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Economic Confidence Boosted in Europe; Fiscal Emergency in California

Aired July 29, 2010 - 14:00:00   ET


JOHN DEFTERIOS, CNN INT'L. ANCHOR, QUEST MEANS BUSINESS: The good, the bad, and the ugly. In Europe economic confidence gets a big boost, in the U.S. there are still traces of weakness in corporate earnings. And in California public finances are in a state as Governor Schwarzenegger declares a fiscal emergency.

I'm John Defterios in for Richard Quest. This, of course, is QUEST MEANS BUSINESS.

Good evening.

A burst of optimism in Europe. The chief executive of Publicis tells me tonight the recession is fully behind us, but still outbreaks of pessimism in the United States as the consumer stays on the sidelines. Today's tone was set by better-than-expected figures on confidence among businesses and consumers that was in Europe, at any rate. Let's join Jim Boulden who joins us for that story.

The best numbers in better than two years, nearly two and a half years.


DEFTERIOS: That is not a bad way to set the tone for the trading day.

BOULDEN: Not at all and such a difference with the U.S., which we'll get to in a little bit. But here, anyway, economic confidence, especially because of Germany, was boosted in July. Now we had two numbers. The business climate, up very well. And also the sentiment with consumers, especially, the best since March of 2008, so we are talking about the beginning of the recession, really. And we are seeing some confidence numbers, coming. They're talking about manufacturers as well. They said the order books, especially, in Germany are out, and a lot of people say that has to do with exports.

But anyway, when you see order books rising and that gives confidence to some people then that is a really interesting symbol, especially for Germany. And they said that a lot of people said that they have less fear in Germany about unemployment. So that means that they are spending a bit more money. And that takes us to the second board here. Unemployment rate dropped to 7.6 percent in July for Germany. This is, of course, the adjusted number. But again, it shows that Germany is coming out of recession, a bit stronger, I think, than people thought. And it is the lowest, of course, we've seen since March2008.

Now all of this did play on the euro. Now, we talked about whether it is a dollar story, euro story, but you know, we were seeing the euro $1.19 just a few weeks ago, maybe a month ago. Now we're seeing it bubble up, over $1.31 cents. That is showing a lot of weakness in the dollar. We did hear the word deflation out of-one Fed official in the U.S., that didn't help the dollar at all today. But you see here, the euro is rebounding quite nicely over the last couple of weeks, after we saw these numbers coming out, in the last few days.

Now, let's look at how the stock market reacted to all this. Now, you might be surprised that we're not going to see green arrows, instead we're going to see red arrows. The European markets all closed lower, that was because of some mixed results that came out of U.S. corporate figures today, John.

DEFTERIOS: It is interesting. If you look at that euro number, one of the reasons we're seeing this recovery, particularly in corporate confidence is because the euro has been down 9 percent against the dollar, throughout the year.


DEFTERIOS: And this is boosting exports, not so much to the United States, but certainly into China.


DEFTERIOS: Does this derail confidence? I didn't see that in the numbers at all. They were pretty optimistic for the second half of the year.

BOULDEN: Which is interesting, because if you think about how they- some of the companies really wanted to see that weak euro, and that was helping a lot, as you say. Now we're seeing the rebound. So some people are saying we're not still seeing the consumer demand that we need to see in Europe. So this might be a peak for some of these numbers, so it might show some weakness going into the next few quarters.

DEFTERIOS: Look at you, trying to put the wet blanket onto the recovery.


BOULDEN: Just a little bit.

DEFTERIOS: No, in fact, it was interesting because Rainer Bruederle who is the economics minister for Germany, said something very interesting. He's thinking that we could get to full employment in Germany.


DEFTERIOS: Which would bring the unemployment rate from 7.6 percent all the way down to 4 percent.

BOULDEN: 4 percent, yes, that is quite a projection.

DEFTERIOS: Yes, I'm not sure how much of that is politics or really economics. But it is saying something about the export recovery in Germany.

BOULDEN: I think I saw the word, "possible", in that comment from him.


BOULDEN: But yes, obviously, we're not talking about 10 percent unemployment, you know where we might have been talking about a few years ago. We're talking about 4 percent, then at least that shows the confidence is in there. But, again, consumers have to start buying an it is not-you can't just with the exports, because if we do see the euro continuing to increase then we can't look at the exports as being the only rosy scenario here.

DEFTERIOS: Yes, in fact, we'll talk with Maggie Lake about consumer sitting on the sidelines in the United States, as well.


DEFTERIOS: Thanks, very much, Jim Boulden.

There was a bigger than usual raft of announcements, some international companies on the agenda Thursday. In Germany Siemens said sales started growing again in the last quarter. The industrial group said revenue, net profit and order intake were all higher and raised its full year profit outlook. Decent numbers from another German giant, profits at chemicals maker BASF tripled it the second quarter to just over $1.5 billion. The company said it was seeing a rebound in demand for its specialist products right now. The chief executive, Juergen Hambrecht, spoke to CNN about the company and how it is emerging from the economic crisis.


JUERGEN HAMBRECHT, CEO, BASF: Well, recovery, however going forward, we should not forget the base factor, there will be a more moderate growth, but there will be no dip, no double-dip as far as we can see. It is a healthy environment we are in.


DEFTERIOS: OK, that is outlook from Germany and France. The advertising group, Publicis says it has come out of the downturn with sales and profits growing right now. For the first half net profit was up 27 percent. And it joined the list of companies that are raising their earnings forecasts right now. Earlier I spoke to the chief executive, Maurice Levy, in the past he said he was confident in the economic crisis and that it was completely behind us. I asked him if he still holds that view.


MAURICE LEVY, CEO, PUBLICIS: I believe that we may face some hiccups, because it is not a straight road ahead of us. But the worst period is clearly behind us. We may have one or two small issues which can happen during that recovery period. But all the indications that we have in hand and all the information are giving us a good level of confidence that we are really getting out of the crisis now.

DEFTERIOS: You spoke of confidence. I looked at the consumer and corporate survey from the European Union, Eurostat, pointing to a better than a two-year high. Can that translate, though, into 2 to 3 percent sustainable growth in your view.

LEVY: It is a question of mood. And if this is resisting some inevitable bad news that we will have to face in September or October, all over Europe, I guess that yes, in 2011 we can imagine that we can have a growth, a compound growth for a total Europe, above 2 percent.

DEFTERIOS: It is fascinating, if you break down your numbers, revenue is up 15 percent in the first half, 21 percent in Q2. And a lot of that growth is organic growth. This must please you, that your existing clients base is boosting spending.

LEVY: Yes, what we have seen is very interesting. If you look at the top 30 clients of Publicis Group, the largest conglomerates or the largest consumer goods company, what we see is that they have all increased their spending during the first half of 2010. I guess that one of the reasons, particularly, for the consumer goods company, the package goods company, is that during 2009, where they have had some heavy cuts, they have lost market share in favor the private labels of the retailers. So therefore they are coming back aggressively, in order to regain the consumer confidence, the consumer loyalty and market share.

DEFTERIOS: I look at one advertising survey from Zenith Media, saying that for 2010 their earlier projection was growth of 1 percent. Now it is up to 3.5 percent. Are we still being way too conservative when it comes to advertising spending by your largest clients?

LEVY: No, I think there is a lot of reason for this level of 3.5, which should be more in the region of 4 or 5 percent. The reason why we had that situation is because there are some sectors which are still a bit shy. The first one is, obviously, the automotive industry. In order to spend more money, to invest in marketing spending and advertising, the need to change the range of products; they need to have the new range of products and the vast majority of the changes will happened during 2011 and 2012. So, this year is much more a year of consolidation with a range of products which are a little bit old, and we will see many of the car manufacturers launching new products. And particularly electric cars, which will need a lot of advertising support.


DEFTERIOS: Once again, Maurice Levy of Publicis. Well, Publicis is one of the companies we are featuring in our exclusive Q25 index as profit season. In the Q25, for each company that releases an upbeat quarterly statement we put a balloon in the green column. And if it is red, for each of the companies that disappoints, the idea is that by the end of the Q25 we get a good sense of how earnings season has played out over all. So far let's take a look. We have given out 14 of our 25 balloons so far. Greens are currently edging out the reds. But I would say, kind of just barely.

We have a lot of earnings announcements in Europe to talk about, and those in New York. Let's bring in Maggie Lake from New York.

Maggie, before we begin, let me give out some of the first balloons. We talked about profits from the industrial groups of Germany, both Siemens and BASF. And we saw the interview there with Maurice Levy talking about the upbeat nature of the advertising spend and the organic growth of 7 percent.

So, let me get started by pulling out some greens. I don't want to rub it in your face there a little bit, but we're doing decently in Europe, can we say? So for Siemens, the CEO, Mr. Loscher saying that just like we heard from Mr. Levy, there, that the recession is completely behind us. That the export sector looks very strong for Germany; we're going to give that to Siemens. And the other industrial group, you heard from Mr. Hambrecht, there. And that quote, he "feels the same way" right now because the industrial sector in Germany is holding up just fine. So BASF gets a green.

And I, after listening to Mr. Levy here, about not just 3.5 percent, perhaps in advertising growth, worldwide and let's not forget, Maggie, he gets a lot of his revenues for the United States, this is his largest market still, 1.25 billion euros in the first half of 2010. And it if the (AUDIO GAP) turns around for them, the Publicis are going to see even better numbers for the second half of 2010. So, I'll be confident that the advertising market is going to hold up for the rest of the year. But also, he's optimistic about 2011.

So now, let's cross over the Atlantic and see what the numbers look like here, in the United States. Now, we know what BP did in the energy sector. But quite a different story for ExxonMobil.

Do you want to pick it up from there?

MAGGIE LAKE, CNN FINANCIAL CORRESPONDENT: Yes, it certainly is and we're going to stay with the greens, because this certainly falls into that category, John. A really nice looking report coming out; profit nearly doubled from a year ago. They really interestingly beat analysts' expectations. I'm not sure why the analysts were so far off on this, but it is always good for the company if you are beating on the upside.

But more importantly, what investors really liked about this, not only was revenue up 24 cents, but they ramped up capital spending to boost production. A really sort of core, underlying support for business going forward. It was the most they boosted production in a long time and investors and analysts really grabbed on to that part of the story. So, Exxon certainly seems like it is certainly a positive one.

DEFTERIOS: And it is not being talked of as a possible bidder for BP anymore right now. So, that is not going to hold back its bottom line. It free cash flow. So, we are going to give a green to ExxonMobil and an agreement with you on there.

Now, we go to the consumer sector and a couple of bellwethers, particularly, Colgate-Palmolive. I know investors look very closely at the company to see what it is saying about consumer sentiment, and right now it is not very positive.

LAKE: No, it is not and remember it doesn't get more basic than toothpaste, right? These are the sort of everyday products we see on the supermarket shelves. And Colgate having a very tough time of it. Their sales missed estimates, remember that is-you know that sales part of the scenario is really what analysts have been focused on. They lowered their full year guidance. They did have a little bit of currency issues, which sometimes hard to figure out whether to include or not, but that is not the whole story, but they're saying, listen, it is a really competitive environment. The consumer is under pressure and they're not ponying up for those brand names, they are really cutting back. And it shows you just how tough it is out there for these companies that have such a direct line to the consumer. Very different from some of those consumer numbers that you were talking about over in Europe. So, I think this one has to be red.

DEFTERIOS: It is just interesting. Is this showing up on the bottom line for Wal-Mart, or the Target stores right now, if in fact, they have had their brand store-or their store brands going out? This is what is really eating into Colgate, which we are going to give a red to, while you answer that?

LAKE: Right, right. Yes, it is-we call them generics. It is not always absolutely no brand name. It is often the store brand name. And they are doing well. They are getting traction. Not only that, remember, Wal-Mart and Target, those companies used be apparel, home goods, and stuff. They are really pushing hard into the food category, the toothpaste, the cleaning products. All that traditional supermarket product, they are making big push there and it has been very successful. It has been a core part of their business, but they're taking away from some of the brand names, which they also carry, but right next to their own cheaper offering.

DEFTERIOS: Yes, we don't have a lot of time, but deflationary environment, is what the CEO of Kellogg's said. This matches some of the concerns that the Federal Reserve has. That means, prices are being pushed down, and it is extremely competitive.

LAKE: That's right. Extremely competitive, a sign of the recession that we're in, but not only that, the idea and the worry on the part of people like Colgate, who have, again, the premium brand, is that once consumers expect lower prices, they're not going to pay higher prices, even when things start to get better. So, it is a real concern again, for these companies that traditionally rely on the brand names. Consumers don't have the money. They are being very cost conscious and not clear they are going to come back to that pattern of buying after things improve. It is a worry for that company and definitely gets a red.

DEFTERIOS: OK, so two reds, linked to the consumer products. Again, like we're seeing in Europe right now. The industrial groups are holding up. You can put ExxonMobil in the industrial group category, because of those profits were surging, up 91 percent over the previous year. Maggie Lake in New York, thanks a lot for the analysis.

A tense calm in Greece. The last group of workers to take on the government show they have the power to hit the economy and draw a response from the authorities. We'll have the latest on the standoff, in just a moment.


DEFTERIOS: Well, the Greek capitol is tense tonight. The government ordered truck drivers to go back to work Thursday, after they had been on a strike for three days. Strikers clash with police who use their tear gas cannons to disperse the protestors. The drivers are protesting government plans to open up their industry and issue licenses to new transport firms.

The truck strike quickly lead to concerns about supplies of food, fuel, and medicines. The government is also worried about the impact on tourism at the height of the travel season. Right now let's talk to Elias Mossialos; he's a member of the Greek parliament and a professor at the London School of Economics, he joins us on the line from Northern Italy, where he is giving a guest lecture.

Elias, I'd like to start, or Professor Mossialos, I'd like to talk to you first about this idea that how important the transport sector is. And it is one of these guarded sectors that the government believes it should be shaken up. And that is why you were brought to deal with these sort of issues. How big of a set back will this be for the economy going into the tourism season, at full steam?

ELIAS MOSSIALOS, MEMBER OF GREEK PARLIAMENT: Yes, it is a problem. We have a (UNINTELLIGIBLE) showing how decisive the government is. We're very decisive in terms of taking on vested interests in Greece, and the closed professions. And the truck drivers are only one case. We are going to really liberalize a number of professions in the near future, including taxi drivers, the notary professions, and legal firms in the country. That is the beginning. The government has decided to increase the competitiveness in the Greek economy in the near future. So, we don't mind if it is the tourist season, or if it is very problematic, as feared. We have just decided to take on vested groups.

DEFTERIOS: In fact, what can we expect in September? It is not going to just be limited to transport, you are going to hit a number of different sectors in terms of trying to open up transport and other, particularly, the banking sectors, for example, to greater competition, and even the ports.

MOSSIALOS: Yes, of course, we're going to do that. The so-called (UNINTELLIGIBLE) so, we needed access to ports, the European companies. This is no longer going to be the case in the next few years. There is going to be open competition to every one in the industry invested in the Greek ports and the Greek economy.

(UNINTELLIGIBLE) and that is why we are going to also reform our competition authority in Greece. So that we can ensure a level playing field for those interested in investing in Greece.


DEFTERIOS: I want to-excuse me, if I can interrupt you here. I want to go to the bottom of this. There is a limited number of licenses in the transport sector, for example, trucking licenses, and this artificially raises the price of the license, and obviously, raises the price of transport in Greece. What are they truckers who are striking right now, suggesting the government should do?

MOSSIALOS: Yes, the truck drivers want to continue with business as usual, so a closed profession. So, this is not in the interest of the Greek economy. This is not in the interest of the tourists in Greece and the European economy, and the global economy, in general. So, we are going to use license fees, so to me all those individuals operating in Greece, will have an the opportunity to do so and the competitiveness of the transport-this part of the transport sector is going to increase, and very rapidly.

DEFTERIOS: As you know, Prime Minister Papandreou was educated in the United States, and in fact, during the 1980s when President Reagan decided to take a very hard line against the air traffic controllers and gave them 24 hours to get back to work, or the fact that he'd fire them. And he did fire those that did not come back to work. Is this a page out of his old playbook, to take a hard line and build up public support, even though it is a silent majority, that it is called, in public?

MOSSIALOS: We are taking a hard position against (UNINTELLIGIBLE) in Greece. We don't like to compare ourselves with the government of President Reagan, in the United States. It is a completely different situation. But we're not going to accept any particular vested interests dictating their terms and destroying the Greek economy. That is the bottom line.

DEFTERIOS: OK. We have to let you go to your guest lecture. But we appreciate you joining us on the phone from Italy. Elias Mossialos an MP in the Greek parliament, and a professor of economics at the London School of Economics.

Nigeria has reported 3,000 oil leaks since 2006, but while the whole world has followed events following the U.S. Gulf Coast accident, what is being done to help people suffering in West Africa, we're live with Nigeria's petroleum minister, after the break.


DEFTERIOS: The man overseeing the federal response in the Gulf of Mexico oil disaster is gearing up to outline plans for the future. Retired Coast Guard Admiral Thad Allen says he's optimistic engineers will permanently seal the well in the coming days. The process they call static kill could begin on Sunday and a relief well may be ready seven days after that.

It has been days since we've seen oil leaking from that broken well, but fishermen still face an uncertain future in the Gulf. CNN's Jim Acosta looks at the question of how far BP's responsibility should go in giving them continued support.


JIM ACOSTA, CNN INT'L. CORRESPONDENT (voice over): Because so many Louisiana fishermen grow up on the water, this is the only life they've ever known. The oil spill changed that. Many of the state's 12,000 fishermen have gotten accustomed to being clean up workers. Drawing their checks from BP instead of from the sea. And just because federal officials say the oil is clearing up faster than expected and the seafood seems to be safe, so far, it doesn't mean the fishermen believe it.

(On camera): Do you see contaminated seafood?

UNIDENTIFIED MALE: Well, we don't see the contaminated seafood, but there is a lot you don't see.

ACOSTA: You want to get them back to doing what they know how to do?

UNIDENTIFIED MALE: What they know how to do and what they love to do. That is the key.

ACOSTA (voice over): Yule Smith, with the state board that promotes Louisiana seafood says it is the fisherman who now need a lure. He wants BP to start paying the fisherman a bonus, 30 cents on every dollar of seafood they catch, to go back to the water.

UNIDENTIFIED MALE: It is a common sense approach to putting the fisherman back to work, to help mitigate claims against them. We have approached BP twice. They have told us no twice, but the told us no twice. But they told us no twice, with the caveat to come back once the well is capped.

ACOSTA: Now that BP is closing in on killing the Deepwater Horizon well a spokesman told CNN the company is considering the idea. No final decision the spokesman said but we are very supportive of programs of guys going back to fishing.

And there is good reason why. Jim Funk with the Louisiana Restaurant Association says its industry could take a big hit, if the fisherman stay on the sidelines.

(On camera): New Orleans restaurants are going to start running out of seafood?

JIM FUNK, LOUISIANA RESTAURANT ASSOC.: Restaurants all over south Louisiana, and so we've got to get the commercial fisherman back in the waters catching the crabs and the shrimp and the fin fish, so we can put them back on our menus.

ACOSTA (voice over): But that is no easy task. Not only will a skeptical public have to be convinced Louisiana seafood is safe, Louisiana fisherman, like Larry Spahn, will have to be convinced it is worth catching.

(On camera): What if BP were to pay you to go back to fish? Maybe an incentive?

LARRY SPAHN, LOUISIANA COMMERCIAL FISHERMAN: We'll go back to fish, but what are we going to do with what we catch, if nobody wants to buy?

ACOSTA: Louisiana and FDA officials say so far none of the seafood they've tested has tested positive for oil or other contaminants. That, the FDA says, could lead to the Gulf of Mexico being largely reopened to commercial fishing within the week. Jim Acosta, CNN, New Orleans.


DEFTERIOS: Nigeria, the world's eighth largest oil exporter understands all too well the plight of the U.S. Gulf Coast right now. The country has reported 3,000 oil spills in the last four years alone.

We're joined here in our London studios by Nigeria's petroleum minister, Mrs. Diezani Alison Madueke.

Minister, it is nice to have you.

Thank you.

DEFTERIOS: I should say, before we get started here, the first female minister within OPEC, so it is going to shake up that organization, I'm sure, in the time to come.

Knowing what has happened now, and I've talked to a number of oil executives and oil ministers about this, knowing what has happened in the Gulf Coast, realistically, what does it do on the ground in Nigeria to adjust your plans for the future. Does it first and foremost have to be that you deal with the environmental disasters that we've seen over the last 30 years, off and on?

DIEZANI ALISON MADUEKE, MINISTER OF PETROLEUM RESOURCES, NIGERIA: Well, I think that it is incredibly important when these sort of disasters happen that we realize there is trickle down effect all over the world. Not the least in Africa, as you have said, that we have an accumulative environmental degradation effect, in the Niger Delta, which has created a lot of problems for us.

But we have also learnt our lessons over the years, and we have put in place very strict guidelines at this time, both health safety and environmentally so, to align ourselves, not only with internal processes and procedures, but also with international standards. You may know that the petroleum industry bill, which Nigeria is about to promulgate into law, in a few weeks.

DEFTERIOS: Yes, it has been stuck for a long, long time. People have been waiting for that, for a couple of years, as you know.

MADUEKE: Quite right. But I am ensuring that within the next four to five weeks, with of course the major assistance of the national assembly, of Nigeria, we shall in fact be promulgating it into law. Now within the Petroleum Industry bill, which is an amalgamation of over 60 existing laws covering the oil and gas sector in Nigeria.

So, it is an historic bill. We have very, very stringent guidelines for environment degradation.

DEFTERIOS: Well, let me follow up here. I want to see if you refute the claim by environmental groups, "There was more oil spilled each year, in the Niger Delta, than in the Gulf of Mexico spill, where we are panicking worldwide because of the disaster in the Gulf of Mexico. But it happens each year in the Niger Delta, is that a fair comment?

No, I don't think so. I would think that if you were talking about accumulative oil spills, we have had our issues over the years.

DEFTERIOS: So, nine million barrels of oil, that


MADUEKE: Yes, we have always admitted.

DEFTERIOS: But this is extraordinary, 9 million barrels of oil being spilled in the Niger Delta. It is extraordinary.

MADUEKE: Yes, but remember that Nigeria has been producing since 1938.


MADUEKE: When (UNINTELLIGIBLE) first started.

DEFTERIOS: So what are we saying here? It is a lack of investment back in, or is it really what everybody else says, which is some pirates really attacking the wells because of political problems?

MADUEKE: I think it is a little of both, let's be frank, over the years. It is not so much pirates, the militancy in the Niger Delta, obviously created some problems. There was piracy in terms of bank rates (ph), but there may have been some misapplication of laws over the years. This, as we say, now has become a thing of the past, because we are in fact implementing extremely stringent law, processes, and procedures, to ensure that environmental degradation is caught in time, and is effectively remediated. And also, is put-is that we actually manage to keep it at bay.

DEFTERIOS: And the other thing that I wanted to talk to you about, and I know Nigeria has had very strong economic growth, but those in the Niger Delta don't feel it is trickling down to them. There is a lack of refining capacity so for the world's eight largest producer, the fact that you don't have the refining capacity to actually serve the needs of consumers there. It is a huge problem, can you really address it?

MADUEKE: It's a huge problem, but we are actually moving forward again with that.

First of all, we have started the process of deregulation. Over the next 12 to 16 months or so, we shall be looking at that very closely. Deregulation, of course, would allow a major investment to come in, in terms of new refineries. And even in terms of we rehabligate -- rehabilitating the existing refineries.

But I think that in terms of the communities of the Niger Delta, as well, the new petroleum industry bill, amongst others, will ensure that there is much more participation of the communities and much more equity participation in terms of funding of the communities...

DEFTERIOS: OK, I have to wrap the interview, but this is a woman's touch in the oil industry in Nigeria.

We're going to see real change is what you're saying?

MADUEKE: I should expect so.

DEFTERIOS: OK. It's good to have you in the studio.

MADUEKE: Thank you.

DEFTERIOS: And thanks for taking the 10 percent of these questions.

This is Diezani Alison-Madeuke, the new oil minister of Nigeria.

A pleasure to have you on the show.

Arizona is locking horns with Washington over an inflammatory new immigration law. The measure imposed by the state has been blunted in the courts, but where does that leave those caught in the economic fallout?


DEFTERIOS: Welcome back.

I'm John Defterios in London.

More QUEST MEANS BUSINESS in just a moment.

But first, here are the main news headlines on the hour.

Prosecutors in France say a woman admitted killing eight of her newborn babies over a 17 year period. They charged Dominique Cottrez a murder a day after the bodies were discovered in a village in Northern France. Cottrez and her husband have two adult daughters. A prosecutor says Cottrez told police she killed the newborns because she didn't want any more children.

It's a day of national mourning in Pakistan following Wednesday's plane crash that killed 152 people. The cause of the disaster is now under investigation. Meanwhile, recovery crews have ended their search for bodies. Now comes the grim task of identification. Officials are calling it Pakistan's worst passenger plane crash in history.

Britain's prime minister is trying to diffuse a row he sparked when he called Pakistan's government lax on terrorism. David Cameron's comments came during a trade mission to India and agreed Pakistani officials. Pakistan's ambassador to Britain says they could harm regional peace prospects. Today, Mr. Cameron sought to clarify his position, saying Pakistan is working to combat terror these days.

A possible breakthrough in the stalled Middle East peace. At a meeting of the Arab League in Cairo, leaders said it's up to the Palestinian Authority president, Mahmoud Abbas, whether to enter into direct talks with Israel. The move prompted Israeli Prime Minister Benjamin Netanyahu to say he's ready to start direct talks within days.

Battle lines are being drawn over Arizona's controversial immigration law. The measure affects areas such as police powers, as well as the employment of illegal aliens. It was due to take effect in its entirety today, but a federal court ruled Wednesday that some of its provisions may not be enforced right now. For example, Arizona would have required police to question a suspect's immigration status during routine investigations. That measure was vetoed by the judge's injunction.

The move is easing fears among immigrant communities, at least temporarily, and setting the stage for a legal battle that could lead to the U.S. Supreme Court. Arizona's governor says the state will appeal Wednesday's injunction.

The U.S. government argues jurisdiction over immigration is a federal matter. The counter argument is that state and city authorities are left to deal with the economic fallout of illegal immigration.

On the other side of the USA, in Eastern Pennsylvania, the mayor of the city of Hazelton strongly backed the Arizona immigration law.

Lou Barletta has been working on immigration reform at the local level for the president four years and he joins us via Skype now from Pennsylvania.

Mayor, it's nice to have you on -- on the program.

Thanks for joining us.

I want to jump right in if I -- I may and get your response. Now, this is a very interesting battle being American, of course. You have federal, state and local authorities.

Can the federal government draw the line and prohibit you from taking action on immigration reform?

LOU BARLETTA, MAYOR OF HAZELTON, PENNSYLVANIA: Well, I -- I disagree with -- with the action that the federal government has taken against not only Arizona, but in our case, where we had a federal judge put a restraining order on the city of Hazelton so that we could not enact our ordinance here, as well.

I believe that the only way we are going to handle this case of the legal -- illegal immigration in -- in our country is by municipalities and state governments working in harmony with the federal government, not pre- empting federal law, but rather working together.

DEFTERIOS: Let's drill a little bit deeper here. I want to know what the impact has been from immigration on your city finances and also city crime.

Has it really trickled into Pennsylvania because of the illegal immigration?

BARLETTA: Well, we need to be careful that we do not confuse legal immigration with illegal immigration. You know, of course, immigration as a whole is -- is how America was founded and -- and we certainly welcome any newcomers, any new immigrants that come into Hazelton. However, illegal immigration has put a drain on our budget. Our population here in Hazelton has grown by over 50 percent since the year 2000, but our taxes remain the same.

DEFTERIOS: And 50...

BARLETTA: Any time we...

DEFTERIOS: If I can interrupt you there...


DEFTERIOS: Of that 50 percent, how much of that is illegal immigration, though?

BARLETTA: Well, it's estimated -- and we can only estimate because, obviously, illegal aliens will not come forward to be counted -- it is estimated that over 10 percent of our entire population is here illegally.

DEFTERIOS: Ten percent.

You know, you're a Republican mayor with Congressional aspirations. And I -- I want to get your view as you move up into the, perhaps, the federal role here as a representative.

What weighs more greatly, in your view, personally, civil liberties or security of your citizens?

BARLETTA: Well, we have laws in -- in America, obviously. And -- and I don't believe that any public official has the right to ignore laws, especially federal laws.

DEFTERIOS: But I -- I'm asking something a little bit different, if I can interrupt. I was asking something specific. Civil liberties or security -- which weighs more importantly, in your view right now, as you run for Congress?

BARLETTA: Well, enforcing the laws and securing our borders is -- is what we need to do. You know, I -- I don't believe that we're impairing anybody's civil liberties. It is illegal to come into this country without proper documentation. It is illegal to use false identification to law enforcement and government officials. So, you know, I believe it's a matter of securing our borders and -- and protecting the American people.

DEFTERIOS: If you get elected, do you think -- if you leave right now, that there's the temperament in Washington to close the divide and actually get immigration reform back on the -- on the federal agenda on something that actually works, because it seems to be failing right now?

BARLETTA: Well, I believe there is a way to -- to handle this problem without, you know, rounding people up, as -- as many suggest, those that want to enforce our immigration laws want to do. You know, I believe that if we -- such as the Hazelton law -- punish businesses that knowingly hire illegal aliens -- and the key word is knowingly -- or landlords who knowingly rent to illegal aliens. And we stopped providing federal benefits to those that are here illegally. And if we secure our borders, I believe what you'll see is attrition through enforcement. The very reason that most come here are for jobs and the benefits that America ahs to offer. And they'll simply self-deport.

So it won't be a matter of rounding everyone up and -- and deporting them. And, as well as when somebody is here even through a legal visa, if they commit a crime in America, it is the law that they are to be deported.

So if we enforce the laws we already have, I believe we could -- we could impact the problem in America.

DEFTERIOS: OK. We'll have to leave it there.

Lou Barletta, who is the mayor of Hazelton, Pennsylvania, joining us on the hot issue in America right now, of course, immigration reform.

Thanks for joining us.

Well, life for many in the Golden State isn't bright right now. Governor Schwarzenegger delivers a dire warning about the state's finances. All the details next on QUEST MEANS BUSINESS.


DEFTERIOS: OK, let's take a look here on QUEST MEANS BUSINESS at the numbers that we've seen throughout the day. We've not seen terrific numbers coming out of the corporate earnings today, as we look at our Q-25.

Let's take a look at the -- the Dow Industrials, which are trading up right now just 5 points. They were down a little bit, by about 50 points, a little bit earlier, after the surprise earnings on the down side by the retailers Colgate Palmolive and Kellogg, even though we saw better than expected numbers from the Dow component, Exxon. We saw its profits rise by 91 percent.

The Dow trading now just below 10500, at 10496.

Well, on QUEST MEANS BUSINESS, we don't just take a global economic view, we like to get up close at the world at work. Tonight, we're looking at the glamour and the greasepaint in the working life of a make-up artist who has a stage door vantage point view of London's West End.



DEBBIE GOODSHIP, MAKE-UP ARTIST, "LOVE NEVER DIES": My name is Debbie Goodship. I'm a make-up artist for the show, "Love Never Dies," in the West End. I do the make-up for the Phantom. And I also do the wigs for the show, as well as working with a team of three other people.

I really enjoy make-up. It fascinates me because it can change the way people look for fashion, TV, especially theater.

What I'm doing now, it's quite specialized. I'm using all aesthetic (ph) make-up, which is made up of silicon so it completely changes the face.


GOODSHIP: This is Pareen Carmelu (ph). He is playing our Phantom. And we are going to make him into make-up now. We are going to start by applying the bald cap. For the main character of the Phantom, it takes about 45 minutes to complete. My favorite part is the scarred side of his face, just because it's completely different than what Reme (ph) looks like. You can experiment a little bit more with color and texture and it - - it just fascinates me. I love it.

The Phantom's make-up is made up of four pieces. There's, first, we put on a bald cap, which goes straight over the head. And then we've got a piece which goes over the nose and up to the eye socket. And then we've got a piece which goes over the ear. We sort of actually glue his ear back to actually apply this piece here. And then we've got a head piece, as well.


GOODSHIP: When I was younger, I was always terrified of Freddie Krueger. And it was only when I watched "Nightmare on Elm Street" that I sat down and I said, how did they do that?

That -- that's make-up. And then as soon as I saw that, I was questioning how they did that -- how -- how they created the monster. And that's -- that's why I went into make-up.


GOODSHIP: A lot of people think there is -- it's a really, really cool job and I -- it is. It's amazing. But I don't think a lot of people realize how much goes into it and how many hours you do a day or a week. But it is -- it's an amazing industry to get into.

And this is the finished Phantom.



DEFTERIOS: The World At Work going behind the scenes of London's West End.

Let's join somebody who earns his keep every single day.

Guillermo Arduino is at the CNN International Weather Center.

That's a fair comment, I think, right -- Guillermo?


Let me tell you what's going on with those people who are really hot - - and I mean temperatures, huh, especially in Russia. You see that there is some stormy weather system that is approaching the area, but it hasn't been enough to actually change the temperature pattern that we have seen there. You see when -- when, John, you see those deep reds, you know that temperatures are extremely hot. And they are over 30 degrees. We've been talking about this for weeks, so it gets to dangerous levels.

The same now is happening in Spain, 37 degrees there. Now, you see these are the storms that I'm talking about that are coming a little bit closer. But this guy is quite prominent, still. So it's not going to allow those areas of bad weather to come here and bring a little bit of a relief. It's not going to happen. So it is unfortunate.

In fact, to put things into perspective, look, the average high should be 22. And we've been talking for over two weeks temperatures that are 10 or more degrees above average. We have reached 39 degrees in Moscow. So the low temperature of the day is what the high should be. And 12 degrees is unheard of. It's something that they do not see -- people in Russia are not seeing these days.

Nice weather in Britain, by the way. And I think the next three days are going to be really nice. We see some storms in Rome, though. We know one of those low pressure centers that were there hanging around. And the same in Vienna -- all in the fringe of that high pressure center that is so strong that it's not allowing things to go -- storms to go into Britain.

So look at Britain, pretty nice. Some scattered rain showers here and there. Also, we are looking better in the Low Countries.

But not in China. We see a little bit of a respite of those bad storms here in the north. Not in the south. Coastal parts and even here in Northern Vietnam is where we see significant storms right now. And the soil is already saturated.

I would say that there's a little bit of a change for Japan finally, because we have seen a lot of hot conditions over there. Things are changing gradually. And we see some rain showers moving there. As they are moving into the southern parts of China, Northern Luzon there in the Philippines, as you see, getting a little bit better.

But we are going to see some thunder in Hong Kong, some windy conditions in Taipei. Nothing bad enough to affect your travel plans. Those travel plans are bad, especially for many in India and Pakistan, because the rain persists. There's nothing we can do about this. This is the monsoonal flow that started at the beginning of June and trails northward all the way to Pakistan and there -- then it starts going backward. So it's weeks -- long weeks of persistent rains that are a lifeline, especially in the agricultural aspects of the story, for all these states, both in India and Pakistan.

We see, also, Nepal under the influence of the monsoon.

But now, of course, we're focusing on Pakistan. I see that in the last 12 hours, things have gotten much better, especially in Pakistan, weather wise. And we need to emphasize on the recovery efforts, especially at the plane crash right outside Islamabad.

So for now, the weather is behaving, but the rain is coming back -- John.

DEFTERIOS: OK, Guillermo.

Thanks very much.

ARDUINO: Thank you.

DEFTERIOS: Guillermo Arduino in the CNN International Weather Center.

Well, cash-starved California is running out of time to sort out its finances.

Up next, can Schwarzenegger save the day?

It'll be a cliff hanger, can I say that?

That's for sure.

We'll be right back.


DEFTERIOS: California Governor Arnold Schwarzenegger has declared a state of emergency over the state's finances. The move puts pressures on lawmakers to work out a state budget that is a month overdue right now. Let's take a look at what this all means.

California, as you know, if treated as a separate country, would be the eighth biggest economy in the world. But it's facing this fiscal crisis -- a $19 billion budget hole right now. It's the housing slump, financial turmoil, high unemployment. It's all really kind of adding into the -- the woes.

The unemployment rate, 12.3 percent. We talked about the German unemployment rate dropping to 7.6 percent. Believe it or not, that unemployment rate in California was at 5.4 percent in 2007.

This budget is a month overdue and, as a result, Governor Schwarzenegger has ordered a furlough Friday, which means that state workers have to take off at least three Fridays a month. It sounds like it's a good deal, but, in fact, they're not getting paid for this forced vacation. That measure starts in the month of August.

Earlier this month, 200,000 workers -- state workers, I should say -- go to minimum wage because there is no budget passed. So if you're making, say, $50,000 or $60,000 a year, you wake up the next day -- and that's in August -- $8 an hour. That's being challenged in court right now, but that's the proposal.

Without a budget in place, the state runs out of cash in October. So this funding needs to be done by October. Delays to the wrangling between the Republican governor, of course, and the Democratic legislature. The state credit rating agency threatened to lower the rating yet again if this deal is not passed. California has the lowest of any of the 50 states already, so it is a huge challenge.

We can listen to what the governor's spokesperson, Aaron McLear, had to say about the cash flow crisis.


AARON MCLEAR, CALIFORNIA GOVERNOR'S SPOKESPERSON: Because the legislature has failed to produce a budget, we're -- we're going to run out of cash and not be able to pay the bills. And so the governor has been forced to -- to do another furlough order.


DEFTERIOS: For more on California's finances, I'm joined on the line by John Ellwood.

He's a professor of public policy at the University of California at Berkeley.

Professor Ellwood, it's good to have you and I appreciate you joining us from the Golden State, which is not appearing too golden right now.

You know, I -- I'm from California. And year in and year out, it's unusual if they don't have a budget crisis.

On a scale of one to 10, how severe is this one this time around?


How about eight?

I just made that up.

DEFTERIOS: Wow! That's -- that is pretty severe, then.

ELLWOOD: Well, but it's -- there are two -- two ways to judge the severity. One is the actual size of the gap and whether the gap could be closed. And the other one is the political crisis, the inability of the various actors and the political parties to reach a compromise.

California is one of only three states that requires a two thirds in both the lower and upper chambers of the legislature to raise taxes. And the Republican Party in this state takes a position of no new taxes. And in your lead-in to this interview, you talked of -- you had an interview with Schwarzenegger's spokesman. The sad fact is that the governor cannot bring a single Republican to the table to vote for the governor's own budget.

So the real problem is the inability of the -- the governor and the Democrats to reach a compromise with the Republican Party, which holds a veto in both houses of the legislature.

DEFTERIOS: With the state of the housing market in California and an unemployment rate of better than 12 percent, would you say it's wise to try to raise taxes right now?

Or should it be done against the bottom line of some of the different state houses right now and -- and the different segments of the government?

ELLWOOD: This is a question of values. Last year, the -- California cut $20 billion off of its budget. This year, there's nothing left to cut except bone. So you're either going to have to raise revenues from people who can afford it or you're going to have to cut funding for schools and for health. That's what's there. And it's really a value judgment as to what you do.

Now, in reality, most states would do both. And -- you know, and the problem is that you have both political parties that are unwilling to compromise. The Democrats don't want to take any cuts to poor folks. And the Republicans don't want to raise revenues -- additional revenues. So they...

DEFTERIOS: That is a...


DEFTERIOS: That is a recipe for gridlock, is what you're saying. And I -- I tend to agree with you, with that $19 billion deficit.

We'll have to leave it there because of time.

But I appreciate you joining us again on the line.

Professor John Ellwood is a professor of public policy at the University of California.

Well, all the day's big market numbers for you in just a moment. We'll look at the closing scores in Europe and the up to the minute figures from Wall Street.



DEFTERIOS: In the stock markets this session, after European shares had rallied for most of the past week and with the host of positive earnings reports that we talked about in this program. The markets actually closed lower. Indices across the region lost as much as 9/10 of 1 percent. There are some suggestions that investors got spooked ahead of Friday's report on the U.S. GDP. There's some concerns that after the comments we saw from Ben Bernanke last week and the U.S. Beige Book report is pointing to perhaps weaker than expected GDP in the United States. The SMI is the biggest loser of the day, at 6220.

Asian markets had a mixed session. The Shanghai Composite rose to its highest close in two months, as worries that the government will try again to slow down the economy took a back seat. But it was a lower finish for stocks in Japan. We saw that the Nikkei was down just over .5 percent, at 9696.

Now, let's take a look at the U.S. big board today. We saw gains in this market in the last hour or so, after we saw a lot of downward pressure of better than 50 points earlier in the session because of lower than expected earnings numbers for ExxonMobil and Semetris (ph).


I'm John Defterios sitting in for Richard.

"WORLD ONE" starts right now.