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QUEST MEANS BUSINESS

Merkel Says No More Excuses; US Fed Releasing Rate Forecasts; Greek Debt Talks Resume; UK Economy Shrank; German Confidence Grows; Analysis of Merkel's Speech, the Fed, and UK Economy; The Curve; Shift in Capitalism; US Federal Reserve Press Conference; Wall Street Response; Global Trade Concerns; Interview with James Flaherty; Interview with Alistair Darling; Interview with Juan Somavia

Aired January 25, 2012 - 14:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


RICHARD QUEST, HOST: Tonight, Angela Merkel tells the World Economic Forum in Davos, Europe needs solidarity, discipline and, most of all, honesty.

(BEGIN VIDEO CLIP)

ANGELA MERKEL, CHANCELLOR OF GERMANY (through translator): I know that we are labeled the big economic headache of the global economy.

(END VIDEO CLIP)

QUEST: Also tonight, the Feds firm forecast, rates stay on hold for two years.

I'm Richard Quest in Davos where, yes, I mean business.

Good evening. No more excuses, no more delusions: Angela Merkel's message to Davos and the world. Tonight, we'll bring you reaction from Stephen King, the chief economist at HSPC, Pascal Lamy, the head of the World Trade Organization, the WTO, plus a bruising message from Canada's finance minister, Jim Flaherty, who tells me he's disappointed in Europe.

Chancellor Merkel says there is only so much Germany can do to help the eurozone. In her keynote speech to open the forum, Angela Merkel says while Germany is ready and able to help, it won't risk everything to do so.

(BEGIN VIDEO CLIP)

MERKEL (through translator): People believe that Germany is particularly strong. True, Germany is particularly -- is quite strong, it's particularly big compared to others, but it's not as if we were saying we don't wish to show solidarity, we are not willing to enter into binary commitments. That is not true. We have said right from the start that we wish to stand up for the euro.

But what we don't want is a situation where we are forced to promise something that, in the end, we will not be able to fulfill. If Germany, for example, on behalf of all of the other member countries, were promising something that if the markets really attack us, we will not be able to come up with, then we have, indeed, an open flank.

(END VIDEO CLIP)

QUEST: Strong words from Mrs. Merkel, who told Europe to stop deluding itself and prepare for tighter rules on debt. She said reducing levels of debt was the only way to keep hold of credibility.

(BEGIN VIDEO CLIP)

MERKEL (through translator): The real message of the fiscal compact that we're trying to agree on right now is that each and everyone is to introduce a cap on debt, so-called debt break, and do this inscribed as in the comprehensive -- it's in the constitution an the European Court of Justice will monitor this, whether this is actually done.

So, we are no longer using any excuses, we are no longer deluding ourselves or deluding others. We're opting for this, and this is obvious, because otherwise we will lose credibility.

(END VIDEO CLIP)

QUEST: Now, while Mrs. Merkel was speaking and we were all in Davos, in Washington, the US Fed was giving its views on interest rates. In a few moments, we'll know where each of the Fed's members, the policy members of the FOMC, expect rates to go.

This is the Fed website right now. Now, the big -- not terribly exciting, perhaps you'll agree. If you click, as we did just there, that is the chart -- or rather, it's not the chart. But it will be the chart that will show us where the FOMC believe rates will go in the years ahead.

Overall, though, they did decide that rates would stay where they are until 2014. But the new specific long-term forecast of the FOMC members for the first time will give a better indication. However, for the moment the panel overall, the committee overall, says rates stay as they are until 2014.

Other economic news that investors and delegates are watching. In Greece, talks with private creditors are back on tomorrow. Charles Dallara of the IIF is flying back to Athens. He'll negotiate for the banks.

Meanwhile, in the UK, figures show the economy shrank by 0.2 percent in the last quarter, as you can see there. It's not quite a recession yet. We'll have to see what happens in Q1 to work out if that's a technical recession.

And one piece of good news, surprise, surprise. Germany's business confidence rose for the third straight month.

There is an enormous amount that we need to deal, with Stephen King, the chief economist at HSBC. Good evening to you.

STEPHEN KING, CHIEF ECONOMIST, HSBC: Hello.

QUEST: Let us begin. Where should -- would you like to start with the Fed or Angela Merkel?

KING: I think with Angela Merkel, perhaps.

QUEST: Angela Merkel, right. There's no great surprises by what she said, was there? But it's the determination to continue to say we won't go to the lowest common denominator.

KING: Absolutely. You can see exactly why, because the Germans don't want to be faced with the whole entire bill for bailing out the eurozone.

At the same time, if the eurozone isn't sorted out, then Germany's economy itself will suffer. So, in one sense, time is running out, because ultimately if Spain, Portugal, Italy, and so on really suffer, German experts will also be hit pretty hard, and the German economy facing a recession.

QUEST: Were you surprised that Angela Merkel actually said that Germany couldn't make promises that she couldn't keep? I mean, there is a view that she's not doing enough to start with, never mind going to the extreme of going all the way.

KING: I think it's very unlikely she's going to make a major announcement in Davos. Ultimately, she has to be answerable to German politicians and the German public, not necessarily the international community and at Davos itself.

But what I think is important is that if you've got this problem coming through in southern Europe, it will eventually spread to northern Europe, as well. German thinks it's somehow immune for this, but that will, I think, slowly change during the course of the year.

QUEST: And also, tonight Mrs. Merkel -- last question on Mrs. Merkel -- she did talk about the way in which other countries have to rise to -- basically to Germany's level of competitiveness. She's not going to go down, didn't she?

KING: Yes, she did.

QUEST: So, she's quite uncompromising.

KING: Yes. And the problem there, of course, is that, in one sense, Germany's become super competitive partly because the appreciation of the Deutsche mark that used to occur prior to the formation of the euro can't happen anymore, so Germany's at a huge competitive advantage.

QUEST: Fed says rates stay on hold until 2014. Now, they've added a year to that. We are still waiting to see if they're going to -- I mean, no surprise. Or are you surprised they've added another year to it?

KING: Not at all. The problem --

QUEST: But 2014 is a long way out.

KING: Absolutely, but the commitment there is very important because in one sense, the Western world is in a Japan-style stagnation, and what that really means is you have to promise very low interest rates for a long period of time.

We learned from Japan if you raise interest rates too early or indicate it's going to happen, you end up with a tremendous loss of confidence and you get back into recession again.

QUEST: UK. Does it go into recession in Q1?

KING: It's possible.

(CROSSTALK)

QUEST: Oh, come on -- you're --

KING: It's --

QUEST: -- you're hedging, you're hedging, you're hedging.

KING: No, that's true. I think it's actually quite likely it'll go into recession in the first quarter, so we'll see.

QUEST: Off to bed. All right, now, we are, as always, going to -- as you know, we have the curve --

KING: Yes.

QUEST: -- which we are using. Tonight, we've prettied it up for you. Before we get your view on the curve, I do need to point out to our dear viewer that our curve is a little bit more animated than it was when we were with last night, and all this was added by Nouriel Roubini, the economist who was in earlier today.

Listen to what he had to say, and then Stephen King will add his views as to where on the curve we should go.

(BEGIN VIDEO CLIP)

NOURIEL ROUBINI, CHAIRMAN, ROUBINI GLOBAL ECONOMICS: In the eurozone, they are totally behind the curve, and not only they're behind the curve, they're doing the wrong policies, because fiscal austerity at a time when there is a recession in the eurozone means they have the totally wrong policies.

So, instead of recovery, the eurozone is going into another contraction. That's a disaster. You're having fiscal contraction and not enough monetary easing at a time when there is already a recession so, instead of recovering the eurozone, we're going to have deep, double-dip recession to become a depression.

(END VIDEO CLIP)

QUEST: All right. So, ruined our chart. Now you're going -- first of all, the fee. The fee, come on.

KING: Oh, the fee, yes, there you go, there you go.

QUEST: The fee. I do love it. All for the Hunt and Rescue, as you know. That'll go into the box. Euros. Where do you want to go onto the curve. There you are, you can -- you can --

KING: Thank you very much, indeed. I think I might --

QUEST: Behind the curve or ahead of the curve?

KING: I think somewhere around here will be fine for me.

QUEST: You've added yourself --

KING: I have.

QUEST: -- so we'll just put another -- we'll put another -- how about there? Are you happy with that?

KING: I'm very happy with that. Yes, that's fine.

QUEST: Many thanks, indeed.

KING: Thank you very much, indeed.

QUEST: It's good to see you, as always. The curve, we'll have more on the curve as the show goes on.

Now, delegates here in Davos are debating what would be the greatest transformation of our time. At the heart of the debate is one key question: is capitalism dead? At a panel discussion earlier today, the co-founder of the Carlyle Group said we are seeing a shift in capitalism as we know it.

(BEGIN VIDEO CLIP)

DAVID REBENSTEIN, CO-FOUNDER AND MANAGING DIRECTOR, CARLYLE GROUP: You now have two types of capitalism competing with each other. The Western style of capitalism, which is largely laissez-faire, though to some extent in Europe, there's more government involvement.

And more state capitalism that you now see in China and other governments where the government is much more heavily involved in trying to create jobs.

It's unclear which model will prevail. Right now, there seems to be a view that the state capitalism model creates more jobs. They may not be high-paying jobs and they may not be the jobs that many people in the West would like to have, but they seem to be able to create jobs at a greater rate than we are in the West.

(END VIDEO CLIP)

QUEST: Now, the chief executive of Coca-Cola says capitalism isn't dead, it just needs transforming. There are fundamental problems on both sides of the Atlantic. I asked Muhtar Kent if he was irritated that those problems hadn't been solved.

(BEGIN VIDEOTAPE)

MUHTAR KENT, CEO, COCA-COLA: I think we all are frustrated. I think everybody. I think the person on the street is frustrated, we in business are frustrated, policy makers are frustrated, because we haven't made sufficient progress to evolve our model to come through with a better solution to some of the issues of governance, of confidence, et cetera.

QUEST: OK. At Davos, they're putting it in very grandiose terms. Capitalism is outdated. Capitalism needs a new model. Capitalism needs a re-think. Coca-Cola is the definitive company of capitalism. Do you agree?

KENT: I don't think we're the definitive definition of capitalism, but I think we are a company that does business on a local basis in 206 countries. We're the most international. And I think we can't just throw capitalism out without having an alternative.

Capitalism -- you can probably say capitalism is the worst model except for all the others. So, I think we have to evolve it --

QUEST: To what?

KENT: -- we have to make sure that it is better socially connected. Connected to the people's wishes and needs. And to create a better harmony in the world.

QUEST: But that evolution began with the great financial crisis. Have you got any idea where it's going to end up?

KENT: I think it's going to end up where we create -- we have that golden triangle, working better with government, business, and civil society --

QUEST: Can it be done?

KENT: I think it can. I think it definitely can. And look at our case. Why shouldn't -- we can continue to grow, we can continue to invest and hire.

QUEST: This is for policy makers. Where would you like to be on the curve. Are we ahead of the curve at the moment, or are we still behind the curve?

KENT: So, the policy makers in terms --

QUEST: At dealing with the challenges and the current crisis.

KENT: I think we're about -- there.

QUEST: Still some way to go. Thank you very much.

KENT: Thank you.

(END VIDEOTAPE)

QUEST: As our chart gets more filled, we will review at the end of the week who went where.

Now, from Davos to New York, the Fed has spoken, and we're going to bring you the forecast on US interest rates from the people who set them. QUEST MEANS BUSINESS, we are live in Davos, and in Washington, they are waiting for Ben Bernanke to give his press conference. Good evening.

(COMMERCIAL BREAK)

QUEST: Ben Bernanke, the chairman of the Fed, is now speaking to reporters in Washington. If history's any judge, he's probably now reading out a long catalog of the state of the US economy. Let's just listen for 10 or 15 seconds.

BEN BERNANKE, CHAIRMAN, US FEDERAL RESERVE: -- strategy. This statement should not be interpreted as indicating any change in how the Federal Reserve conducts monetary policy. Rather, its purpose is to increase the transparency and predictability of policy.

There is today widespread agreement --

(CROSSTALK)

QUEST: I promise you, we're not just leaving him. He's got a long way to go before he gets to anything interesting about the -- what they're doing, why they're doing it.

It is an enormous change at the Fed because not only have they said they're going to keep interest rates low until 2014, adding a year to their previous statement, today we get Fed fund forecasts from FOMC members.

Felicia Taylor is at the New York Stock Exchange. It's -- we're really in the weeds, now, of US monetary policy, so how significant is it?

FELICIA TAYLOR, CNN CORRESPONDENT: It's very significant, especially in the effort to provide greater transparency for the marketplace, because there was criticism that the markets were somewhat in the dark in the past.

So, this is very significant, and especially -- and this is exact -- is the press release that he's reading, the fact that they have extended the low interest rate into 2014 and possibly the end of 2014 was a bit of a surprise for the marketplace.

There was only one dissenter, and that was Lacker. He didn't like the wordage -- or the verbiage, rather, "are likely to warrant exceptionally low levels for the fed funds rate at least through late 2014." He didn't want to hear -- he didn't want us to specify exactly what date.

The other thing that was interesting is that they left the possibility open for further stimulus, and that is very significant. I'm joined now by Ken Polcari of ICAP. Were you surprised that they left the door open so clearly?

KENNETH POLCARI, ICAP CORPORATES: No, I'm not, and actually, I think that the markets been telling you that it's been expecting it. This rally that we've seen over the last six or seven weeks, that's what the market's been telling you.

I think the fact that when he said he's very nervous about what's going on in Europe, he's nervous about what that's going to do to our recovery.

And there was only one choice but to leave the door open, because you couldn't shut it after making a comment like that. So, you had to leave the door wide open and you had to extend the rates, and the market, once again, is rallying as a result.

TAYLOR: The thing that's interesting, though, is that there's a slight negative to this report, because it almost seems -- we've seen -- had some pretty good economic numbers of late.

POLCARI: Right.

TAYLOR: It seems like he is more concerned -- Bernanke is more concerned that there may be further problems down the road. The recovery isn't so good.

POLCARI: And I agree with you, and do that's why you could really run either way with this story, right? And say wow, great, the Fed's going to be there.

On the other hand, you say, wow, I guess things are not nearly as good as maybe the reports are saying. Which then opens the door to the Fed being there to support and to help stimulate the economy more. And that's ultimately the overriding factor, which is why you saw our market turn around.

We've just rallied a hundred points. But we were down 60, we're up 50 now. So -- and so, the market likes that.

Now, do I necessarily agree with it? It's another manufactured rally, so it's very -- it's frustrating and it's confusing for investors, and it's -- the truth is, it's confusing for the market.

TAYLOR: And that's why we saw people jump into gold --

POLCARI: Right.

TAYLOR: -- because obviously, that's a safe haven, and if there's problems down the road, that's where they're going to go.

POLCARI: That's exactly right.

TAYLOR: This is a type of QE3. Are we going to see that, or a different sort of stimulus?

POLCARI: Well, again, he left that door open. He didn't tell QE3, he didn't call it an extension of Operation Twist, he didn't call it QE2.5, or 2.8. He just said the door is wide open, we have every tool at our advantage.

So therefore, it leaves it open to speculation on what it's going to be. But what it doesn't leave is -- what it doesn't leave, actually, is the fact that they've -- they're going to stand there in the event that they need it. And I -- the fact is, I think the sense is, he thinks we're going to need it.

TAYLOR: Very quickly, we're going to show you the other thing that's significant about this report, and that is the fact that two graphs were released, and this is what they look like. And this shows exactly how many voting members think that the Fed funds raise should begin to increase. And this down here is showing exactly the percentage where they think the Fed funds rate should go.

Obviously, 2012, 2013, they think it'll stay pretty much where it is. 2014, there are number of -- a number of members, there are 17 in total, who think that the Fed funds rate will begin to rise. And then, of course, the longer run, that it will increase somewhere between 4 and 4.5 percent. But that, obviously, is farther down the road. Richard, back to you.

QUEST: Before -- hang on, before I leave you, Felicia, while you've got your graphs there, we're in a new world here, Felicia, aren't we? It's going to take us months to work out the -- what having this extra information really means in terms of market trading and monetary policy.

TAYLOR: Absolutely. There's no question about it. It's a little bit confusing if you take a look at the graph, because obviously, there's a number of members of the Federal Reserve that believe that the Fed funds raise should start to tick up in 2014. We've heard from Bernanke himself that rates aren't going to go up at all.

So, that's a bit of a confusion for the marketplace. How do you trade that, because is anything going to change? Obviously, there'll be a number of meetings that are going to happen between now and 2014. Will they change their stance? Clearly, there's dissent amongst some of the members in the Federal Reserve.

So, things could change. Does more information make it better for the marketplace? Some people would say that greater transparency isn't necessarily a good idea, and obviously, that -- waits to be seen.

QUEST: We live in exciting times. You and I are old enough to remember when there wasn't even a statement. Well, maybe I am. Maybe not you, Felicia.

(LAUGHTER)

QUEST: Felicia Taylor at the New York Stock Exchange.

TAYLOR: Yes, I am.

QUEST: We thank you for -- leave it there. Don't dig the hole any deeper. When you're ahead, quit.

Now, times are tough, and countries are more guarded than ever. Protectionism is on the agenda. We'll be talking to head of the World Trade Organization, Pascal Lamy, in just a moment. QUEST MEANS BUSINESS, we're in Davos. Good evening to you.

(COMMERCIAL BREAK)

QUEST: The opening bell has sounded in Davos. Angela Merkel in her convening speech, the German chancellor said "We've not learned sufficient lessons from the financial crisis," and she says she's seeing more trade barriers going up around the world.

(BEGIN VIDEO CLIP)

MERKEL (through translator): If one is realist, even perhaps a little bit pessimistic, then one has to say that although in 2008 and 2009 we've - - experienced very clearly that there is a very close interdependency.

We've not been able to bring the Doha around to a successful conclusion of the international trade round. Quite the contrary, during our last meeting, the ROCD said -- it said to us at the G20 that there are increasing signs of protectionism, so that protectionism is rather on the rise.

(END VIDEO CLIP)

QUEST: The head of the World Trade Organization, Pascal Lamy, is also warning of protectionism and Mr. Lamy is with me now. Good evening to you.

So, Angela Merkel basically said it's a disappointment they haven't done Doha, and warns that protectionism is one stage further. This is something you've been saying for some time. So, I'm wondering, with a deteriorating situation economically, what breaks the logjam?

PASCAL LAMY, DIRECTOR GENERAL, WORLD TRADE ORGANIZATION: I think given that the macro look at the situation is deteriorating, this impacts unemployment, which impacts public opinion, which created protectionist pressures. Protectionist pressures are there, and they will be on the rise as long as the economic situation will deteriorate.

Now, as these pressures translated into protectionism, i.e. trade measure that would restrict rates, so far not really, although the rates remain.

QUEST: So what can you do other than bang the drum for it to avoid? What can leaders actually do to prevent that? Because clearly they've failed to get Doha going properly, so what's next?

LAMY: What can be done is two things. First, we in the WTO track each and every trade policy measure on this planet every month and we publish the results so that everybody knows what's going on.

Then, we have to make sure that our rules, which are about keeping trade open, are enforced, and this is part of what the WTO does.

QUEST: Are you finding it harder to keep -- basically, are you finding it harder to keep countries honest on this?

LAMY: Quite. It's harder to keep trade open in a situation where unemployment deteriorates. Now, so far, governments have been reasonably resistant to these pressures. There have been some exceptions. In some countries, in some places, on the other side, there has been trade opening measures.

But it remains a matter of big concern because we all know that protectionism is the only catastrophe that didn't happen since --

QUEST: So far. So far. So far, it's the only catastrophe.

LAMY: Quite.

QUEST: Early days. Now, look. We're going to come to the curve now. First of all, your entrance fee to the curve.

LAMY: My entrance fees in euros.

QUEST: That's all right. Nice to show somebody's got confidence in this. Right. So, the question is, as we look at policy makers on dealing with the crisis, are they behind the curve at the moment or are they now ahead of the curve? And I shall give you -- you can just make a nice cross -- where'd you --

LAMY: They clearly are behind the curve. They are behind the curve because they are not addressing this problem together. They are behind the curve because they don't have enough energy --

QUEST: That's a very depressing outlook, though, isn't it? At this stage, three years on, there are so many of them, people believe, behind the curve.

LAMY: You're asking me my view?

QUEST: Yes.

LAMY: I'm giving you my view. My experienced view as DG of WTO, these leaders do not have enough political energy to address together a number of problems which they have to address together, not the same solutions everywhere, but more cooperation in order to avert this crisis more quickly.

QUEST: Lovely to see you as always, sir.

LAMY: Thanks.

QUEST: Many thanks, indeed, for joining us.

LAMY: Right.

QUEST: Now, when we come back in just a moment, the UK economy is in reverse. A declaration from Alistair Darling, he saw the last big downturn from inside Britain's corridors of power. He'll tell us his views on the recession in just a moment. QUEST MEANS BUSINESS.

(COMMERCIAL BREAK)

QUEST: Hello, I'm Richard Quest, live in Davos.

More QUEST MEANS BUSINESS in a moment.

First, this is CNN, where the news always comes first.

And Fionnuala Sweeney has that from the CNN Center.

FIONNUALA SWEENEY, CNN ANCHOR: Hello, Richard.

Thousands of Egyptians are in Tahrir Square to celebrate the launch of the revolution one year ago. Many are both proud and deeply frustrated by what has followed. The protests toppled President Hosni Mubarak but the slow pace of reform troubles many Egyptians, who want the military to cede power immediately.

Video posted online appears to show new efforts to crush Syrian protesters. Here, we see burnt out buildings in the hotbed city of Homs. Activists say two people were killed there today and that 14 others have died in clashes across the country. Hama is also under siege with security forces and armored tanks shelling several neighborhoods.

The U.S. president focused on energy and the economy in his annual State of the Union Address on Tuesday night. Barack Obama says he wants to strengthen U.S. manufacturing. He also wants to shift government support away from oil and toward natural gas, solar energy and high tech factories.

These two Western aid workers are free after U.S. Special Forces stormed a compound in Somalia, killing nine gunmen. A Pentagon official says they were heavily armed and had explosives nearby. U.S. officials say the kidnappers were coat -- quote, "ordinary criminals" and did not appear to be linked to any terrorist group.

Angela Merkel has opened the world's Economic Forum in Davos. The German chancellor saying there is only so much our country can do to help the Eurozone. Mrs. Merkel also says tighter rules on debt are the only way to fix Europe's credibility.

Now, back to QUEST MEANS BUSINESS live from Davos.

QUEST: A lambasting today for Europe from Canada's finance minister. James Flaherty says the EU needs to get its act together. He oversees one of the fastest growing economies in the G-8. He's so hot under the collar about the Eurozone crisis, I thought he might melt the snow behind me when he talked about it a short time ago.

He joined me in the studio here at Davos.

(BEGIN VIDEOTAPE)

JAMES FLAHERTY, CANADIAN FINANCE MINISTER: We're very concerned about it and -- and we're -- we're disappointed that the Europeans haven't stepped up to the plate, haven't put their resources behind what needs to be done. And they -- now they're asking other countries to put money into the IMF to be used for Europe, which is a non-starter for us, to ask other countries in the world that are relatively poor -- I'm not talking about Canada, but other countries, China and so on -- to subsidize wealthy European countries is a non-starter.

QUEST: So how do we get out of this mess, because you and I have been talking about it now for three years...

FLAHERTY: Yes.

QUEST: It's not got much better and your growth is at risk if the IMF, as yesterday, said -- made -- made clear.

FLAHERTY: Yes, we're all concerned about that. And we're concerned about a constriction in -- in credit with -- with a banking crisis, if the European situation deteriorates, as it probably will unless they take action that needs to be taken, which means build a firewall, put in adequate resources, quite frankly, do what the Americans did a few years ago. The Americans didn't go ask the Europeans to bail them out. The Europeans -- the Americans did it on their own.

And the Europeans need to step up to the plate, grab the bull by the horns, do what they have to do, suffer through the difficulties and move on.

QUEST: Away from Europe, because that doesn't seem to solve any solution immediately, are you now concerned, not just a world of haves and have-nots, but an inequality in society, when we take the Occupy movement, that is now getting a head of steam, that the elites have not listened?

FLAHERTY: I think there's evidence in some of our financial institutions that they have not learned very much from the crisis of a -- of a few years ago. Some of the compensation issues are back again, with...

QUEST: What would the...

FLAHERTY: -- a very...

QUEST: -- what don't they understand?

This is what I can't understand -- because you know what they do. You're obviously -- down with the bankers.

Don't you say to them...

FLAHERTY: Well...

QUEST: -- which bit of greed do you not understand?

FLAHERTY: Well, unbridled greed is a dangerous thing, as we learned a few years ago. So they need to get that under control. They really have to rely on their boards to do that, the board thinking about the, you know, the corporation, the good of the corporation and the good of the shareholders.

QUEST: Money out of the pocket?

I have some money out of the pocket?

FLAHERTY: This is a money thing, yes.

QUEST: This is the money. All right.

FLAHERTY: All right. There we go.

QUEST: Thank you very much.

FLAHERTY: You're welcome.

QUEST: We're in euros today.

You're are -- you are a policymaker, obviously.

So where do you -- how far, in terms of dealing with the crisis, do you do -- where are we?

Are you -- you, we, Europeans, whatever you want, are you be -- are you ahead of the curve or are you still behind the curve grappling, trying to get hold of it?

FLAHERTY: Overall?

QUEST: Overall.

FLAHERTY: The global situation?

QUEST: Yes.

FLAHERTY: Yes.

QUEST: You can choose to -- yes.

FLAHERTY: This is the mid-point.

QUEST: This is the mid-point. That's ahead of the curve, that's behind the curve.

FLAHERTY: Over here somewhere.

QUEST: That's quite worrying, isn't it?

FLAHERTY: It is.

QUEST: It means the potential is really risky.

FLAHERTY: The potential for crisis is -- is serious.

QUEST: A pleasure.

FLAHERTY: Thank you.

(END VIDEO TAPE)

QUEST: Jim Flaherty of Canada.

And it's interesting now how we seem to be coalescing people's views that basically, no matter how close they want to get to ahead of the curve, basically, they seem to believe we are behind it.

The U.K. economy is shrinking. Output declined by .2 of a percentage point in the last three months of '11. Another contraction in Q1 will officially put Britain in recession.

CNN's Jim Boulden sat down with Britain's former finance minister, Alistair Darling, and asked whether Britain is, indeed, on the brink of another recession.

(BEGIN VIDEOTAPE)

ALISTAIR DARLING, FORMER U.K. FINANCE MINISTER: Look at what is happening now. The chancellor -- the new chancellor is borrowing 180 -- 58 billion pounds more than he thought he would have had to borrow when he presented his first budget. Our debt has gone over a trillion pounds for the first time.

So, you know, I -- there are worrying signs there. And it's all due to the fact that we have lack of growth.

Interesting, this is exactly the debate that was had in the 1930s in Europe and America, what do you do when growth stalls?

Because if you don't get growth, you don't have income to pay down your borrowing and therefore your debt.

That's why I'm so critical of the stance the present government is taking.

JIM BOULDEN, CNN CORRESPONDENT: So stimulation, you would be looking for?

You would be looking to pop money into the economy, which would, of course...

DARLING: Well...

BOULDEN: -- increase the deficit?

DARLING: Well, that is precisely what the government started to do here last November in their autumn statement. You know, they brought forward capital spending that they hadn't intended to -- to do. I think what you will see anyway in the budget, the government will do something to lift the tax burden on the middle and lower earners. It will have to do something about youth unemployment, because that is a big political problem, as well as as being a social problem. And, you know, I think they need -- will need to look again at how do you get capital spending going on infrastructure, because some of the big projects take years to get going, whereas something like, you know, house building, where you've got the planning consents, you can press on with that.

But the idea that you can simply do nothing, stand back, the risk is our economy, it's now -- it's clearly -- it's in -- it's in reverse at the moment. If that were to continue, then borrowing is going to get worse, not better. And, actually, what the IMF has been saying is that yes, of course, they would approve of consolidation. But they also said to -- you know, if we don't get growth, then you might have to look at the rate of it. That's what Oliver Blanchard was saying just a day or so ago.

BOULDEN: Now, we don't know for a fact that the U.K. is probably in recession this quarter, but we should assume that, shouldn't we?

I mean it -- we will be saying the U.K. is in recession by the middle of this year, no?

DARLING: Well, it -- it is more likely than not, although my prognosis for a whole of the year is, you know, I've always said I thought we might go either side of the line.

But my worry is that you're just going to see flat-lining for another year. And remember, this is -- we're still way below, in terms of output, what we were producing back in 2007. And, as I say, when you -- when you consider the importance of the Eurozone, not just to us, but to other parts of the world, as well, as long as that paralysis of decision-making goes on, then the greater the risk that we do go into a recession and that we may stay there for longer than we would otherwise do.

(END VIDEO TAPE)

QUEST: Alistair Darling talking to Jim Boulden there.

What a busy day it's been in the economic world and another down day on the European key markets. This is part of the reason why Ericsson, the world's biggest maker of wireless networks, and drug giant Novartis were big drags on the session. Their earnings missed analysts' expectations. Shares of Ericsson sank more than 13 percent in Stockholm. A different story in Athens. Hopes of a Greek deal brought relief to the Athens stock market. Greece and its creditors plan to continue talks on Thursday.

And to the bond markets. Look at where the bond market is. Portugal's borrowing costs touched record, 10 years up. Worries are mounting over possible contagion from Greece's debt crisis.

And to the big bourse now, in New York, as you take a look at how the Dow Jones is trading, particularly bearing in mind the Fed's claim that interest rates will remain on hold for perhaps -- until 2014.

You think that up 38 is not impressive, but the market had been down 75 at the start of play.

When we come back in just a moment, our next guest basically has one simple message -- forget the finances, it's about people. We'll hear from the head of the International Labour Organisation in just a moment why jobs are the key to recovery.

QUEST MEANS BUSINESS.

(COMMERCIAL BREAK)

QUEST: The Fed chairman, Ben Bernanke, speaking in Washington at the moment. And he's been talking to reporters about the unemployment situation and what's been happening.

We have a listen in to what the Fed chairman has been saying.

BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: A number of recent indicators point to some further improvement in overall labor market conditions but the unemployment rate remains elevated. Moreover, in light of the anticipated modest pace of economic recovery, the committee expects that over coming quarters, the unemployment rate will decline only gradually towards its mandate consistent levels.

Indeed, participants projections for the unemployment rate in the fourth quarter of this year have a central tendency of 8.2 percent to 8.5 percent that is little different from the latest monthly reading of the 8.5 percent.

QUEST: Now that's the Fed chairman. Details stuff. But it does point out the picture of a financial crisis and a social crisis.

The head of the International Labour Organisation says we must recognize what we're dealing with or we risk making things worse. The ILO's latest global employment trends report says 2012 will represent an urgent jobs challenge -- the prospects getting worse after three years of crisis.

I asked Juan Somavia whether growth and austerity are contradictory ideas.

(BEGIN VIDEOTAPE)

JUAN SOMAVIA, DIRECTOR GENERAL, INTERNATIONAL LABOUR ORGANISATION: You don't need the austerity now, right away, immediately. You can give yourself a space. The whole history of the world sort of tells us that when you have a high debt, you give yourself a longer maturity time to be able to do what?

To recover growth.

QUEST: Did...

SOMAVIA: We didn't do that.

QUEST: Don't you end up with Greece, Italy Spain and the bond market attacking, if you give yourself too much space?

SOMAVIA: Look, the bond market and the financial operators and the ratings agencies didn't have a clue about what was going on in 2008. To think that they have the correct approach, that they have the good solution would -- is a mistake.

QUEST: So what do you want by way of growth-oriented policies?

Tell me in concrete terms?

SOMAVIA: In really concrete terms, give longer maturity, concentrate on investment in the -- in the small and medium enterprises which will create jobs. You have $2 trillion cash surpluses in large companies of Europe and the United States. Public/private agreements in order to get the private sector going, because you can't do fiscal stimulus. You have to ensure that the private sector invests.

All of these things are perfectly possible if you don't have the financial markets telling you by Monday next, you have to have a solution...

QUEST: But...

SOMAVIA: -- which is what we're doing.

QUEST: But if you have got the financial markets telling you that, isn't it very hard to go against them?

I mean if you've got the dogs barking at your feet and you want to carry on walking up the postman's path?

SOMAVIA: The problem is that trying to solve the debt, the fiscal -- the financial debt, you are seeing the social debt. The confidence of people, in the end, is more important than the confidence of the financial markets. And that's the reality.

QUEST: Which countries are you most worried at now, where -- when we talk about a deterioration of the social fabric of society?

SOMAVIA: Obviously, the European countries are one problem. But, you know, the -- the emerging countries came out of the crisis much quicker than the developed ones, because they cared for social protection policies, increased minimum wages. They did things that were not done here.

But now, the impact is getting over there. So you -- you now have a double whammy -- the problem here and the impact on the emerging countries.

The IMF has told us that growth this year is going to be 3.3. Come on. With that, there's no way you can solve the fiscal crisis.

How can you address the debt problem if you continually grow less, less and less?

It doesn't work. It's not good economics.

QUEST: So you're concerned that eventually this does spill into something more serious, basically, than just a financial crisis?

It spills into a jobless totality of -- of social unrest and -- and disruption?

SOMAVIA: It has already. We're already there. We have a a 600 million jobs challenge. We have 200 million unemployed, which are going to increase with the latest IMF calculations. And you have 400 million young people coming into the labor market. And you're going to deal with that by -- by constraining and constraining growth, because we only have to worry about the fiscal issue?

It's not -- it doesn't work from an economic point of view. You need the consumption that people have.

QUEST: In dealing with this crisis, are we ahead of the curve or behind -- if you pay up first?

SOMAVIA: Well, there we are.

QUEST: Are we ahead of the curve or behind the curve?

SOMAVIA: Let me put it there. I believe that we are behind the curve, because there was a crisis before the crisis. Not only the things that I've been saying, but also the fact that inequality has grown for the last 30 years in an enormous amount.

(END VIDEO TAPE)

QUEST: Behind the curve from Juan Somavia. Maybe we're not surprised with that response.

Philip Jennings is with me, representing 20 million workers globally.

You are the secretary of UNI, the global union.

And, obviously, workers, social unrest, civil society, these are now all issues. But even here at Davos...

PHILIP JENNINGS, GENERAL SECRETARY, UNI GLOBAL UNION: They're here. They're back. I thought it would all be about crazy bankers. It's about inequality and it's about a -- an ecology which is not sustainable. We've been told for years at Davos that inequality was a price you had to pay for globalization.

QUEST: No, we were never told that.

JENNINGS: We were told that, Richard...

QUEST: We were never...

JENNINGS: -- we were told and now it's a burden. It makes businesses sick. It makes your economies sick. Equality -- inequality is back in numbers that we've not seen since the 1920s.

QUEST: Isn't that...

JENNINGS: Welcome to the Great Gatsby years at Davos.

QUEST: So...

JENNINGS: Richard.

QUEST: -- so, when we hear people talking like this and they say like Nouriel Roubini says, that were back to 1920s...

JENNINGS: Yes.

QUEST: -- high style and you hear -- you hear the head of the IMF, Christine Lagarde, saying that a 1930s style depression...

JENNINGS: Yes.

QUEST: -- could be upon us.

JENNINGS: Yes.

QUEST: That is, to some extent, what you've been warning about.

JENNINGS: We've been warning about this for years. We have a second chance to get things right.

QUEST: So what went wrong?

JENNINGS: People didn't listen. They thought -- they looked for those green shoots of recovery last year, thinking that all those issues were behind them. They weren't. To be seen -- we -- they've not -- policymakers have ignored the workforce. They've ignored their people and they've let the people at the top get away with it.

QUEST: So...

JENNINGS: It's the 1 percent who have won, the 99 percent are rebelling.

QUEST: So when people like Muhtar Kent says on this program that he now recognizes that there has to be a reforming of capitalism, A, do you believe the leaders, and, B, what would you want them to do?

Give me some concrete suggestions?

JENNINGS: Suggestions. First of all, I think there's a breakthrough in thinking. They -- there is a change in the mind set that this is a problem that has to be dealt with. You have to change how wealth is distributed.

How do you change that?

First of all, use your tax system and you give people like me a stronger voice. We are being systematically hounded out of the workplace around the world. We need a stronger trade union movement with a -- with a unified voice...

QUEST: All right...

JENNINGS: -- who can sit with these guys...

QUEST: -- all right...

JENNINGS: -- that boss at the top of Coca-Cola and say we don't like the fact that you're earning 350 times more than...

QUEST: All right...

JENNINGS: -- the workers.

QUEST: -- all right...

JENNINGS: Give me a seat at the table and I'll change that distribution. Give me the chance...

QUEST: Are you prepared to be moderate?

Are you and your colleagues prepared to be moderate, or, allowing you back a seat at the table, do we end back to the 1970s...

JENNINGS: No.

QUEST: -- and (INAUDIBLE) Britain?

JENNINGS: No. No. We were aiming for a sustainable growth and a sustainable business. You can't do that without an organized workforce and you can't do that without respecting what the union voice is all about.

We have to change the distribution model.

QUEST: Right.

JENNINGS: We also have to change the framework within which corporate decisions are made. We have to change the people who are around that table, more workers involved in decision-making...

QUEST: OK.

JENNINGS: -- about remuneration.

QUEST: Get...

JENNINGS: Get more women involved.

QUEST: -- get your hand in your pocket.

JENNINGS: Richard, I'm prepared to dig deep for you.

QUEST: Apparently. Apparently.

JENNINGS: A hundred Swiss francs.

QUEST: Oh, my word, this is -- hey, hey, this is -- he sent the bar even higher.

JENNINGS: There you go.

QUEST: We thank you for that in advance.

JENNINGS: Thank you.

QUEST: But now here you can -- you can do what you like on the -- on the curve.

Where would you like (INAUDIBLE) you can have the curve.

(LAUGHTER)

QUEST: Where would you like...

JENNINGS: This is -- this is not a leveraged buyout of the curve.

QUEST: No.

JENNINGS: I'm going to put us down here. If Europe continues...

QUEST: All right...

JENNINGS: -- with this fixation with austerity, without any reflection on growth and jobs, we are sunk.

QUEST: Good to see you, as always, Philip.

JENNINGS: Thank you.

QUEST: Many thanks, indeed.

JENNINGS: Thank you.

QUEST: Now, as you can see, our wonderful curve, it wasn't only Nouriel Roubini who left his mark on our curve jot. We've gone through a great transformation on our own here today, right here in Davos. We had these templates made -- laser technology developed by the Massachusetts Institute of Technology. As you can see, it is the way ahead on our curve.

So, to the weather forecast now.

And Jenny Harrison is at the -- I -- I do beg your pardon. We will check with the weather after the break.

(COMMERCIAL BREAK)

QUEST: Now, welcome back to QUEST MEANS BUSINESS, live from Davos.

You may have noticed that I went to my winter coat here. Well, a little earlier, if I had e-mailed some of my friends about winter coats, using Gmail, for instance, an advertisement for winter coats might pop up in Google search. That's the coat from earlier.

Google has just made a radical policy change allowing Google products to tell each other what we're doing, what we're searching for and what we're we're talking about. At Facebook/quest we've got an article that explains not only about my coat, but more importantly, about the new rules on Google search.

The weather forecast -- Jenny, you quite rightly said it would stop snowing. And it did.

JENNY HARRISON, ATS METEOROLOGIST: Jolly good. Yes, don't sound so surprised.

And by the way, don't think your costume changes haven't gone unnoticed. I've been watching you for hours today and I've seen all sorts of nice outfits on there.

So, yes, look, you see?

Don't you look lovely?

I like the hat particularly. It's like that thing that where's Richard?

Where's Waldo?

Anyway, you might have...

QUEST: I know. I've seen -- I've seen -- I -- I've said -- I know, I've seen it. I've seen it.

HARRISON: Oh.

QUEST: I've seen -- I -- just because...

HARRISON: Oh, you've got it there. Look. You -- are we about to have another viewing?

No. He doesn't even know he's on camera.

QUEST: Oh.

HARRISON: OK. Oh, you see? Always all over the place, Richard.

Back and forth, we are, to you in -- you in Davos and me back here.

Let's talk about the snow, because, yes, it did come to a stop. I said it would and sure enough.

Right now, the wind is very, very calm where you are. Minus four is the temperature. It does, I'm sure, feel pretty cold, having said that, now that the sun has gone down.

But things, as you can see, in the last few hours, have been relatively quiet across the entire region.

Not so out toward the northwest. Some very heavy rain now pushing in toward the U.K., pushing into Scotland and working its way through Ireland, as you can see there. The winds quite blustery, as well. But the winds are not going to get much stronger over the next couple of days. We're just going to see sort of blustery conditions across much of the north of Europe.

The main weather, this is further in the south, and, of course, on its way toward the southeast. This is where we've seen the rain and also the very heavy amounts of snow.

But when it comes to snow depth, we know you've had a lot there in Davos. You can see the lower levels, 150 centimeters. In fact, that's the -- that's right. And then the average is 63.

We know we've seen a tremendous amount this year, 10 centimeters in the last 24 hours. Now there is some more, I have to say, toward the end of the week. But first, there should be a lovely day.

This is the forecast for the snow. There'll just be a scattering across the mountaintops up there in the Alps. And when it comes to the actual forecast for Davos, as I say, Thursday, a very nice day. Some pretty good sunshine. And it should feel very nice, too, in that sunshine, because temperatures should make it just above freezing, only a degree, but even so, not bad. Very cold in the overnight hours because of that sunshine. So clear skies then by Friday.

The snow is back in the forecast on Saturday, a mix of scattered snow flurries.

But there's that snow working its way in toward the southeast, also more snow eventually pushing into the west.

Some pretty hefty accumulations really building up here in the southeast, as much as 25 Celsius. So, not surprising, when I show you that on Thursday, we could have some lengthy delays in Sofia, two hours or more, because of that snow that's actually heading in.

Elsewhere, we've got some brisk winds and low clouds causing, as I say, a few more delays, fairly widespread. And then temperature-wise, look at this, double figures -- 10 Celsius in London, 11 in Paris -- Richard.

QUEST: Many thanks, Jenny.

Jenny Harrison at the World Weather Center.

And when I come back with a Profitable Moment. We will explain with curve and who's behind and who's ahead. That's in a moment.

QUEST MEANS BUSINESS.

(COMMERCIAL BREAK)

QUEST: Tonight's Profitable Moment.

Economists, politicians and analysts constantly speak about being ahead of or behind the curve.

In the global financial crisis, that means have they got a grip on what's happening?

Are things getting better or are they getting worse?

So QUEST MEANS BUSINESS, we have our own version of the curve. And that's the question we are asking. Honestly, this will show the level of confidence that people have about whether policymakers have got a real grip on what's going on.

So you have PWC behind the curve, Nouriel Roubini behind the curve, Richard Edelman ahead of the curve. And by the end of the week, I promise you, you get this vision that shows the level of pessimism and the lack of confidence.

And as for the money that they're giving, the donations, they're going to charities related to mountain rescue,

Because that's QUEST MEANS BUSINESS for tonight.

I'm Richard Quest in Davos.

Whatever you're up to in the hours ahead, I hope it's profitable.

I'll see you tomorrow.

END