Chief economics commentator and associate editor at the Financial Times, Martin Wolf has been described by Harvard economist Lawrence Summers as “the world’s preeminent financial journalist.” His weekly column is must reading for government leaders, central bankers, and business executives around the world. And his books, including Why Globalization Works and Fixing Global Finance, address some of the most important trends in the contemporary global economy.
In early December 2011, Wolf was the keynote speaker at BCG’s third European Private Equity Seminar in London. After the meeting, BCG partner Johan Oberg sat down with him to discuss Europe’s sovereign-debt crisis, the future of the euro, its implications for the M&A market, and the role of private equity in today’s volatile economy.
We’re curious about your view on the current sovereign-debt crisis in Europe. Are you an optimist or a pessimist?
I’m not sure I’m either. There are reasons to be a pessimistic, for sure, but also some reasons to be optimistic. What we’ve learned is that the sovereign debt of all euro zone countries is different from the sovereign debt of other countries, in the sense that they don’t have a central bank to back them up. There’s a clear liquidity risk. There are certain policy options—for instance, devaluation—that other governments have which the euro zone countries don’t have.
The market obviously recognizes that and is concerned about their capacity to manage solvency. Once that becomes priced in the market, then these countries can get into a very bad equilibrium where interest rates are too high. They get into a debt trap. That has been happening in some countries, but in the big cases—at present, Italy and Spain—they can still roll over debt. And they probably would be helped to roll over debt. They can bear these kinds of interest rates for quite awhile before it becomes a really serious problem.
Now, in addition to this, there is clearly an element of breakup risk in the sovereign debt crisis in the euro zone. There are people who are actually thinking, “Maybe the euro won’t survive, and in that case there will be huge moves in the new currencies. Germany will go up; Italy will go down. And therefore we want a higher price in Italian debt to compensate us for that risk.” They can’t assess how big the risk is, but it’s there.