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QUEST MEANS BUSINESS

Central Banks Take Action; European Markets Mixed; Economist Looks at Central Banks Action; US Stocks Rebound; Final Report on Air France Flight 447; The Modern Aircraft; Euro and Pound Down; Make, Create, Innovate: The Perfect Formula; Easy Way Out of Euro

Aired July 5, 2012 - 14:00:00   ET

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


RICHARD QUEST, CNN INTERNATIONAL HOST: Cut the rates, roll the presses. It's the Central Banks to the rescue once again.

Inappropriate. Excessive. Destructured. The words used to describe the pilot actions on Flight 447. We have a special report tonight.

And look sharp. The Shard is open and searching for tenants.

I'm Richard Quest. I mean business.

Good evening. In China, in the UK, and in Europe, Central Banks across the world are cutting rates and printing money. They are altering liquidity requirements. It's all in an effort to jolt the economies back into gear. Never more seriously, and five years after the Great Recession began, but there's still much work to be done.

If you join me over in the library, you'll see what I mean. The first -- the Bank of England, where QE3 is now the order of the day. It is 50 billion pounds, $78 billion in total, some $375 billion. This is where the Bank of England creates new Central Bank Reserve, which is then used through primary dealers and through the market to buy government UK gilts.

As -- they left interest rates on hold, but this is seen, QE3, as being an important measure to try, bearing in mind that the Bank of England and the governor of the bank believes that, basically, inflation or interest rates, growth forecast, everything is having to be rethought about.

In China, too, the People's Bank of China has also cut rates. This was a surprise. It's the second cut in a month. The last one was before that, it was in 2008. And the fear, of course, when the People's Bank cuts is that there could be a hard landing instead of a soft, smooth landing. Down just about a third -- I mean, it's 0.3, down, now at some 6 percent.

Compare that 6 percent, by the way, with 0.75 percent and you get an idea. But then, look at economic growth, 8 percent versus recession in the European Union.

So, the eurozone has cut central banks -- the ECB has cut rates by a quarter of one percent. It's the lowest in the eurozone's history. It was widely expected, it was unanimous. They didn't announce any other unconventional measures, such as their bond-buying program. But the ECB president Mario Draghi says that the eurozone banks still needed to recapitalize.

(BEGIN VIDEO CLIP)

MARIO DRAGHI, PRESIDENT, EUROPEAN CENTRAL BANK: It is essential for banks to continue to strengthen their resilience where it is needed. The soundness of banks' balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalization of all funding channels.

(END VIDEO CLIP)

QUEST: Mario Draghi, there. And European stock markets mixed, two down, two up. The interesting things were the downs. The two downs -- and Paris was off very sharply -- are the two eurozones, that the two outs, slightly above, barely changed. London FTSE gained just slightly up.

Investors were disappointed with the lack of other new measures from the ECB in Frankfurt, so that's one of the factors. Cutting rates were so widely expected, but frankly, nothing else was announced.

There's only so much ammunition that the central banks can fire at this crisis. Ken Wattret from BNP Paribas says that when all is said and done, the only thing that really will fix this crisis is time, and I wondered whether central banks are rapidly running out of options.

(BEGIN VIDEOTAPE)

KEN WATTRET, CHIEF EUROZONE MARKET ECONOMIST, BNP PARIBAS: Well, I think the ECB would probably say there is some room for maneuver on rates, only very marginal. And they also have some unconventional weapons in their armory: more liquidity for banks, larger asset purchase programs and so on.

But I take the point. The economy's weak, it's likely to say weak. There's a demand side problem here, so you can cut the level of interest rates, but if there's no demand because of very high uncertainty and very tough economic conditions, it isn't going to make a huge amount of difference.

QUEST: As we now watch these -- this further monetary stimulus move into the system, is the best we can really hope for that more ingredients have been put into the cake, and the cake now has to bake?

WATTRET: Well, I would say we also need to consider the counter- factual. What would the situation be like if central banks hadn't taken onboard these measures and other unconventional measures.

And probably economic conditions and financial market conditions would be even worse. So, we need to bear that in mind.

I think realistically, what's going to fix this problem is time. It's going to take time to deal with the imbalances which have built up, with the high levels of debt, with these competitiveness problems I've talked about. And therefore, what we're talking about is probably central bank actions mitigating those circumstances. But really, the underlying problems are likely to persist for quite some time.

QUEST: At any given moment in this whole saga, now, we are also at risk of another serious downward leg if, for example, an Italy or a Spain gets into a worse fiscal position, as we'd already seen from the Italian numbers, or there's another euro bust up. So, the risk, Ken, is still very firmly on the downside, isn't it?

WATTRET: I would certainly echo that. We had exactly the same today from the Bank of England and also from the ECB in terms of economic outlook. Risks are very much to the down side, and it's those event risks which are of particular concern.

I'd say the best-case scenario is we kind of grind our way through these problems, maybe eke out some small, modest rates of growth every now and then, but in a very difficult environment more generally.

And if some of these event risks materialize, then there's limited ammunition to deal with them, and that would be a very bad scenario, of course. Very similar, maybe, to what we had after the collapse of Lehman Brothers in 2008, 2009, but potentially with the recovery from that kind of shock coming later and in a less dramatic fashion.

(END VIDEOTAPE)

QUEST: Ken Wattret from BNP Paribas.

(RINGS BELL)

QUEST: The markets in New York coming back from sizable losses, of course. Well, I say coming back: just a gain of 8 points. Traders return from Independence Day.

The ADP jobs report showed that more jobs were being created in the private sector. Of course, that is only part of the story. We get a full jobs report, which is out on Friday, showing the number of jobs. The unemployment rate, that's still to come.

In one moment or two, the final report into the crash of Air France Flight 447. Here is the long report, and we'll take a look at the chain of events that led to the loss of the plane and all those onboard. QUEST MEANS BUSINESS.

(COMMERCIAL BREAK)

QUEST: The final report on the accident of 1st of June 2009. After three years of investigations, this final report concludes that pilot reactions for the crash of Air France flight 447 was the main cause. All 228 people onboard died when the plane plunged into the Atlantic on the 1st of June 2009.

Now, what you're about to hear comes from the report itself by the BEA, the French investigating authority. So, the authority says the accident resulted from a succession of events.

It talks about the inconsistency between measured airspeed and inappropriate controls. Basically, the speed sensors froze up with ice, and then of course, a variety of effects took place: the autopilot, the auto throttle disengaged and the like.

But then, the report goes on to say, the apparent difficulties with airplane handling at high altitude in turbulence led to excessive handling inputs in roll and sharp nose up by the pilot flying. Now, what this means is, having had the speed sensors, the way the pilots behaved became the crucial issue.

And then, towards the end of the report, it says the crew progressively became destructured, and it's likely they never understood they were faced with a simple loss of airspeed information. In the minute that followed, it said, the failure of the attempts to understand the situation and the destructuring fed on each other until the -- and this is the phrase -- "total loss of cognitive control of the situation."

The BEA chief investigator, Alain Bouillard, said that once --

(BEGIN VIDEO CLIP)

ALAIN BOUILLARD, BEA CHIEF INVESTIGATOR (through translator): -- never understood that it had stalled. The commander then approached and heard the stall alarm and noticed strong vibrations. They did not give a good diagnosis of the situation.

At this stage of the event, only an extremely determined crew having really understood the situation could have attempted to bring the plane back into its correct flight. Thus, the crew was in a state of virtually total loss of management of the situation.

(END VIDEO CLIP)

QUEST: Alain Bouillard also said safety is ultimately based on the capacity of the pilots, the signals they receive, and how they react. The BEA makes new recommendations for training and education.

So, let's talk about those signals and the capacity to react. To find out more, I went onboard a flight simulator to find out how complex the modern cockpit actually is.

(BEGIN VIDEOTAPE)

UNIDENTIFED MALE: V-1.

QUEST: This Airbus A330 leaves the runway. But this isn't a real airport, and I'm not in a real plane. It's a simulator, the sort that's used to train today's pilots. It's an exact replica of the cockpit, right down to the noises it makes.

At the heart of the Airbus cockpit philosophy is the side stick. When it was introduced, it was a radical departure from conventional flying. Now, the pilot uses it to control the pitch and the roll of the aircraft. It uses technology called fly by wire.

QUEST (voice-over): Fly by wire sends signals to computers, which then command the movements. Today, both Boeing and Airbus planes have fly by wire technology. Airbus's chief operational advisor, Harry Nelson, has been flying for 50 years.

HARRY NELSON, CHIEF OPERATIONAL ADVISOR, AIRBUS: Fly by wire is here to stay, and I can confidently say to you that fly by wire with envelope protection has reduced the accident statistics by 50 percent. 50 percent. So, I'm talking now, we're achieving an accident rate of one accident per 10 million flight hours.

QUEST: On an Airbus, the side sticks operated by the captain on the left and the first officer on the right work independently of each other. One pilot cannot feel the side stick movements made by the other. This asynchronicity is one reason why the pilots on Air 447 didn't realize each pilot was commanding the plane to do different things.

Airbus planes also have envelope protection, which in normal conditions, prevents the plane from being flown dangerously. When there's a serious fault, the protections are designed to go away, and the pilots receive detailed information from the computers.

QUEST (on camera): There is a logic to the way the Airbus plane tells the pilot that something's gone wrong. It starts with a warning sound --

(DING)

QUEST: -- which has to be acknowledged.

(TRILLING SOUND)

QUEST: That draws attention to the ECAM messages, which then come up in order of priority.

QUEST (voice-over): On the Qantas A330, where the engine exploded after leaving Singapore, the ECAM computer generated more than 50 messages that took the crew almost an hour to clear before the plane landed safely.

So, the question becomes, are pilots overwhelmed? The increasing demand for pilots today mean planes are designed for a trained flight crew at all levels of experience. Now, the human factor is being looked at more closely. Why pilots behave in certain ways in a crisis, which seems to contradict everything they've been taught.

COMPUTER VOICE: Stall. Stall. Stall. Stall.

NELSON: There are industry trends, which are now -- which need to be looked at. We have an even perhaps a younger set of pilots coming into the industry, perhaps even with less experience. Less military pilots coming into the industry.

QUEST (on camera): Is the cockpit too complicated?

NELSON: We design for the whole range, if you like, to cover those pilots who, perhaps, were at the lower end of the scale who may need that kind of protection. The better pilots never need it.

QUEST (voice-over): Closing the training gap between the different level of pilots is paramount.

QUEST (on camera): While flying is without doubt the safest form of travel, the industry is considering the lessons to be learned. Airlines, manufacturers, regulators, and pilots -- everybody is looking to see what needs to change to improve the way we fly.

(END VIDEOTAPE)

QUEST: Now, coming up later in this program, we'll be speaking to Mexico's tourism minister. And that ties into tonight's Currency Conundrum. Which currency did the Aztecs use? Was it the cacao beans, the sea shells, or the tropical birds? Answer later in the program.

But from the Conundrum to the rates: big movements after today's central bank. The euro's down almost one percent, falling rates. The British pound also lost against the dollar. QE, more inflation, falling rates. Those are the rates --

(RINGS BELL)

QUEST: -- these are the breaks.

(COMMERCIAL BREAK)

QUEST: "Ideas," said John Maynard Keynes, "Ideas, they shape the course of history." And tonight, we argue they are the fabric of even the most depressed economies. We launch our new series --

(RINGS BELL)

QUEST: Make, Create, Innovate. Over the next course of the months ahead, we will discover the ideas and the designs, the products that keep the wheels of the economy moving and drive new growth and prosperity.

This is what it's all about. Join me over in the library. It is about the ideas of manufacturing, whether it be the folding bicycle, or the -- from manufacturing, it may be the process involved in printing your daily newspaper, bringing light to us all.

Or it could be a small, tiny computer, so small, it would fit into your wallet. We'll meet the people behind these ideas and the industry involved in putting them together, executing it. It's Make, it's Create, it's Innovate. It's the heart of industry and, more importantly, it's the lifeblood of an economy.

So tonight, we get off to a rip-roaring start ahead of this week's weekend British Grand Prix in Silverstone with the Formula 1. And to take us through the cream of British F1 engineering, Red Bull's elusive and brilliant Adrian Newey.

(BEGIN VIDEOTAPE)

ADRIAN NEWEY, CHIEF TECHNICAL OFFICER, RED BULL RACING: In terms of communicating my ideas and developing my idea, I work on a drawing board. I like the freedom of drawing, the fact that you can sketch very easily. You can rub out, you can change, you can freehand. I guess I'm the last dinosaur in the industry, really.

In front, suspension is carried very high, that's something we started at McLaren in 2005, the so-called zero keel, where we raise the bottom wishbone and lock it -- tuck it into the bottom of the chassis so that all the force coming off the bottom of the wing are able to pass cleanly under the wishbone.

We have a set of regulations, then do a layout for the car. The last two years, we've been working hard on getting the most out of the exhausts. We've been making the engine into a gas producer as well as something that gives horsepower at the rear wheels. And then, it's giving all that exhaust thrust and gas that we have available, how do we best use it?

We have other details. This one, for instance, is the engineering take. It used to be if you go back to the late 80s, early 90s, blend straight in, and we had a lot of trouble with separation in the base of the ducts.

I actually took inspiration on a small internal flight to the Caribbean where the propeller aircraft I was on had a similar detail for its engine intake.

I very often find if I think about a problem for a while, kind of store it, walk away, do something else, the brain's an amazing thing. It seems to tick away on a problem, and sometimes, the solution will pop up in the shower the next day, the next week, whatever.

I first started in motor racing in 1980, so I've had a career of 30- plus years in it. When I first started, then, Formula 1 teams would particularly have, let's say, five engineers. Today, top Formula 1 teams will have over 100 engineers, maybe as much as 130. So, we have a tremendous research capability.

What motivates me, we're out there every couple of weeks being measured on how we're doing, which if it's going well is great. If it's going poorly, it's a lot of pressure. But at least you get some results. And I think that's what's so fascinating about motor racing is that blend of designing competition. And it really doesn't exist anywhere else.

Really, the design job is part commiseration and part blue sky, light bulb-type things. So, it's really trying to get that blend of evolution and revolution.

(END VIDEOTAPE)

QUEST: Make, Create, Innovate, which will be here every week.

Four hundred entrants, five finalists, and now there is a winner. Economist Roger Bootle has scooped the $390,000 Wolfson prize for the least-painful way of breaking up the euro. Bootle says the idea of that happening isn't too far-fetched, and it's more likely than not that Greece will leave the euro this year, starting a chain reaction from the other members.

Here's his 112-page winning exit plan summed up in 60 seconds.

(RINGS BELL)

(BEGIN VIDEO CLIP)

ROGER BOOTLE, WINNER OF WOLFSON PRIZE FOR ECONOMICS: Our plan envisages a country preparing in secret, a small group of officials. And then, enacting that plan very quickly, essentially overnight, announcing to the populous that domestic monetary amounts are being redenominated into a new currency, let's call it the drachma, at one for one.

So a given amount in euros becomes the same amount in drachmas. Meanwhile, on the exchanges, on the foreign exchanges, the drachma depreciates sharply. Perhaps it would be one up to 1.7, 2 to 1, we don't know. That's not a problem. That is the essence of the solution.

The country than redenominates all its debts, its domestic debt, into this currency. It establishes a new policy regime, bans wage indexation, establishes tight controls on fiscal policy. And then, lies back and hopes, I think correctly, that before very long, that much lower exchange rate will bring renewed economic growth.

(END VIDEO CLIP)

QUEST: Roger Bootle. Well, Lord Simon Wolfson is the man who backed the prize with his own money. And though he had no say in the outcome, he told me why he agreed with the judge's choice.

(BEGIN VIDEOTAPE)

SIMON WOLFSON, WOLFSON PRIZE FOR ECONOMICS: What I like about his submission is that it's comprehensive. Roger deals with every major issue, whether it be what happens to people's mortgages, the stability of the banking system, the role of the ECB, what happens to notes and coins.

Roger looked at ever single element. And it's that -- what is needed is some form of comprehensive template.

QUEST: And with -- we talk about it in terms of Greece because it's the closest country to the position, but this competition or this contest was designed in sort of an academic scenario, wasn't it? Not with one country in mind.

WOLFSON: No. And I think, of course, if one country does come out, the chances are more than one other will follow.

QUEST: How likely do you think we are, now, to that scenario? How likely is a Roger Bootle scenario to come about?

WOLFSON: Well, more likely than it was six months ago. And every day that passes, the end of the euro becomes more likely.

The problem is that what we're seeing now is a series of refinancings, where Germany, in essence, is lending a lot of money to countries to refinance debt that is probably never going to be paid back.

At some point, that process has to end. But the real problem is that underneath all this isn't a financial problem. Underneath it is an employment problem. How do you get the 25 percent of the people that are unemployed in Spain back to work? Without devaluation, that to me looks impossible.

QUEST: And you can't devalue unless you actually leave. Are you not encouraged by the last summit? By the fiscal compact? By the decision to move between now and the end of the year to the four pillars, Van Rompuy's four pillars? Does that not make your contest a little further away from reality?

WOLFSON: Well, let's hope so. I have to say, I'm -- I hope you're right, but I -- listening to the governor of the Central Bank, the ECB today, one has to say, that wasn't he sound of a confident man.

(END VIDEOTAPE)

QUEST: That's Lord Simon Wolfson on the Wolfson Prize.

Mexico is blighted by drug wars, gang violence, and murder. That's one side of the story. But millions of tourists still go there, and we'll be talking to Mexico's tourism minister about the future under a new president.

(RINGS BELL)

QUEST: QUEST MEANS BUSINESS, good evening to you.

(COMMERCIAL BREAK)

QUEST: Hello, I'm Richard Quest. More QUEST MEANS BUSINESS in a moment. This is CNN and, on this network, the news always comes first.

In a final report, French investigators say pilot reaction was ultimately to blame for the crash of Air France flight 447; 228 people died when the flight from Paris to Rio plunged into the Atlantic in June 2009.

Football authorities hope controversial goals like this one will be eliminated with a big rule change they made today. The sport's main rules board approved goal-line technologies for use in professional matches, and it could be in use by the 2014 World Cup.

The European Central Bank has lowered a key interest rate to an all- time low. The ECB cut its main lending rate and other rates by a quarter of a percentage point to 0.75 percent.

A natural disaster set in motion, but report says last year's crisis at the Fukushima nuclear plant was actually manmade. The report pointed the finger at Japan's culture of obedience (inaudible) the government, saying it colluded with regulators and owners of the plant.

The whistleblower website WikiLeaks says it's begun publishing more than 2 million emails from Syrian ministries, politicians and companies back to 2006. WikiLeaks founder Julian Assange says in a statement the files are embarrassing to Syria but also to Syria's opponents.

(MUSIC PLAYING)

QUEST: Mexico's tourism industry's been breaking records over the past few years, despite stories of drug violence and high murder rates. The previous outgoing government ran campaigns dispelling tourists' fears and safety it seems to have worked.

Mexico now gets a new government. More half of the votes being recounted, the country's old guard has already claimed victory. The PRI party and its leader, Enrique Pena promising many things, among them a new strategy. Joining me live from Mexico is Gloria Guevara, the country's secretary of tourism.

Always good to have you with us, Minister, making sense of this. Firstly, after the new administration takes office, do you still hope to have a role in the industry?

GLORIA GUEVARA, MEXICAN SECRETARY OF TOURISM: Well, absolutely. And the reason is because we all are part of the industry and (inaudible) we all have to continue supporting the industry after the government changes.

QUEST: But will you be -- do you have hopes of -- I suppose I'm being too polite. Do you have hopes of still being a minister?

GUEVARA: Ah, well, that's a different question. What I can tell you that is the decision of the new president. My job basically was to support President Calderon with a strategy, the strategy that we put in place a couple of years ago that is working quite well. And hopefully it will continue.

QUEST: This strategy, you've got the U.S. slowdown, you've got the Eurozone in recession, the high-spending tourists. So you're -- but I know that your strategy is predicated on still allowing for that.

GUEVARA: Yes. Well, let me tell you that -- I can tell you that the best legacy that I think this administration will leave to the country of Mexico is that finally that sort of a strategy, everyone is aligned.

The alignment that we have between the private sector and the public sector and to have one object before the entire industry, that's totally unprecedented. That was created from everyone. We have a business plan that we are executing as we speak.

QUEST: Right.

GUEVARA: And the new administration -- and what we are hoping is that they will continue with the strategy, the one they would like to continue growing in person (ph).

QUEST: Does -- is there any evidence that the drug violence, the story, if you like, the criminal stories has had a deterrent effect on tourists? And if so, do you still have to do more work to turn that around?

GUEVARA: Well, the work is something that we have to do every single day. And what I can tell you, based on the facts and the numbers that we have, you can take a look and see that for the last 14 months, 14 months we have seen a growth in, for instance, hotel occupancy, where you can see there the domestic traveler, both international travelers.

And you take a look at 70 different destinations, where we receive data from all the different hotels, we compile that information and our numbers today are much better than 2008. So in other words, that has been growing for the last 14 months.

At the same time, if we consider international travelers, if you look at the information from the database from immigration for instance, you know, we find that a traveler arrives to the country --

QUEST: Right.

GUEVARA: -- (inaudible) scan the passport and their name and last name in these forms. Well, we -- you can see that we have seen a growth of nine consecutive months. So that basically is telling us that more travelers are coming to Mexico.

QUEST: All right, Minister.

GUEVARA: (Inaudible) shared, that thing that I share with you, we broke a record. We have the highest.

QUEST: We have to leave. We have to leave it there. You and I will talk about this, whether you're minister or not, because I'm sure you won't be leaving the industry in the future, when I see you at ITB in Berlin or at WTM in London.

Minister, many thanks for joining us, the Mexican tourism secretary there. We'll be back, QUEST MEANS BUSINESS.

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(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

QUEST (voice-over): The answer to the "Conundrum," which currency did the Aztecs use? Was it the cacao beans, sea shells or the tropical bird, and it's the beans. They are, of course, one of the key ingredients in chocolate. The Aztecs treated them as a precious commodity -- the beans, that is, not the chocolate.

(END VIDEO CLIP)

QUEST: In less than three hours, London will unveil Europe's tallest building. It'll have a light and a laser show. It's The Shard, which has taken half a decade from planning permission to actually building. That's the outside. The work inside continues well into next year, and it could take much longer to fill it up with tenants. Issa Suarez reports.

(BEGIN VIDEO CLIP)

ISA SOARES, CNN CORRESPONDENT (voice-over): The London skyline has a new giant, The Shard, Europe's tallest building, towering 310 meters high. Despite its impressive propositions and striking presence, it's ability to attract tenants has been somewhat lacking (inaudible) developers are concerned.

IRVINE SELLAR, CHAIRMAN, SELLAR PROPERTY GROUP LTD: We will phase the letting. We have a plan to let X amount of space within the next few months and Y amount of space within a year or two after that. The funding and the business plan provides a sufficient facility and headroom for us not to be in a race. So there's not a panic.

SOARES (voice-over): The construction of skyscrapers in London often only begin once developers have secured a pre-let, the guarantee of an occupied signing a lease.

PETER REES, PLANNING OFFICER, CITY OF LONDON: Preletting of buildings has always been a difficulty with the amount of investment involved, of course, for a skyscraper is enormous. And very few developers are in the position, even if they wished to, to fund the development until they have a guarantee of occupation of at least a third of the building.

SOARES (voice-over): The Shard had only two back in 2006 before building work started.

SELLAR: We had signed up Shangri-La for a substantial lease for over 200,000 square feet of space and we'd also signed up a 30-year lease with Transport (ph) for London.

SOARES: But by 2010, the developers had already parted company with Transport (ph) for London, hoping they could get a better rent and a more exclusive clientele.

SELLAR: We decided that probably they're not the best tenant for what we considered to be a five-star building. So we agreed to take them out and it cost us money.

SOARES (voice-over): The developer wouldn't tell CNN how much the building has already let. But the latest media reports put it at 30 percent. This is the first time a building in Europe has been used for so many purposes. From the 2nd to the 28th floor, office space, 570,000 square feet of it, media companies and several banks are rumored to be interested.

Floors 31 to 33 are earmarked for Michelin star restaurants. Then there's a hotel, the Shangri-La, with a pool and a spa and over 200 rooms with a view. The 53rd to the 65th floor can be yours if you have enough money to spare for a luxury apartment, and there's a 360 view of London from the 68th to the 72nd floor. Just don't look down.

With this impressive resume, finding a tenant may not be a problem.

SELLAR: This is a global landmark building. It will attract tenants who want that recognition, to say my address happens to be in The Shard London. They don't have to say any more.

SOARES (voice-over): It has taken five years to build. It'll be another year before they find out whether The Shard can really live up to their high hopes -- Isa Soares, CNN, London.

(END VIDEO CLIP)

QUEST: (Inaudible) The Shard. (Inaudible) if I can actually see from where I live. Not that you care about that.

Heat wave in the southeast of Europe, Jenny Harrison is at the World Weather Center.

JENNY HARRISON, CNN METEOROLOGIST: Yes, this is what people do care about, Richard, the heat. My goodness, not for you in the northwest of Europe, but instead, still across the southeast, temperatures a good 10 degrees above average, again Belgrade, 37; the average 27. And so it goes, so it goes on now. This has been going on, of course, for several days now.

And in fact, it's the 28th of June, the temperatures have generally been as much as six degrees above average in this particular portion of southeast Europe. And you can see going away from there that even for much of mainland Europe, temperatures past about 2 degrees above average, not so in the southwest. Portugal, the western north and Spain, temperatures below average.

And as for conditions in the northwest, well, temperatures around average, but of course very little in the way of sunshine and very little in the way of break from the rain. This is the pattern as we go through the next few days. There's still hot and dry in the southeast, and meanwhile across the northwest, more scattered showers, also some fairly strong thunderstorms.

Belgrade then for the next few days, again, temperatures not really coming down, still well above the average. And Warsaw, (inaudible) Sunday, it should be feeling a little bit better, but it's the overnight hours that it's actually very warm as well, temperatures there 8 degrees above average. That's when it really become (inaudible) very unpleasant at nighttime.

You can see the thunderstorms that have been firing up in the last few hours, the high pressure across the southeast. And at the same time, we have had some pretty strong hail reports coming through. Hail as big as 3, 5 centimeters across some areas, and then around the Black Sea in particular northern Turkey, we've seen some very, very flat, strong thunderstorms.

These have produced dangerous flash flooding. This is the situation we will continue to monitor over the next couple of days, Richard.

QUEST: Jenny, we thank you for that. I'm off to Madrid, to Rome. And thank you for the private forecast by email for the temperatures there.

And that is QUEST MEANS BUSINESS for tonight. I'm Richard Quest in London. Whatever you're up to in the hours ahead, I do hope it's profitable. MARKETPLACE EUROPE, that is next.

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JULIET MANN, CNN HOST: Welcome to MARKETPLACE EUROPE in Hannover in Germany. I'm Juliet Mann.

This city on the banks of the River Lina (ph), is a house for the railroad network which crisscrosses the heart of Europe's largest economy. Berlin is 250 kilometers in that direction. Cologne is 250 kilometers over there.

MANN (voice-over): Coming up, I meet the fashion designer who's taking on the very fabric of the industry, using a rather different spin.

And the boss of software giant SAP on how navigating choppy waters on the high seas is like running a business.

UNIDENTIFIED MALE: You need a lot of communication among a team that has individual roles, and they need to act as one team.

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MANN (voice-over): Hannover in lower Saxony, northern Germany, is well known as the city of trade fairs, playing host to some of Europe's major business events, like CeBIT and the Hannover Fair. Wolfram von Fritsch is the chairman of Deutsche Messe, which organizes 100 trade events each year.

DR. WOLFRAM VON FRITSCH, CHAIRMAN, DEUTSCHE MESSE: The Hannover Messe have been for 65 years the most important flagship event in all the industry. And as the all industry is just coming out of the box again, Hannover is an indicator for the reindustrialization of Europe, and it's an indicator where the innovations really take place.

We can see that China is growing and growing and growing, as you can see the south European countries are weakening. As you can see here in the participation of the trade fairground as well.

MANN: Some 10,000 exhibitors from all over the world come to Hannover to showcase their products. It's also home to a biochemist turned fashion designer, who's hoping her environmentally friendly fabric will revolutionize the fashion industry.

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MANN (voice-over): Here's one collection that might quench a thirst for fashion.

UNIDENTIFIED FEMALE: Rock it (ph), girls.

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MANN (voice-over): Clothes cut from a cloth that looks and feels like silk, but is actually made from milk. The German designer who invented the fabric, called QMilch, says it fills a gap in the textiles market, which struggles with the falling supply and the rising cost of raw materials.

ANKE DOMASKE, CREATOR, QMILCH: Milk is such a great natural resource. So we have to keep it natural. And there must be a way to produce all the natural fiber from it. This is how we started, actually basically in the kitchen, so and our process is so simple, it's almost like baking basically.

MANN (voice-over): Milk fabric has been around since the 1930s, but the process involved chemicals. The company says QMilch doesn't, and requires less water to produce than natural fibers do.

DOMASKE: To make 1 kilogram of cotton, you need 20,000 liters of water. So it's tremendous. Our process, to produce the fiber, we only need two liters of water for 1 kilogram. So much more less than compared to cotton.

MANN: Here's how it works: a local dairy takes leftover milk that no one can drink and lets it ferment to this lumpy cheese stage, and turns it into a powder. This milk powder, a bit like the protein powder that body builders use, is mixed with a secret recipe of natural ingredients. In a few minutes, you get this, which is spun into a yarn to get the finished product.

MANN (voice-over): QMilch is wearing well with the fashion crowd.

MARION THOLEN-HORU: It's extraordinary. I think it's -- for me, it's a new one. I didn't know that you could produce it out of milk.

SABRINA MICHELI: I like the thinking that it's made out of milk. And I never heard about it. And the designer told me that it doesn't produce any waste, and I like this because our pollution is so terrible. So this is very, very good idea.

MANN (voice-over): But is the price right? QMilch costs around $30 per kilo to produce. The average cost of producing cotton yarn is $3.8 per kilo.

But they're marketing QMilch as a luxury fiber, like silk, and say that while commodity prices fluctuate, depending on the markets and the weather, the cost of QMilch is expected to be more stable, mainly because it's produced from waste. The textile industry is starting to pay attention, and the business is growing.

DOMASKE: We are just ordering our machines for a production of 1,000 tons a year. So it's a (inaudible) plan, but it's a good start. So and very exciting. But the scaling-up process on one -- from 2 kilograms an hour to 120 kilograms an hour.

MANN (voice-over): On the drawing board are expansion plans. Anke Domaske claims the material is non-allergic and says there's keen interest from makers of hospital and hotel bedding, plus car upholstery firms.

Churning up the textiles industry with an innovative, sustainable fabric could well change the future for the fashion business.

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MANN: Coming up after the break, we hear from the boss of German software giant SAP.

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MANN: Welcome back to MARKETPLACE EUROPE in Hannover, Germany. Whether your business employs five people or 50,000, running it in the most cost-effective way, in good times and in bad, is a top priority. Increasingly sophisticated computer software systems are a fundamental tool, driving productivity and helping businesses perform better.

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MANN (voice-over): Germany's SAP was founded 40 years ago by five former employees of IBM, and has become the world's third largest independent software manufacturer. Most of the world's economic transactions interact with an SAP system in some way.

With subsidiaries in every major country, the group employs more than 55,000 people and has over 183,000 customers, with annual revenues of $18 billion.

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JIM HAGEMANN SNABE (PH), CO-CEO, SAP: What fascinates me about sailing is exactly this need for a strategy based on information that you gather on wind, on current, but also on competitive moves. Then you need to make your execution happen, and that happens by the team (ph), where everyone has distinct different roles, and yet they need to work as a team.

And the faster you're able to execute your strategy, the more likely you are to win, if you chose the right strategy. And this is very much like this, only the differences are here. Twenty minutes later, you'll know whether your strategy was right. In business, it's often 20 months later.

MANN: So where do you see the growth? Because I know you're also looking in the Middle East and in North Africa.

SNABE (PH): Obviously right now a lot of growth is happening in Asia, in the Middle East, Latin America and Russia. I just was in St. Petersburg the other day. But we also believe that there's growth opportunities in Europe. We have proven, as one company, that if you focus on speed of innovation and bring in young and fresh ideas, you can actually grow your company.

We've been growing our company now, double-digit growth for nine quarters in a row. And we're a European company. And we are suggesting a focus on innovation for growth in Europe as well, because without growth, there's not enough opportunity.

But we have been known to be the choice for the last company (ph). And the way we are looking at the current economic situation is that we need to embrace the small and medium-sized companies who often have the next ideas, but lack the ability to scale (ph).

MANN: Of course, you're in the business of solutions, helping companies. The German business confidence is below what it's been for two years. How do you feel?

SNABE (PH): I believe that any challenges and opportunity and we've seen how SAP can be an answer in a difficult environment economically, where there's not enough opportunity to look into the future, the uncertainties are high. With that, you need more accurate data and you need to help companies make better choices faster.

MANN: It's interesting, talking to some other CEOs over the last few months, they said what they're missing from presidential election campaigns, for example, in France with a lack of a technology agenda, everyone's talking about the euro crisis.

SNABE (PH): Yes, I believe we've been talking far too much about this euro crisis. In fact, it's not even the euro that's in the crisis. It's a debt crisis. And I think we should turn the agenda towards the opportunity of innovation, because innovation drives growth.

I think in tough times, you see the difference between well-managed companies and less-well managed companies. And I think the current climate allows strong companies to take stronger market positions and move ahead. And so in that sense, we feel good about the future.

MANN: Do you think that Germany is going to end up paying the bill for the bailout of the Eurozone periphery countries? And if so, what would the impact then be on long-term German borrowing?

SNABE (PH): I don't believe that Germany is paying the bill. I think Germany is a solid part of making the euro survive and come out strong.

MANN: But there has been a lot of teamwork, as you put it, lots of summits, lots of talking about it, a little bailout here, a little cash injection there. But the fundamental problem is still the same.

SNABE (PH): Running a country is almost like running a business. You need to make sure that you earn more than you give out. And you need to find opportunities for growth. And so what does that translate into a country as situations? Countries do need to look at their budgets and their deficits and need to make sure that they get more money in than they give out.

At the same time, we have an aging population in Europe. So we need to find more productive ways of doing health care, of doing public services and so on. And finally, we need to educate the young people so that they can help us innovate for growth. And with that, I feel that we need to tackle the issues in Europe.

This is not a simple fix. This is not a bailout and then everything is gone. I think this will take us some years. It requires stamina, but I would say those three topics are the main topics to make it successful.

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MANN: Jim Hagemann Snabe (ph), the co-CEO of SAP.

That's it for MARKETPLACE EUROPE in Hannover in Germany. Join us again next week. Goodbye.

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