00:00The ongoing conflict in the Middle East and a potential sell-off in US assets are the two
00:04biggest risks facing the Eurozone economy. That's according to fresh analysis from the
00:09European Stability Mechanism, which warns the shocks could tip the euro area into recession
00:14and push inflation as high as 5%. The Luxembourg-based institution was set up in the wake
00:20of the Greek debt crisis to provide financial support to Eurozone countries in times of distress.
00:25For more, we're joined now by the ESM's Chief Economist, that's Wolf Strauch. Good morning,
00:30great to have you with us. Good morning, Maeve. So this is quite a gloomy outlook you're presenting
00:34here. Tell us more about your findings. From the perspective of the European Stability
00:38Mechanism, euro area resilience is coming under strain. And we see on the one hand that
00:44geoeconomic and geopolitical risks are rising and you have security threats, you have energy price
00:51disruption, you have financial market volatility and fragmentation in the trading system. And on
00:57the other hand, you see that this leads to higher demands on governments while the fiscal space is
01:02shrinking. And that is what we mean when resilience is coming under strain. Governments need to create
01:08fiscal buffers and they need to create growth. So many of our viewers would be worried this morning
01:14about this risk of a potential recession. How high is it? The point is, as a crisis resolution
01:20mechanism, you ask what happens if things go wrong, not what will actually happen. When you ask the
01:26second question, what will happen, you do a forecast. We do a scenario analysis. And as you said before,
01:31if we have two shocks, a meltdown of US assets and a re-escalation of a conflict, yes, then the
01:37risk is
01:38high that we will have a recession. And that is what we point out in order to be prepared for
01:43a crisis,
01:43not because we are predicting the crisis. And is the Eurozone stronger now than it was for these
01:48potential kind of shocks? The shocks that we will maybe seeing is indeed the Middle East conflict,
01:55and that leads to higher energy prices and uncertainty. And on the other hand, a meltdown in
02:01US assets that would imply that we have faced tighter financial conditions. So what should consumers
02:07be doing and thinking now? We think that governments mainly should be prepared. And that
02:13means that they have to get growth going. And that will help also the consumers.
02:17And just finally today in Ankara, billions are being pledged for defence. Can European countries
02:23afford this?
02:24Well, European countries could create a win-win situation here. And we have looked in depth into
02:30the defence spending. And when you actually create a situation where defence spending spills over
02:35into the civilian economy, then you can recover 53 cents for each additional Euro spent through
02:41taxes and higher growth.
