LUCREZIA REICHLAN: The revisions were always in one direction so I think you can learn a lot from how you revise. In Europe, what we have had the is slowdown of trend growth, what the economies called potential growth. At least since the great crisis, the recovery has never really been very decisive. GDP is not the only metric. We have less skewed income distribution, a much more balanced society.

ED HARRISON: Lucrezia Reichlan, it's very good to talk to you here on Real Vision. We are, I think, at a critical moment in Europe right now in terms of policy. I want to talk to you about what's going on in Europe but also about what you've been doing in terms of forecasting policy or actually the economy in general, and then what that means in terms of what you see going forward in Europe.

LUCREZIA REICHLAN: Okay, Europe. You say we are at a critical point in Europe but I would say we are at a critical point, not all in Europe, but also in the US. If I have to look at the broad picture, I would say that actually, Europe, relatively speaking, looks quite good. If I have to see the rest of the world, it doesn't look as bad. I'm a little bit more optimistic on the broad picture on Europe.

Now, if I have to look at the economic data there, I'm a little bit more pessimistic. My business, which is called Now-Casting, it's about reading the pulse of the economy on a real time basis. We analyze through the lenses of a model the data flow, through the publications of different data every day, something gets published, the model eats it up and produces a series of updates on the economy. We do that for all the main economy in the world. If I look at the European data, in what the data flow has been telling us, is that basically since the end of 2017. we have seen a very persistent softening of the data of the real economy.

ED HARRISON: That precedes the whole China-US trade war.

LUCREZIA REICHLAN: It does, it does. I think it's not just related to that. In fact, there are different views in Europe about especially on the German economy, which is the main economy, the engine of the European economy, and we have seen this slowdown, particularly in Germany. If you talk to the Germans, a lot of them say this is temporary. it depends on the trade uncertainty and so on. I just don't believe that story. I think this has been too persistent to make the stories believable.

There is something else going on, which is probably related to structural crisis of the automobile sector. The general slowdown of the economy that you see that the IMF has review, also the forecasts downward for all the economies. Now, we have the lowest growth since the great crisis. Now, Now-Casting had detected that at an early stage. Actually, I remember talking in a big meeting here in New York, the beginning of 2018 and the market just didn't believe us, but we turned out to be, I think.

Now, is this a catastrophic event? I don't think so. We are not necessarily seeing like a deep recession. I think this quarter, the German economy will be more or less a zero. There is a difference between a recession, consecutive quarters of negative growth and just very, very low growth in a persistent way for a protracted period of time. I think we are more in the latter category. That, I think is trend growth that has slowed down, and this has to be understood. I can't give you a number of conjectures, but I think it's more like we're becoming like Japan. This is what we have to worry about also from the policy perspective.

ED HARRISON: There are two ways I could pivot off of that. One is go deeper into that, but actually, before I do, I want to go back to-- because you talked about 2018 the beginning and Now-Casting, it makes me think about tell us what is Now-Casting exactly? How can you use it for an economy? How far out can you go in terms of your projections?

LUCREZIA REICHLAN: Well, the philosophy of Now-Casting it is that we are forecasting a present and a very, very short future, short-term future.

ED HARRISON: In the short term future is?

LUCREZIA REICHLAN: One, two quarters ahead. The present is already a big deal, because GDP is published only one month and a half after the end of the quarter, one month of data depending on the country, it gets very much revised and so you need to have a tool for forecasting the present. Well, I designed these tools like years ago, so that was a very natural academic research, building up models that could be appropriate for that problem.

ED HARRISON: I heard that you are a pioneer in Now-Casting, that's right?

LUCREZIA REICHLAN: That's right. Yeah. Basically, I did it. At the beginning, well, that was the product of academic research, but was also trying to adapt the academic research to the problem of central bankers where facing-- not facing, which is you see all these data, you're bombarded by data, but then at the end of the story, you have to form a view about where are we now. This is very important to set interest rate. Of course, you have to set a view about where the economy is going in the next couple of years. If you don't know where you are now, your forecast for the longer horizon are about to be wrong.

ED HARRISON: It's not just for central banks. My understanding is you have a client base that is in the markets in particular who also think understanding that is important.

LUCREZIA REICHLAN: That's right. Well, that was my background, I was more academic then, and then I was a central banker for a while and then I was a consultant for many central banks. Now actually, I am not doing this for central banks anymore, I have my own company and we sell the Now-Casting for basically all the economies of the G20 for investors. Our clients are basically hedge funds or sovereign funds or pension funds. A lot of our clients are actually systematic traders. They use our input. At the end, what we are selling is a string of data. It's a Now-Cast that we move all the time. Now-Casting the same thing, but we update our view in relation to the data flows.

If you want, you can say that this is a signal about the pulse of the economy, a signal about the macro economy and we know the macro, the macro signal is very important also for financial markets, more than maybe what was taught in the past. That's what we're doing. Now, we are also trying to combine this with financial information to try to see whether the disconnect between risk appetite and the macro signals provides a signal that can be exploited in investing.

ED HARRISON: Now, it sounds like trend data or the data and the trend of that data is very important in terms of what your assessment was from the beginning of 2018 to now, meaning that the ECB as an example was saying, actually, things are going to be fine. You were saying at the beginning of 2018, the trend is not in that direction. The trend is going slowly down.

LUCREZIA REICHLAN: Well, more than the trend. Okay, I also use other models, but the Now-Casting model was saying that there was a-- the time, at the beginning of 2018, the we signal that the fact that the data were signaling negative seen. Now, two years later, I can see that the revisions were always in one direction. I think you can learn a lot from how you revise. We kept revising downwards. We do that on almost on a continuous time. That's a very interesting signal, I think, for investors.

Now, institutions like Central Bank, the EMF, the ECB, they revise whenever they produce their forecast for the market and then if you look at it, a lot of their revisions have always been downer rubbish. Now, I also use other model, especially for forecasting inflation which look more at the underlying trend like you were saying and if you use those tools then you can see and that actually, you just observe GDP employment but you could actually also try to decompose the observations into some movements which are more high frequency, something like goes up and now and something which is more low frequency that move very, very slowly, that's what I would call the trend.

Now, if you extract that trend, so of course, it's controversial how you're going to do it but if you do it and that you have a number of ways to verify your techniques for doing this, then you can say that in Europe, we have had a slowdown of trend growth, what the economies called potential growth at least since the great crisis. The scar that the great crisis put in, in our economy has been quite severe. In Europe, like the US, we had two crises [indiscernible], 2008 plus 2011, related to the debt crisis. We had like, two recessions so the legacy is quite heavy. I don't know, I don't think that it has been digested yet but this has affected the long term trend and this is what we're seeing now that we are-- the recovery has never really been very decisive.

ED HARRISON: Going back to what you were talking about at the outset then, you're relatively optimistic about Europe at this particular juncture, that is relative to other economies. When you talk about the trend being down, how do you reconcile those two?

LUCREZIA REICHLAN: No. Okay, in terms of economic number, the trend growth in the US is slightly higher. There are different reasons for that, including demographic. In terms of what that means for the European citizens, GDP is not the only metric for [indiscernible]. We have less skewed income distribution, a much more balanced society, much more protection for people in terms of social security and some. No matter how much our divisions of course, also in Europe, we have lots of issues, but I think that our society is more cohesive.

ED HARRISON: That is interesting, because now, we're moving into the political economy realm because that is big topic here in terms of when I said that Europe is facing a crossroad so to speak, it does seem like the very recent period has seen a coming together on a political economy front within the Eurozone. If you look at, for instance, data on the citizens of Europe and what they think about the Euro since the crisis, the sovereign debt crisis, people are much more positive about the euro. It seems like there is that cohesiveness, and the question is, is how does that play out in terms of likely Eurozone reformation that's necessary to help the economy going forward?

LUCREZIA REICHLAN: Yeah, you're right. Definitely, there is much more trust now in the common currency than there used to be a while ago. Of course, we need to reform the economic governance of the monetary union. I think that is difficult for Americans maybe to understand what are the issues, what are the problems of having a common currency but not having a common federal state, so that all the fiscal decisions are decentralized at the level of the national state.

ED HARRISON: What are those problems? What is it that are the most salient problems in the way that the Euro architecture is now?

LUCREZIA REICHLAN: Well, let me just give you some example. Central banks during the crisis, and they have expanded a lot their scope of action, everywhere in all jurisdiction, the balance sheet have expanded, they have implemented policies, which were quite innovative and I think that was the right thing to do. They have a very important function in avoiding a total meltdown of the Economy, especially in 2009, but also going later on. The more they expanded their scope of their action, the more they had an effect on distributions and this distribution effect in Europe means that some countries gain more than others and some sectors of society gains more than others.

This has created some tensions and we have-- because there are national interests that are not-- there are still different national interests even if we have the same money, of course there is a big divide between the debtors and the creditors for example. We now have negative interest rate and the bankers are not happy with negative interest rate, insurance companies are not happy with negative interest rate, but where there is debt, those guys are happy. This creates tension.

Countries are divided among countries which are creditors and countries which are debtors, it's not a very clean division because there are also division within countries, but clearly, Italy for example, my country, has a public debt which is above 130% GDP. Clearly, the low interest rate policy of the ECB is giving it a big boost, and the Germans are worried that this will create moral hazard which means incentives for the Italians to misbehave and to overspend and so on. Then if these would lead to a debt crisis in Italy, this will have consequences also for the Germans and the rest of the Europeans.

This is the discussion that has paralyzed in the past. Now, the German economy is also slowing down, and everybody's pushing the Germans to expand their fiscal policy because monetary policy cannot be the only game in town. They have the so-called fiscal space to do it because their debt level is very low, but they don't want to do it because the Germans don't like that.

ED HARRISON: If they don't do it, then who will? Because we were talking about this in the telephone earlier, I think that the German point of view-- and I'm dialed into the German point of view, is that look, 60% debt to GDP and 3% deficit. Those are the numbers that are enshrined in the treaty. If we're not the ones who are saying these numbers matter, then who else will? It was terrible when we-- under Schroeder and the French under Chirac, violated the deficit hurdles, now, we're not going to do that again. We're going to stick to it and therefore, act as an example for everyone else.

LUCREZIA REICHLAN: Yeah. I have a lot of sympathy for the attitude that the Germans have with respect to rules. You have treaties, you have rules so either you change the rules, or you follow the rules. If I had to look at the situation today, I would say let's change the rules, because those rules were designed in the '90s, where the problems were very different. We were, like Europe, like other economies, we're coming out from the experience of high inflation and so design-- the way in which we designed the mandate of the European Central Bank was very much with that problem in mind. The fiscal rules were designed because the big problem at the time was feared was debt sustainability.

Today, we're facing very different problems. We have a very low inflation. People don't want to spend, they prefer fair to keep their money at negative interest rate rather than invest. The externality is quite different, so we need to spend, we need to put money on the table, we need to sustain aggregate demand. Also maybe we need more public intervention in a number of areas. I think the deep the cause of why companies do not want to invest in private investment is very low in Germany and in Europe in general, is that there is a lot of uncertainty about all the big transformation technology. We talked before about the car industry, but also climate change, which is a huge concern and maybe in Europe, we are much more sensitive to that problem than in the US since you worked out on the Paris Agreement.

Well, I don't know about the population, but definitely our administration is less sensitive than the Europeans in general are to this problem. We know that something will have to be done on climate change. so that will mean a lot of transformation, painful transitions for a lot of sectors and so on. If we want to push the economy, then we need more public guarantees. We need the public sector to say we will be there as an insurance to make sure that-- we are facing big externalities and when we have these externalities, there is a case for more public intervention.

ED HARRISON: Do you think that public intervention, if and when it comes, will come before a recessionary crisis or something, a debt crisis, whatever it might be, is on the doorstep or do you think that European policymakers would be proactive in creating the rules that allow that physical space to be utilized?

LUCREZIA REICHLAN: Well, I don't believe there will be ever an agreement, not in the next few years, an agreement to have an instrument to do common stabilization policy at the physical level. However, because there is too much fear that this will mean too much risk sharing between countries, there is no enough democratic accountability for that differently. We cannot have a super national instrument of that kind without having the vote of the taxpayers that will legitimize something like that.

On the other hand, I think that, and the president, new president of the commission has been very clear on that, that we will have a big investment program related to climate change. I think that there are lots of issues of the size of the program, how it's going to be finance and so on. I think there will be an effort in that direction. I think climate change maybe will be the vehicle for some fiscal push.

ED HARRISON: Interesting. There's also on the banking side, a problems. I think I would look at it from a twofold perspective. One is about capital. The second is about the structure of the banking sector. That is, is that as compared to the United States, the banking sector within a common currency is balkanized. The question becomes, how much of an impediment is that to growth in Europe? What are the solutions to that problem that is on the one side, capital and the second, the balkanization?

LUCREZIA REICHLAN: Yes, that's a very important point because if you think of risk sharing across different areas, there is fiscal but there is also the financial. Europe is overbanked. Our financial sector is based more on banks than on the capital market and that's a big difference with respect to the US. We have to-- and banks, there are issues about having too much banking because that correlate banks are also-- they hold sovereign debt. When we have fragile state that makes banks fragile and when we have fragile banks that make states fragile, so there is that correlation that we have to break.

To break that means that we need to have more cross border banks, we have to hold diversified portfolios and not just the national banks holding their own sovereign bonds and being exposed excessively to the local economy. We need to break the balkanization. To break the balkan