00:00Concerns are growing over the European economy.
00:02The euro has hit a 17-month low, pushed down by a global energy crisis,
00:08a sustained bond sell-off and the dire states of the French economy,
00:13where record public debt is causing political gridlock.
00:18Here's what happened in the last month.
00:20Now, if you look at this steadily falling line, particularly acute there in the last week or so,
00:26it's reached US$1.12 just a few hours ago.
00:31And now, the election announcement in Spain has thrown yet more uncertainty into the mix,
00:37the Spanish economy having been the standout performer of the eurozone.
00:43Vicky Price is an international economist.
00:44Great to have you on Global Business Europe.
00:46Look, there's a lot playing into investor uncertainty, isn't there,
00:50from French debt being under pressure and now this snap election that's been called in Spain.
00:55Is this the start of a wider eurozone problem?
01:00There is a concern that politically, in any case, things look quite uncertain,
01:05and I think that's affecting the capital markets.
01:08You mentioned, of course, the snap elections in Spain.
01:10There are, of course, riots in France.
01:13There were demonstrations in Spain as well and in some other countries too.
01:17So what you're finding now is that the cost of living crisis is affecting people across Europe.
01:23So it's not just a question of France or Spain.
01:26And there are uncertainties ahead, particularly in terms of what may be happening with inflation in the future
01:32and also with interest rates.
01:33So I think one of the reasons why the euro is quite weak right now is not just because of
01:40just what I've just been discussing,
01:42but it's also because, of course, the interest rates in Europe are considerably lower.
01:47That's the central bank interest rates considerably lower than they are in the U.S. and in the U.K.
01:54and I think that's weighing on it and the markets expect perhaps rates will be going up
01:59but nothing like to the levels that the other currencies are now seeing
02:03and I think that's certainly putting pressure on the euro.
02:07How much of this comes back to the price of oil?
02:11Well, the inflation element most definitely is affected by the price of oil and diesel, of course,
02:17which is used quite extensively, not just in the U.K. where there is an issue, but also across Europe
02:21too.
02:22What is happening in a number of countries is, of course, that they have been intervening,
02:25they have been cutting prices, they've been putting caps on some of those prices at the pump,
02:33which is quite interesting, including a number of private companies that are stepping in and doing exactly that.
02:37So what you're finding, therefore, is that there is an attempt by the authorities
02:42to shield both businesses and the consumers up to a point,
02:46but unfortunately the amount that they can give back to the economy is restricted
02:50by the fact that in a number of cases we have very high debt-to-GDP ratios
02:54and, of course, big deficits, like is the case in France right now,
02:57which is causing actually one of the shocks to the system
03:01in the sense that you see long-term yields go up very significantly
03:06by comparison to where the German ones are.
03:08We haven't seen anything like that since the financial crisis.
03:11So you talk about the authorities and things they can do.
03:14You also talked about interest rates and a different outlook from different places around the world.
03:20Can the European Central Bank fight inflation and calm the bond market at the same time?
03:27It's going to be difficult, of course, because you've also got the weakness of the euro right now.
03:31So a weak euro means possibly higher inflation in the future.
03:35And there is also, of course, a lot of talk about putting extra tariffs on various goods
03:39that are coming in by Europeans and that type of policy,
03:42which, if anything, might actually lead to higher prices internally.
03:47What the European Central Bank, of course, is worried about is that if it raises interest rates
03:51as it had done back in the eurozone crisis,
03:53and everyone is comparing what we're seeing right now with that period in the early 2010s,
03:58at a time when the economy perhaps will start slowing down.
04:02It hasn't done too badly in the last sort of six months or so.
04:05But if it starts slowing down because of the impact of the higher oil prices
04:09and the cost of living issues and household spending, of course, also being affected,
04:14then it may not be able or willing to raise interest rates to make any difference to,
04:20for example, the overall inflation picture or, of course, what happens in the bond markets.
04:26So it is an issue for the European Central Bank to worry about.
04:31But if the markets think that inflation will go out of control
04:34and there will be nothing done to support the various countries
04:38which are right now in difficulty fiscally,
04:40then the markets won't like that and will continue to put pressure.
04:44Vicky Price, thank you very much indeed.
