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Spain Vows New Austerity Measures; Future of Spain; UK Minister to Europe Wants More Integration for Eurozone; Stimulus Effect; European Markets Up; Euro, Pound Making Gains; Diplomats' Remains Arrive in US

Aired September 14, 2012 - 14:00   ET


RICHARD QUEST, HOST: It's the elephant at the summit and the EU leaders are playing for time on Spain.

Call it a Bernanke bounce. QE3 fuels a second day of gains on the market.

And bottling fame. Tonight, if anyone could find a way, it's Lady Gaga.


LADY GAGA, SINGER: The smell of fame is that -- that mating call. That mating call. I am larger than life.


QUEST: Now, Lady Gaga on a business program. That's what you call meaning business.

Good evening. Gaga still to come. First, though, Spain has vowed to tighten the screws of its economy still further as it seeks to avoid an EU bailout. Spain's economy minister Luis de Guindos has vowed to outline new reforms by the end of the month.

With its borrowing costs in the danger zone and its economy showing no signs of recover, Spain has been tipped as the next state to need and ask for help. The minister's in Cypress. It's a gathering of European finance ministers. At the meeting, both the Commission and the IMF denied bailout talks are already underway.


OLI REHN, VICE PRESIDENT, EUROPEAN COMMISSION: There is no request, and I only want to say that the framework of conditionalities now defined and known both as regards to the European Stability Mechanism and as it regards the ECB.

CHRISTINE LAGARDE, MANAGING DIRECTOR, IMF: We have clearly noted that the Spanish authorities have been taking very strong and wide-ranging reform measures, which need to be -- to continue to be implemented.

And I know that there have been some trepidations and speculations as to whether President Draghi and myself would be in deep negotiations. I can assure you that we are not.


QUEST: Oli Rehn and Christine Lagarde. All this week, we've been looking at the Future of Europe for one reason and one reason only: important decisions were taken, and we've been attempting to map out the web of connections which feed into the crisis in Europe.

If you join me at the CNN's super screen --


QUEST: -- you'll see, tonight it's the turn of Spain. So, Spain said it does not need a bailout, or at least not yet, and no talks are underway. But this is the goal: to avoid a bailout at all costs. But at the same time, they also have to make sure that they keep their borrowing cost, their long term yields down.

And to do that, of course, we already know that money's being provided by the ECB and the IMF that is to go towards the banks, that Spain is trying to avoid having to ask for any more.

But when we talk about Spain, we see a very complicated picture, because you also see a similar situation with Italy and Mariano Rajoy and Chancellor Merkel, throughout this entire week, we have really seen that Germany is the key lynchpin to all of this.

So, let us put this together for you. Come and join as we show you, at the end of the Future of Europe, just how complicated this whole picture actually becomes.

These are the relationships, how the countries all react with each other. Every one of them has interlined to another. And that's why this is so difficult to deal with. CNN's Al Goodman is in Madrid for us tonight.

Good evening, Al. The -- as we look at Madrid tonight, we see that they say they don't need a bailout, there's no talks underway, but the situation's starting to get difficult again.

AL GOODMAN, CNN MADRID BUREAU CHIEF: It is, except you've got this respite in the stock market and in the ten-year bond yield. That has been treating Spain favorably here in these last couple of weeks, and that's given the government a little bit of breathing room.

It appears, Richard, they're trying to buy some time. The prime minister said twice publicly this week that he is not read to go for this full sovereign bailout. He needs to see how the markets are reacting, he said, how the -- a variety of conditions are playing out before he might do that and what conditions there might be.

And it seems that if they go down that route, they want to have much more say over the conditions that would happen on a potential sovereign bailout than they had on the bank bailout that was announced last June. They were criticized heavily for coming to the bank bailout late and taking some really bad conditions. Richard?

QUEST: So, Schauble of Germany says he doesn't think Spain will need a bailout, or might not. But every private economist still believes that this short-term bounce from the OMT, from Draghi, won't last much beyond the autumn.

GOODMAN: That's it. And this is why this package of structural reforms that the economy minister de Guindos announced this day in Cypress to his colleagues, which we're going to see probably on September 27th, when they unveil as well the 2013 budget.

The structural reforms, we're told by the economy minister, are aimed to keep the deficit reduction targets on target for this year. Spain is trying to get to a level of 6.3 as a percentage of GDP this year, and that's also in danger.

So, you've got the deficit reduction targets, which the prime minister here said are the prime priority, because that's the key to everything, is what he said twice publicly this week, and then you've got the potential bailout. They have a huge problem and just a little bit of breathing room. Richard?

QUEST: Al Goodman, who is in Madrid for us tonight, watching over the Spanish situation. And so we come to the end of the crucial week for the Future of Europe. We have the permanent bailout fund, we have the greater sympathy for Greece's request for more time, and we have the assertion from the Commission president a federal Europe is unavoidable.

And as we showed you a moment or two ago, it's worth showing you again, the relationship between all the countries is just exceptionally complicated, and any one of these fault lines could ultimately scuttle the plan.

As the federalist chain gathers pace, countries outside the eurozone are at risk of being left at the station. I asked the British minister for Europe, David Lidington, if the UK was a mere spectator to all of this.


DAVID LIDINGTON, BRITISH MINISTER FOR EUROPE: Now, we're active participants --


QUEST: You're a voyeur.

LIDNGTON: -- in discussions on this. Oh, Richard, come off it! I mean, the -- I don't think that's how the others -- what is true, what is true is that we have taken a considered and settled decision in the United Kingdom not to take part in the single currency.

Our friends and partners in the eurozone have made a commitment to doing that. We wish them well, and our economic well-being depends in large measure upon them being able to restore stability and growth the eurozone.

Roughly 40 percent of UK trade is with the eurozone economies. So, it's in our interests they get this right, and we wish them success in doing that. And we're -- particularly with our expertise and history in financial services, London being Europe's global financial center, we are trying to be helpful wherever we can.

QUEST: As I read President Barroso's state of the European speech yesterday, I came to the conclusion that perhaps that's inconsistent. Because you've got 17 getting closer at a gallop. You've got the other 10 on the outside, some may join the euro in the future.

And you've got this rump of countries that will never join, or not foreseeable future join the euro. Isn't this inconsistent? There's a contradiction, now, within the Union.

LIDINGTON: No. What we're seeing is the emergence of a different type of union where we are a much more diverse community of countries now than when the EEC and the European Union were first created. And that requires changes to the architecture of the way Europe is organized.

Those who've chosen to go ahead with the single currency, yes, are going to need measures on greater integration of their financial systems. But there are very important things like the single market that will be there at 27. Like the foreign policy cooperation that will be there at 27.

QUEST: Ultimately, when -- it doesn't matter which way we slice this story or this issue, ultimately it really comes down to two questions. Certainly, first of all in Britain, at some point, the British are going to have to decide, are you in, are you out, are you wholehearted, or are you halfhearted? And Europe generally is going to have to make that same bigger decision, isn't it?

LIDINGTON: I think you're presenting things as too much in terms of binary choices. I think what Europe has to do is to build a set of institutional and cooperative arrangements which match the reality of its diversity in terms of the size of the countries in the EU, the history, the culture of the different countries in the EU.

That -- and it's going to be difficult --


QUEST: It doesn't work.

LIDINGTON: -- a very complicated task.

QUEST: It doesn't work. We've seen it doesn't work.

LIDINGTON: We haven't seen that that doesn't work. What we've seen are tensions that emerge when countries have a single currency and a single monetary policy and interest rate, but don't have the sort of greater integration of fiscal economic policies needed to back that up.


QUEST: The Europe minister for the UK, that's David Lidington with a robust defense of the non-federal way forward for the European Union.

The QE3 feel-good factor has spread across the globe.


QUEST: Coming up next, we'll look at how Wall Street is back for a second round of celebration. Not as bull, but a strong session. QUEST MEANS BUSINESS, good evening.


QUEST: A day after the US Fed broke champagne across the bow of QE3, investors are still toasting its launch. If you join me in the library, you'll see the profits are everywhere. Well, at least they are for tonight.

The Dow Jones, currently up 31 points, 13,571, extending the gains. Very much the market likes the $40-plus, $45 billion, a total of $85 billion going into the market of the long -- the purchase of long-term assets and securities. So, value this moment.

And as you can see, look how the week has gone. All right, so we've given back just a little bit from here, but over the past three days, a strong rally. That's the anticipation, that's the actual announcement, and that's the way the market has traded.

And what they are really keen on is because they know -- Fed chairman admitted it in his Jackson Hole speech -- that this QE also has the effect of a portfolio alterations and ultimately, we also see it in the market as well.

Wall Street is at multi-year highs. The -- Ben Bernanke insists the Fed is just one part of the solution.


BEN BERNANKE, CHAIRMAIN, US FEDERAL RESERVE: And I want to be clear that while I think we can make a meaningful and significant contribution to this problem -- to reducing this problem, we can't solve it. We don't have tools that are strong enough to solve the unemployment problem.


QUEST: Julia Coronado is the chief US economist for BNP Paribas. She joins us now from New York. We need to speak to Julia when we have these situations, get some good common sense. How long, Julia, does this Bernanke bounce last before we're back to a dose of economic reality?

JULIA CORONADO, CHIEF US ECONOMIST, BNP PARIBAS: Well, I think that this -- the impact on markets can last for a while, because the Fed has basically indicated that they're going to be in the markets, pumping in liquidity, until the economy gets better, which if you look at their own forecasts, suggest that they're going to be printing money through -- into 2014, actually.

QUEST: Right.

CORONADO: So this is going to be an ongoing operation. So, if you want to bet against the Fed, you can try, but this isn't about economic reality, this is about getting to better reality.

QUEST: OK, but -- at $40 billion plus the other $45 billion that's going -- but $40 billion. Were you surprised that Bernanke didn't tie it, other than in the most vague terms, to an economic number or a barometer? Obviously, we're looking at employment numbers and the jobless numbers --


QUEST: -- but he didn't tie it any tighter than that.

CORONADO: Well, but the vague, qualitative hurdles that he set out to stop buying are pretty high. So, in other words, he needs substantial improvement in the labor market, it needs to be job growth, not the unemployment rate falling because people are leaving the labor force.

In order to believe that it's sustainable, it has to be driven by real GDP growth. In other words, the labor market is a lagging indicator. So, effectively, what we're getting is a GDP targeting regime. So, you need to see GDP that is above trend. Their estimate of trend is 2.5 percent. And they don't think we achieve that until 2014.

So, it is vague. There isn't a number. But in fact, you can almost look at that as being far more powerful, because they're going to look at the whole broad picture, and it needs to be pretty darn strong before they're ready to stop.

QUEST: He is -- the other big view seems to be that it's quite a blunt hammer that is now being used with QE3. It might have diminishing economic returns, we saw that from QE1 to QE2. If that is the case, what's the next bullet in the arsenal, do you think?

CORONADO: Well, to the point of diminishing marginal returns, Chairman Bernanke made a pretty important point, and that is -- we have -- there's this assumption that there's diminishing marginal returns, and certainly I think the fact that from QE1 to QE2, as you know, under QE1, financial markets were not functioning. So, the marginal return was huge.

But I think from QE2 to Twist to now, they're trying to achieve a greater marginal impact, one, by being far clearer and far stronger in their commitment. They hope to avoid that fading effect as we get to the end of a Fed program and everybody runs for cover. So that -- in that way, they hope to achieve a greater marginal impact.

And secondly, he made the point that if we look at the housing market, we're at a pretty important turning point where prices are starting to stabilize. And that's been happening across different regions. It's lasted for a good six months now.

If this continues, then banks might actually be more willing to lend, and the credit channel is less blocked, and they actually get greater bang for their buck.

QUEST: Ah, and then we're off to the races and everything's rosy in the garden.

CORONADO: Ah, and then --

QUEST: Good to see you. Have a good weekend, Julia. Julia Coronado at BNP in New York.

European stocks got their own boost. Mario Draghi announced the bond scheme last week. Look at the gains since the ECB announcement last week. And like his counterpart, Draghi says he can't take full credit. He says it's a combination of several elements falling into place.

So, to tonight's Currency Conundrum. How many dollar bills are destroyed every day by the Fed? 16 million, 16,000, or 1600? The answer later in the program.

The euro and the pound are making gains against the dollar. The dollar trades at $1.31. The yen's losing.


QUEST: Those are the rates, this is the break.


QUEST: So, we break away from our evening digest of business -- excuse me -- to turn our attention to the US state of Maryland, where the remains of the four American diplomats killed in Libya have been returned to the United States.

Now, let me tell you -- this is the ceremony, it's the -- it's known as the transfer of remains. And what we are expecting to happen over the next few minutes or so, the remains of the four people that were murdered, including the US ambassador, J. Christopher Stevens, and three other Americans at the US consulate in Benghazi, have now been repatriated to the US.

The president of the United States, along with the vice president, the Secretary of State Hilary Clinton, the Defense Secretary Leon Panetta, are all going to be in attendance. There will be an invocation and a benediction in this hour. And then there'll be remarks from the president and Mrs. Clinton.

The human remains will then be transferred to Dover Air Force Base in Delaware. Let's just pause for a moment as we watch the events taking place.


QUEST: And at this point, it's a moment as we reflect on what is taking place in the United States, that we join our colleagues at our sister network, CNN in the United States.

ELISE LABOTT, CNN WORLD AFFAIRS CORRESPONDENT: -- actually traveled with him to Libya in 2007, Don, when he was the US envoy to Libya as the US was restoring ties with Libya after decades.

And he was so excited about the potential for US-Libyan relations. We traveled to one of the ruins. Libya has these really beautiful, untouched Roman ruins, and there were -- there was really no tourism there. There was nobody there.