. It is a rate.
Cris deRitis: It is a rate. Okay.
Mark Zandi: It's a financial market.
Cosimo Pacciani: No.
Mark Zandi: Oh, it's an unemployment rate.
Marisa DiNatale: Not an interest rate?
Cosimo Pacciani: It's not interest, but still a financial market's rate. They need to-
Mark Zandi: Oh, it is a financial market. Okay. Is it a price earnings multiple?
Cosimo Pacciani: No.
Mark Zandi: It's not an interest rate. It's not-
Cosimo Pacciani: It is the same rate taken to different period of time because we had these... We found out this interesting correlation. So one... If you want, I can help you. One-
Mark Zandi: Inflation rate. It's an inflation rate.
Cosimo Pacciani: No.
Mark Zandi: No. Inflation expectations? Inflation expectations?
Cosimo Pacciani: It's very easy. It's very easy but it's very interesting. The period, 2016 and 2024.
Marisa DiNatale: Is it the value of a currency?
Cosimo Pacciani: Precisely, yes. It's Euro-dollar trade. And what we did, we had this kind of... If want I can reveal it, we had this curiosity-
Mark Zandi: Oh cool.
Cosimo Pacciani: 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. We found it very interesting because we are playing with the idea with my team that financial markets, especially FX markets, they have some kind of collective memory. It's like the brain where 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 Euro-dollar behave precisely along the same lines.
Mark Zandi: This is so cool. So just to describe it for folks, and we will put... This is on YouTube and we will post it, if you don't mind, Cosimo, to our notes to the podcast. You're showing the Euro-dollar exchange rate over two periods of time, 2016, that's the blue line, and then 2024. And 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... You called it a collective memory or have 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-?
Cosimo Pacciani: It's possible. Yeah. I think an element is that anticipation of tariffs in addition of pretty much a relative weakness of the European economy compared to the US. But what we found interesting was really the parallel behavior because when we started doing these analyses, just to see, "Okay, let's see what happened last time," and we started plotting the numbers, the actual numbers of 2024, the correlation remained stable, didn't go in different directions or completely different direction. Remain completely parallel that we found fascinating.
Mark Zandi: Yeah, I guess, I mean tariffs would imply a stronger dollar, weaker Euro. So tariffs in general will result in a stronger currency for the country that's imposing the tariff, and that's exactly what you're seeing here, that kind of dynamic play out. Very interesting. Fascinating. And have you seen this kind of collective memory working in other markets as well?
Cosimo Pacciani: No, this is what we started. We looked at the period the year before elections. We did a similar analysis but we could not find anything as fascinating as this. We found some-
Mark Zandi: Fascinating. Yeah. Yeah. Very interesting. Well, that's a good one. This is the first stats game we played with a graph. Maybe we should-
Marisa DiNatale: That's fun.
Mark Zandi: That's fun. I would pick that up. Yeah. Let's do one more before we move on. Gaurav, I think we should go to you. What's your stat?
Gaurav Guanguly: How about an easy one? 2.4.
Mark Zandi: Is that German bond yield?
Gaurav Guanguly: No.
Marisa DiNatale: Is it the Euro German rate?
Gaurav Guanguly: You're right. It's a rate.
Marisa DiNatale: Is it inflation?
Gaurav Guanguly: Yep.
Mark Zandi: European Eurozone inflation.
Gaurav Guanguly: Eurozone December inflation, yes.
Mark Zandi: December inflation. That's not a good stat. I'm just saying.
Marisa DiNatale: Gaurav, I hear this all the time. Don't worry.
Cris deRitis: It's a fine stat.
Mark Zandi: It's so boring. It's so boring.
Gaurav Guanguly: He tells us that it's not a good stat, but there's no backing reasoning behind this.
Mark Zandi: It's my judgment, my judgment as moderator.
Cris deRitis: If he guessed it right away, it would've been an excellent stat.
Mark Zandi: Yes, exactly. If you hadn't embarrassed me.
Gaurav Guanguly: That's the criterion.
Mark Zandi: Right. Anyway, so you want to explain?
Gaurav Guanguly: Do I want to explain? Well, I think some of it Cosimo has already talked about in that... Well, headline inflation fell in the Eurozone below 2% in end of the third quarter of last year, and now it's bumped up again a bit. Now big reason for that is what's been happening at energy prices. Also, to some extent, the high shipping costs earlier in the year has been bleeding 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. 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. It's been a big force in service sector inflation. There are some one-off negative signs, things like insurance, premier and airline fares. 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.
Mark Zandi: 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.
Gaurav Guanguly: Yeah, I pulled it all together in the end.
Mark Zandi: Yeah, you pulled it all together for us. So 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. Cosimo, 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? We can also turn to the solutions as well.
Cosimo Pacciani: Yeah, I would say the Draghi Report highlights what we discussed before, the substantial investment technological gap that we are seeing more and more in Europe. Somebody mentioned automotive before that. So the lack of R&D or development of new technologies. And also the difficulty to adjust the competitive capacity of Europe in a world in which we've seen different kind of acceleration, of China, we also have India, with the US, with IRA. 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. Another Matt Colyar is about how to bring back European economy to function and 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 is to say how we can rebuild is European competitiveness.
Mark Zandi: So my take was, just to make sure... This is to repeat what you said, but just to say it again for the listener is that he was asked by the European Commission, "What's going on here? We can't seem to kick into gear. We're not growing." The big German economy is the poster child, but all of Europe is struggling to some degree. Italy a little less so compared to historical performance, but nonetheless, and he found lots of things going on, but most fundamentally, Europe doesn't have a technology sector of consequence and all of the basic research and development is still being done by the automakers who've got their own set of issues. 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. Did I get that roughly right?
Cosimo Pacciani: Yeah, yeah, it's right. And Draghi is used in the word "champions." We need to have champions in each industry and we need to abandon the idea that the automotive is all we need to grow. He is talking about defense industry as well. One of the potential terms of negotiation with Trump will be if you buy more defense goods from the US, and it is about 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, Draghi prepared with other people report about zombie companies. So the idea that in Europe we have a quite substantial small and medium enterprises, that they're suffering from lack of competitiveness, the 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 the business to the kids, to the son, daughter, et cetera. And to give an example, in Italy we expect at least 1 million small and medium enterprises will have to pass hands in the next five years.
Mark Zandi: Wow. Really? Wow.
Cosimo Pacciani: Quite. This includes taxi drivers. Never said that because it's considered a small and medium enterprise, but still it's part of the connective elements of European economy. It is the same in Spain, same in Portugal. In France to a lesser extent. There are bigger corporates. But Europe, we don't have big corporates or we have only 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 Draghi, the 800 billion of Euros investments per year.
Mark Zandi: Per annum? Per annum?
Cosimo Pacciani: Per annum, yeah. So there's quite a big discussion on how we will get to that amount of money.
Mark Zandi: So my take is he says, "Okay, we've got to build these champions up, particularly in the technology sector. And to do that we need industrial..." Using Gaurav's term, industrial policy, which costs to the tune of 800 billion Euro per year, which is... That's consequential. Just for context, the US defense budget's about a trillion a year. So it's like saying, "I need to have something along that scale." So what do you think, Cosimo? Is that even remotely possible? I mean, how do you think about that?
Cosimo Pacciani: Well, the only way out is... Well, there is another report, report of Enrico Letta about the completion of European Union, so the banking union, capital markets, et cetera. And I think the two reports are consequential. Even Draghi said, "The first one in the reforms, we need to compete in unions. Then we can move into redesigning how we finance either these investments or European public goods, how we redefine them, et cetera." So this implies, I think, an 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 the ESM and Marco Butti. I really invite you to read it because it's really trying to address the point, "How do we finance this need? Do we finance through a mix of EBI, ESM, commission money? We tap into the European savings?" Interest enough, the current commission, von der Leyen, she designed a commissioner for European savings and capital market union where they use the word savings for the first time to decide the commission will have to deal with how to tap and use European savings quite a lot. If you see the numbers savings in Europe, they keep going. So we've quite a lot of money there. And at the same time it is to finalize the capital markets union to create a proper capacity to trade those European assets in a proper way.
Mark Zandi: So what you're saying is, "Look, we got a 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 issuing their own, debt ending up..." Because I know it's not going to happen-
Cosimo Pacciani: Well, things have changed. It all depends on the German elections obviously, and the French elections as well. At the same time, we can see that the wind is kind of changing. Also, recently, the Bundesbank governor, maybe one of the first few times opened up to the idea that maybe this could be possible to talk about a European mutual bond and also to try to find a solution because I don't think there are any other ways out to warrant that amount of money.
Mark Zandi: And I think that kind of satisfies something Draghi's always wanted to do, and that was have a European wide capital market, a deeper market. And 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 big tech companies and I need a deeper, more liquid fungible kind of capital market."
Cosimo Pacciani: And we had it in London once upon a time, that kind of capacity.
Mark Zandi: What do you think, Gaurav? What's your view on this? Is this feasible? I mean even directionally, is it feasible?
Gaurav Guanguly: 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 and I like the way you said, Mark, that yeah, that's the one thing you have in the US is a very deep capital market and I think this is one thing that needs to be said in very simple terms, Europe ain't country.
Mark Zandi: Yeah, right.
Gaurav Guanguly: 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, has a 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 skeptical 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 upcoming European as to which way Europe is. 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.
Mark Zandi: Hey, we're running out of time. Cosimo, 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 US, the US 10 year Treasury bond, the benchmark bond is up... Even with the rally in the last couple of days, it's up a hundred 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. I haven't looked at Italy. Same kind of dynamic playing out there in Europe? Are you seeing higher long-term yields?
Cosimo Pacciani: Yeah, I think it's a similar dynamic. I think it is down to uncertainty, relative strength or the relative perception about European economy, also maybe Italy. I think there are two things happening. We are seeing an increase in yields because there's also the uncertainty surrounding some of the bigger economies. At the same time, we are seeing a shrinking of the spread across European bonds. So interesting enough, I always... No joking but it looks like the risk-free is disappearing the market or everything's becoming risk-free because everything's kind of lining up. If you look at, for example, the differences between French and Greek or France or Portugal, also Italy and France is really reducing over time, but the yield is increasing because I think there's a sense of heightened uncertainty also in respect to the next moves of the central bank.
Mark Zandi: So you're saying it's not because Greece is getting any more creditworthy, it's just that France is getting less creditworthy?
Cosimo Pacciani: Well, you can read them both ways. I would say-
Mark Zandi: Yeah, right.
Cosimo Pacciani: Been home in the past to the DSM, I'd like to think that Greece put their books in order there. At the same time, there's also France and Germany that discounted the higher uncertainty. Well, 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.
Mark Zandi: Did you know this, and we're going to end it this way, I guess, that CDS is a credit default swap? You can buy insurance against a bond default. If you look at the CDS on the bond sovereign debt, the CDS spread so that the wider the spread, a greater perceived risk of investors not getting paid on time by the sovereign is now higher on ten-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.
Gaurav Guanguly: Yeah, I never look surprised.
Marisa DiNatale: That's just his face.
Mark Zandi: I'm just saying. In fact, that was going to be my stat. I'll tell you, it was a lot better than 2.4%. I'm telling you. Well, we're going to call this a podcast, I think. Cosimo, thanks so much for participating.
Cosimo Pacciani: Thank you.
Mark Zandi: Really appreciate it. Thanks for your hospitality and your great support. Really appreciate that. Gaurav, thank you. Cris, I kind of completely locked you out of this conversation, so I apologize for that.
Cris deRitis: I'll make up for it next time.
Mark Zandi: Yeah, you definitely will. And Marisa's hanging there. Matt Colyar, 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. I consider that to be a good thing.
Matt Colyar: I would agree. Yeah, absolutely. We're looking at third, fourth decimal points before. It's definitely-
Mark Zandi: Yeah, right. Coming down to two.
Matt Colyar: It's down there.
Mark Zandi: Now we're down to the second decimal point.
Matt Colyar: Yeah, it's nice.
Mark Zandi: All right, with that, dear listener, we are going to call this a podcast. Talk to you next week.