00:00Well, I think that now the level of uncertainty in the global economy is very high, very elevated,
00:08and this has given rise to a lot of volatility in recent times.
00:14We have identified three main vulnerabilities or potential risks for financial stability
00:20in the euro area.
00:22The first one is the level of valuations.
00:25Valuations are very high, are very elevated, are very rich.
00:29Valuations are discounting a very, let's say, I could say, benign scenario.
00:34No recession, lower inflation, lower interest rates, and perhaps they will be right, but
00:42you know, there are risks around that.
00:45Secondly, we have, you know, the potential impact that, you know, the uncertainty might
00:50have on corporates, on investment, on households, on consumption, and finally, fiscal policy.
00:56So, a huge level of uncertainty surrounding, you know, the situation in the global economy,
01:04and simultaneously, you know, valuations in markets that are extremely high, you know, that could
01:09give rise to a correction.
01:11And one of the most striking features of the recent turmoil was the behavior of the dollar
01:15and U.S. Treasuries.
01:17You mentioned in the report that investors may have questioned the haven status.
01:21Are you concerned that this could become a disorderly situation, or are you more focused
01:26on the opportunity this creates for the euro, perhaps?
01:28Well, I think that, you know, the chance and the opportunity for the euro will depend on
01:35the European institutions and the decisions that we take.
01:38I think that now, you know, as you have said, we have seen a depreciation of the dollar, that
01:45I think that it was against, you know, the conventional wisdom, you know, that because tariffs should
01:50give rise to an appreciation of the dollar.
01:53And I think that this has to do with the uncertainty with respect to the policies implemented, you
01:57know, in the U.S.
01:58It's not only about tariffs, it's about fiscal policies, about the regulation.
02:03I think that we need to have a comprehensive approach with respect to the policies of the
02:10new U.S. administration.
02:12But going back to the euro, I think that it's going to depend on us, it's going to be in
02:17our hands.
02:18If, you know, the European institutions apply and we are able to put in place the correct
02:22policies in terms of capital market union, in terms of banking union, in terms of the
02:28single market, for sure that, you know, the role of the euro in the global economy will
02:38be, you know, more and more relevant and will gain market share.
02:42You said in the report that any more distrust in the dollar could have far-reaching consequences
02:48for the financial system.
02:49Could you say what these would look like?
02:51Well, volatility in the exchange rate, you know, can give rise, you know, to capital flows,
02:57and these kind of things, you know.
02:59But I think that, you know, uncertainty is pervasive, you know, it's having an impact on the exchange
03:05rate, it's going to have an impact on growth, it's going to have an impact even, you know,
03:10in the perception of markets about the global economy.
03:14And these are the elements that we have to take into consideration.
03:18So, I think that we need to have, you know, a sort of polyethic approach to the potential
03:23situations that we can confront in the near future.
03:27One of your concerns is also about the European economy.
03:30At least in the first quarter, it was pretty resilient.
03:33But when do you expect it to be hit by the full impact of the trade tensions?
03:38Well, I think that the data of the, you know, the figure of the first quarter was better
03:44than expected.
03:44It was 0.3 quarter on quarter in the Euro area.
03:47But I think that we have to take into consideration that there are some one-offs, you know, that
03:52have had an impact on the growth rate of the first quarter.
03:57For instance, some from loading of exports, and even, you know, the volatility introduced
04:02by, you know, the figures of Ireland that, you know, is an element that we have to bear
04:09in mind.
04:10I think that now if you look at, for instance, the projections of the European Commission, they
04:15have downgraded the growth rate for 2025, we will have projections in three weeks.
04:23And, you know, I suppose that they will go, you know, in the same direction as the ones
04:28that the European Commission has recently presented.
04:31But do you think there will be a downgrade compared to your March projections?
04:34Well, I think that, you know, let's see what the projections, you know, imply.
04:40But let me say something.
04:42And I think that in March we said very clearly that the risks to growth were tilted to the
04:49downside.
04:50And now I can assure you that many of the risks that we identified in that moment of time have
04:55become a reality.
04:57Yeah.
04:58And on public finances, you say that public finances could become stretched because of all
05:04the investment needs and defense and infrastructure and so on.
05:07But how should governments actually balance the need to invest with some public finances?
05:11Well, the situation of public finances in Europe, you know, is a strain.
05:16As you know, the fiscal space of some countries is limited.
05:22But sometimes in life you have to try to square the circle in the sense that, well, defense is
05:28going to be a need.
05:29You know, it's a priority.
05:30And I understand why it's a priority for Europe.
05:33And simultaneously we are going to have, you know, weaker growth.
05:37And so these are two elements that we need to bear in mind in order to try to define how,
05:43you know, public finance is going to evolve in the Euro area.
05:47But let me say something, you know, given these priorities, it's very important and very relevant
05:52that, you know, we guarantee and that we send the message that fiscal sustainability, you know,
05:59is going to be attained and is going to be, you know, one target for the Euro area.
06:05Because otherwise we can see that markets can, markets so far are very, very, very quiet, you know,
06:11and yields, you know, are very low, even, even the, you know, the spreads are perfectly contained
06:19and, you know, even they have, they have been narrowing a little, a little bit with respect to the recent past, you know.
06:25But, you know, we cannot take that situation for granted.
06:28And I think that is very important that, you know, with, you know, the new fiscal pact
06:35and fiscal agreement that we reached and that we applied this year,
06:38we indicate clearly that fiscal consolidation is going to take place
06:41and that fiscal sustainability is going to be, it's going to be a reality
06:45that is not going to be challenged by other kind of factors.
06:49And you already mentioned the European Commission forecast,
06:52and they also said that inflation will fall below the 2% target at least next year.
06:57Do you also feel like the, or do you think the combined effects of the tariffs and weaker growth
07:04could push inflation below your target?
07:06We are positive with respect to inflation, and I think that the appreciation of the Euro
07:11and simultaneously the evolution of energy prices are two positive factors
07:15that, you know, are going to give an additional, you know, push, downward push to inflation in Europe.
07:26The impact of tariffs is something that we have to analyze in detail, you know.
07:31Tariffs in the short term imply that, you know, it's a tax on imports, you know, on imported goods.
07:40So it's going to be, you know, it's going to be negative, you know, in the very, very short term.
07:45But simultaneously tariffs are going to reduce domestic demand and aggregate demand.
07:49And I think that, you know, in the medium term, that, you know, that drop in demand will more than compensate
07:56the initial increase in the price of imported goods because of tariffs.
08:00If you go a little bit longer, then you have to take into consideration the possibility of fragmentation.
08:06Because trade distortions will give rise to, you know, distortions and the breakup of, you know, supply chains that, you know, for Europe are very, very relevant.
08:19And this could have a negative impact on costs for the European corporates.
08:25And finally, in order to make it a little bit more complex, you have to consider and you have to bear in mind that you are going to have a diversion of trade.
08:35That, you know, other jurisdictions that are going to be, you know, penalized because of the US tariffs will start to look for new markets.
08:44And perhaps, you know, they will start to export at very low prices to Europe.
08:51All these elements are the ones that we have to take into consideration.
08:54But to summarize, I would say that it's clear that trade distortions are detrimental to growth.
09:03And simultaneously that, you know, the impact, you know, on inflation is much less clear.
09:08And it will depend on the time horizon that you are considering, that you are regarding.
09:12But I would not dismiss the possibility that, you know, that trade distortions and tariffs could have eventually a disinflationary impact on the global economy and the European economy.
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