A Conversation With Martin Wolf

A Conversation With Martin Wolf

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from C. Peter McColough Series on International Economics

Martin Wolf discusses the economic origins of the rise in global populism, the political and financial implications, and the state of democratic capitalism.

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

ZAKARIA: Ladies and gentlemen, a pleasure to be here. Martin was just asking me as we walked in, I wonder if anyone’s here? And I’m so glad to see that we can—we can answer that question affirmatively.

It is always a pleasure to do something with Martin Wolf because the moderator has a very simple job, as you will see. Martin has many intelligent opinions about everything—(laughter)—and so my job is really to sort of wind him up and get him going. (Laughter.)

Martin Wolf, for those of you who don’t know, is the chief economics correspondent, or commentator, I think it’s called, for the Financial Times. Has held that job for a long time, and really distinguishes himself in the world of the commentariat for being extraordinarily thoughtful, extraordinarily deep, and bringing a kind of perspective that I think is often lacking in commentary—part analytic, part academic. He really does the research, looks at the charts, often appends them to his columns.

I was going to—I think for many years you were the only economics Ph.D. writing a column, and then Paul Krugman, you know, decided to jump into your—into your pond. But in any event—

WOLF: They don’t give him charts, though. (Laughter.)

ZAKARIA: Martin is one of my personal favorite writers for many, many decades, so this is a great pleasure.

Martin, let’s—the format is we’re going to chat for a bit and then open it up.

Let me ask you about—to begin with about something I know you will start by saying, well, I don’t talk about, which is markets as opposed to the economy. I know you’re—you say you don’t like to talk about or you really don’t like to predict markets. But I want to ask you what you think of this proposition, that, you know, people predicted or many people predicted that the markets would crash after Brexit; they were wrong. Many people predicted that the market would crash after Trump; they were wrong. Many people now look at the market going up as Trump’s troubles get worse; they were wrong. What is the wisdom one can glean from the markets right now?

And I think it’s not unlikely that the—that the scenario goes something like this. Global growth is actually improving. China has turned out better than many people thought. The United States continues to be strong, and there’s some hope for perhaps some tax cuts or infrastructure spending. Europe is coming back. Commodity prices remain low. So, all in all, a very benign environment. And compare that to whatever happens to one guy who holds one office in the United States. Even if he were impeached, Mike Pence becomes president; it’s really not a big deal. Is that a scenario you think you could attach yourself to? (Laughter.) I mean, the markets might go up is Pence became president. (Laughter.)

WOLF: Am I allowed to give a half-hour answer to that? (Laughter.)

So thanks for pointing out—first of all, I’m delighted to be here again. Thanks for pointing out how long I have done this job. (Laughter.) I am—

ZAKARIA: We aspire to that.

WOLF: I am getting to the point where but the odd correspondent says, why haven’t you retired yet? (Laughter.) So one must think about this.

So the answer to your question is that I work very hard—and I think I have succeed in this—in never forecasting the market, because it will be fantastically stupid of me to do so because it’s not my business. My strong belief is most people whose business it is don’t do it very well, and—but at least they’re paid to be wrong, and I’m not. (Laughter.)

And the—and we do know quite a lot about the behavior of markets over the long run, which is—and here I’m talking about the market as a whole, as opposed to individual stocks. I think the market is pretty clearly pretty good at weighing stocks relative to one another, but for the market as a whole it, in my view, oscillates around reasonable valuations. And the most you can say is whether at this moment the valuations look extraordinarily stretched, given historical experience and the economic conditions at the time, of which the most important, obviously, is what’s happening to profits, what’s happening to the real interest rate. And on that basis, all I would say is the markets are priced—particularly in the U.S., less so elsewhere, the stock market—for pretty good outcomes, so they are—I mean, really pretty good outcomes. That’s the first point.

And when the market is like that on the whole, it’s more likely to go down than up. That’s the experience. I started really following these things very closely in the ’90s, and I spent several years talking about the stock market in the late ’90s, and I was one of the few people who thought they were crazy. And we were right. But the—

ZAKARIA: As a personal aside, tell us—tell us, what do you do yourself with your money? (Laughter.)

WOLF: I’m not allowed to talk about that. But the answer—

ZAKARIA: OK, you can’t give state secrets.

WOLF: The answer to that is my miserable little portfolio, actually, I sat out the late ’90s. That was OK. And—

ZAKARIA: But you do actively manage it as a—

WOLF: I time the market. My best thing that I did was I was in cash in between 2005 and ’(0)8, and I bought a lot in late 2008. That’s the best thing I did. So I like crashes. (Laughter.) This is—I think—

ZAKARIA: Like everyone—like everyone else, you won’t tell us the worst things you did.

WOLF: This is—oh, that’s easy. I think this is the one thing that Warren Buffett has taught us all: when everybody else is hysterically anxious, that’s the time to buy; and when everybody is convinced things are wonderful, it’s the time to sell. I’m not a player, but that seems to be rational.

But anyway, the bigger question, where I do feel more comfortable: Is it reasonable to be, as you suggested, confident about the underpinnings of a strong market? And I think your point is actually the deep one. From an economic point of view, we are in a synchronized global upswing. It’s not insanely strong, which is good. There is reason to believe it might continue. Pretty well every significant economy now is growing. That’s been the first time since the crisis. There are reasons why we are in this synchronized upswing which you can trace to global developments, in particular the three great shocks of the last 10 years. The global financial crisis, the eurozone crisis, and the commodities crash are now basically worked their way through. The financial sector is basically restored in most places. Confidence is returning because that’s the way human beings are. Ten years after a catastrophe, people sort of begin to feel—and it hasn’t happened again—people begin to feel calmer about things. They’re beginning to be willing to take risks. There’s a long backlog of investment that hasn’t been undertaken which now has to be undertaken around the world. The major emerging economies, China and India, remain reasonably robust, though they both have big difficulties. And so I think the idea that we’re having a pretty decent cyclical upswing which might be stronger than that is not an unreasonable view of where we are.

Then you talk about the geopolitics. The problem with geopolitics has always seemed to me the general problem of how you allow for tail risks, which are clearly tail risks; absolutely the most likely thing with geopolitics is that it won’t be devastating. I’ve written a few columns about this in which I’ve looked at the last hundred years of historical experience of what sort of geopolitical events cause real economic turmoil. And they’re quite rare, but when they happen they’re incredibly big.

So if we look back in the last hundred years, the events that have caused major disruptions to economies and markets have essentially been world wars—surprising; the Yom Kippur War, so that’s the third war, that was really big—

ZAKARIA: But that was really because of the oil shock—

WOLF: Because of the oil shock, exactly, that coming too.

ZAKARIA: —not because of the—

WOLF: —financial crises; and huge commodity shocks. Those are the events that have actually triggered major disruption. So as long as the geopolitical story doesn’t lead you into, you know, war between U.S. and China, big things like that, something enormous like that, it doesn’t really matter. And then—

ZAKARIA: And let me—

WOLF: And then what we are, of course—you can’t really hedge yourself against Armageddon scenarios. So, perfectly reasonably, most people don’t.

ZAKARIA: So we had dinner at Davos, the last night of Davos, and you were then much more gloomy. And your gloom came from the fear that macroeconomic policy was going to go wildly awry in the United States. You know, you looked at—

WOLF: (Inaudible.)

ZAKARIA: Right. You looked at Trump’s plan; that Brexit was going to go—you know, was going to go badly. What do you think of those risks? And why do they not—why do you now speak about a synchronized global recovery without talking about those macroeconomic risks?

WOLF: Well, the question then, when we go to that, is we’re talking about big geopolitics. So at a slightly lower level of geopolitics, there are plenty of risks out there. In the big picture, I suppose at that stage—this was just when Mr. Trump was inaugurated—there were two concerns I had; the first, that he was going to push the trade-war agenda with China much more vigorously than at the present he seems to be doing, which is very encouraging, or at the least not discouraging. We didn’t know what that would mean—

ZAKARIA: Right.

WOLF: —particularly given the inaugural. And secondly, we thought he might be promoting a huge fiscal expansion, combined with possibly—and I still think this is an open possibility—a lot of pressure on the Fed not to tighten monetary policy. And if he failed in the latter, we would be risking a return of the sort of Reagan-Volcker dollar situation, which I think would be very destabilizing, given the amount of dollar debt there is out in the world, particularly in emerging economies. And if he succeeded in pushing the Fed, really pushing the Fed, then we’re in a sort of Nixon-Burns situation. And that’s even worse.

ZAKARIA: Just explain those two scenarios.

WOLF: Well, the Reagan-Volcker situation was one in which we had a president who pursued a very expansionary fiscal policy at the same time as the Fed—this is obviously much more extreme than now—the Fed, with the support of the president, appointed by his predecessor, pursued a very tight monetary policy to get inflation out of the world system.

The result was extraordinarily high interest rates and a very high dollar. One could imagine it wouldn’t be so extreme, but we’re in a different starting point, as if we’d had, say, a fiscal expansion and this was the limits of what Mr. Trump seemed to be suggesting in his plans before the election, a fiscal expansion of up to 3 percent of GDP, which would bring the structural deficit in the U.S. to something like 6 or 7 (percent), depends on how you—but something like—which is enormous.

And the Fed would, I think, then have accelerated its tightening substantially from the one—the path.

ZAKARIA: But why—

WOLF: That would have—let’s suppose we get the fed funds really shooting up in this situation, and the dollar might have strengthened a very great deal. A lot of economists were concerned about this. That now seems a much smaller possibility.

ZAKARIA: Why? The tax code is 2 (trillion dollars) to 3 trillion (dollars). He’s not forsworn the infrastructure.

WOLF: Well, we—

ZAKARIA: So what—

WOLF: We—at the moment, I am modestly optimistic, but only modestly, that what will finally come out of Congress on fiscal policy, just looking at the macro point, if you—will be more modest. And though—you know, American citizens can decide whether they like the microeconomic aspects of fiscal policy and budgetary policy, but the net stimulus will be perhaps 1 percent of GDP or so. If so, the stress on the system, I think, will be considerably smaller. And I think that’s also what the currency markets are telling you and the interest-rate futures are telling you.

So basically I think, at the moment, the view in the markets is Mr. Trump will not have—the administration will not have the authority, the capacity, to put through such an enormous fiscal expansion. If so, that risk is very significantly diminished. And if that’s also true, it means the pressure on the Fed to monetize it when it no longer thinks that’s appropriate will be reduced.

Now, of course, there are many important questions. Who is going to be the next chair of the Fed is a very important question. One of the things we’ve learned, I’ve learned possibly in the last 50 years of following economies, is who’s running the Fed really makes a difference. So one hopes it’s somebody sober and able to do the job. But at the moment I think the—looking at it from the outsider point of view, the possibilities look less frightening; perhaps, if I may say so in the sort of—in a sort of gentle way, because, to tell the truth, the administration doesn’t look as competent as I feared. (Laughter.)

ZAKARIA: Let me ask you about Europe, and before we get to Britain. Why does Europe seem to be recovering? There are two—there are two theories behind this, one which is the—let’s call it the Axel Weber, you know, the prevailing kind of Brussels wisdom, which is we did austerity, which forced these countries, like Spain and Ireland, to do reforms; finally, those reforms are paying off, and you’re seeing growth. The other is that, you know, after a decade, lost decade, because of austerity, finally consumers and governments are spending again, and so you’re beginning to see a recovery. Which of those two is true? Don’t say a little bit of both.

WOLF: Well, I was going to say mainly the second. But you missed out, I think, the crucial element in this, which is what the European Central Bank has done. So I think the most important player in this story was Mario Draghi. When he took over in 2011, it really looked like a pretty dead-ish duck. And he took a series of decisions which took an immense amount of risk on the—off the table, obviously starting with the famous whatever-it-takes commitment, which eliminated—I mean, we have to remember that in 2012 the bond yields in Spain and Italy were running at about 7 percent, close to 7 percent, on 10-year bonds, which is a real interest rate then of about 6 percent, because inflation was falling fast.

ZAKARIA: Right.

WOLF: There’s no way they could have survived with those real interest rates. And he killed that, because they were all about redenomination risk, i.e. crashing out of the euro. And then, after that, he adopted a whole slew of complex policies to inject a massive monetary stimulus, mostly under the—fiercely criticized in Germany for doing so, took a lot of moral courage and immense political skill, which I am still astonished by that he managed to do this essentially with only the opposition of the Bundesbank. The ability to run the ECB against the Bundesbank is an extraordinary political achievement. I don’t think most people realize how extraordinary it is. You might like it or hate it. I love it.

But the—but to be able to split off the Dutch, the Austrians, and all the rest of them, from the Germans in this situation is a remarkable achievement. And that transformed it. He made the ECB a remarkably effective European institution, the most effective one. That’s number one.

Number two, once it became obvious that it was very unlikely to break up—that became obvious, I think, in 2013/14—confidence did begin to return to business across much of the eurozone.

Three, the Spanish and Irish cases are the very interesting ones. To me, actually, I’m beginning to be most interested in Portugal. But if you think about the countries that went into the crisis, they were slightly different cases. Portugal, Italy, and Greece had immense structural problems and had grown—well, Greece is sui generis. I’m going to put it aside. We could spend a lot of time on Greece.

ZAKARIA: Greece is not really—

WOLF: We could put a lot of—just because it’s so complicated. But Portugal and Italy had had very, very long periods of slow, weak growth, very low productivity growth, and they had really deep structural problems. Spain and Ireland didn’t have such deep problems. Spain did in the labor market, but not in other areas. And they just had a huge financial-sector boom and boost.

And huge financial-sector booms and busts, it’s unbelievably painful. You have colossal crashes after them. And they are still affected. Spain’s GDP is still way below where it was 10 years ago. It is a lost decade. But they passed. And underneath it, it was quite a good economy. They did a lot of labor-market reform, which is their one success. They still have frighteningly high unemployment. And—but I think it was basically about getting through the financial crisis.

Now, here the ECB’s policies, their own willingness to recapitalize their banks, the fact that Spain and Ireland went into the crisis—very important—with incredibly little public debt, so they could borrow an immense amount without going over—they still shot up like mad and they’ve got a huge debt burden, but they started with next to nothing—has left them—gave them the possibility of financing their way through the crisis and financing the bank bailouts, which in Ireland’s cases were just frightening.

So they have come out. And I think they’re—one part of the reason is that the structural problems there were weaker. Italy is the most worrying major case, because the growth is very, very weak, unemployment remains high, growth is positive but it’s still about half a percent or so. Productivity growth—there’s been no productivity growth to all intents and purposes in Italy since the end of the last millennium. You know, this is quite, at least, frightening. It’s a deeply divided society now. The politics are very, very fragile. Debt—public debt is very, very high. It still has some very appreciable strengths, but the failure to—and because the structural reforms haven’t really happened there.

And there, they’re much deeper, because it goes back to the whole way the Italian economy evolved. So I think the structural reform story is—it’s a part of it. It’s certainly a part of it in Spain. I think it’s the most important case where it’s really succeeded. Now, I was going to say about—Portugal seems to be a country, and I’ve been there a couple of times recently, where they have very slowly and painfully, along with the sort of macroeconomic side, done reforms that might now be getting them into a better shape—a better stage of growth. Now the really big questions are Italy, which I’ve already mentioned, and what Monsieur Macron can do in France.

ZAKARIA: Let’s talk about Brexit. It seems to me that what I was saying to you, I talked to a former very senior European official about the negotiations, and he said they have to go very badly for Britain. That from Europe’s point of view, they have to set an example that says that Britain gets a much worse deal than they had when they were in the European Union, otherwise what would be the point of staying in the euro? And the deterrent effect is very important to stop others from doing it. So, A, do you accept that? And, B, that suggests a pretty bleak future for Britain.

WOLF: Well, I’m—that’s all perfectly obvious. So, I mean, there’s never been any secret about that. You know, I’ve been clear before we had the referendum and after we started on this insane path of having one, but the—that if we voted to leave the best we could plausibly hope for at the end of that—and I will put aside the actual process of negotiating the divorce, which is going to consume most of the next year or two—but the best we could hope for is a standard free trade area in goods, which would have some services features, and probably in the end wouldn’t look vastly different from what Canada has, which is VAT.

And that means that the flow of goods will be incumbered by quite complicated regulations essentially relating to so-called rules of origins, because we’re no longer in the customs union. And that’s a technical point, but quite important. We would have to—complications relating to regulatory standards, and proving that goods we’re exporting meet EU regulatory standards, on which they can be difficult, because we’re not in the single market—we would no longer be in the single market. And on services, it would be a pick or mix sort of thing. It might be—it might have some of the features of the Swiss arrangement, but most of our financial sector would be outside the single market.

ZAKARIA: So what’s the effect of that?

WOLF: So that that would be, I think, the best. The long-run effect of this is one of those very controversial questions, because people come up with such wildly different estimate. But the overwhelming likelihood is those parts of our economy which were established, integrated fully inside the European supply chain system—of which probably the most important is motor vehicles, but there are some other areas, aerospace and so forth—I would expect slowly but surely the factories that have been established in Britain by foreigners, mostly by foreign investors, will leave. And the—that integration process will halt.

Furthermore, I think that a lot of businesses that are basically made the U.K. for obvious reasons—language, culture, law, and so forth—the base for their operations in Europe, will move to another base. Again, slowly, I expect this is a very important effect which we haven’t discussed here, because we will be introducing immigration restrictions. But in any case, we won’t be in the system of completely free movement that a lot of foreigners, particularly Europeans not only will but already are going home. And they supplied a lot of the skills that made London the—you know, the commercial capital and the financial capital of Britain. And the fact is, we—

ZAKARIA: Of Europe.

WOLF: Of Europe—that we were able to import so many highly skilled people. So what I expect to happen on this side is the attenuation of possibilities. What this accumulates to over time will be very difficult to tell, because it won’t be—it’s not really visible. But we did pretty well in Europe. We actually were the fastest growing of the larger economies of Europe in the last 30 years, since the single market was created. And I will be very surprised if that were true in the next 30 years.

The more—the thing that I’m worried about more is the short term. So we’re sort of talking about the long term. But there’s something I think about right here at the moment, which is let’s suppose we don’t do a deal on the divorce. We actually don’t have a deal on the divorce. If we don’t have a deal on the divorce, we won’t have a deal on trade. And that means at a certain moment in March 2019, we will be outside the EU and the procedures, which are complicated, for redoing the whole technical basis of trade—we’re talking about millions of products a year going across the borders—won’t exist, because they all take—we will have to redo the entire system governing our trade—presumably we’ll move to some sort of WTO basis, though even that is a controversial question—overnight.

If we have had a breakdown in the relationships, we will have the problem of trying to persuade our partner countries, with whom we have, at that stage—on whom, as it were, we have defaulted. From their point of view, we have refused to do a decent negotiation and agree on what we owe them and all the rest of it, to complete—to cooperate with us to completely redo the trade facilitation arrangements with our country. And we will have to have decided that’s what we’re going to do months before, probably, in advance—because it will take months to do this—in advance of actually knowing whether we’re going to have this breakdown.

It seems to me very likely, therefore, there will be a point at which trade—just simply running trade between Britain and our partners in Europe will become very, very difficult. And it might just break down for a while. And the problem then is relations will be absolute poison. You have to imagine the situation. The negotiations have broken down. Britain has refused, from the European point of view, to pay up. Our trade has stopped, so we’re in a very serious recession. Their trade is also damaged. And that’s a very, very bad situation to end up. it’s completely poisonous relationships. And the question is, can we—so we have to have a deal. There has to be a deal which allows all this to be worked through. And I don’t think the British have yet got that into their minds.

ZAKARIA: Finally, before we throw it open.

WOLF: Or, at least not all of them.

ZAKARIA: You—and the Europeans have a lot of negotiating leverage here.

WOLF: Yeah. I mean, obviously, this would cost them too. There’s no doubt it would cost them. And there will be strong interest on the other side. They would like to avoid it. But it wouldn’t cost them as much as it will cost us. As I like to say, very simple, we lose access to 27 countries, markets, and they lose access to one. It’s a big one, but still we lose access to more market than they do. And they know this very, very well.

ZAKARIA: You had spent a lot of time talking to government officials all over the world, but high government officials in Europe in particular. What do they make of the Trump administration so far?

WOLF: I think the best answer to that is probably twofold. They’re bewildered. I mean, astonished is the—they didn’t see this coming, at least, of course, until a year and a half ago now—a year ago. Neither did I. I was persuaded it might happen in January 2016. I remember exactly, at the previous Davos. And so they’re bewildered and they don’t know what it’s going to mean. But they, I think, are increasingly feeling—and Angela Merkel’s possibly unwise remarks in the last few days indicate that—that it’s a fundamental break. It’s not just about this administration. Something fundamental has changed in the relationship, which might in some ways force Europe to grow up, and all the rest of it.

But I think they are now in the process of trying to work out is this—the following: Is the world in the process of fundamental transformation because the U.S. has essentially decided—not, of course, unanimously, things are much more complicated—to adopt a fundamentally different stance, and in particular one which doesn’t really differentiate between its traditional allies the rest of the world? They always felt, you know, we are in the inner circle, as it were, among relation—of relation—of America’s international relations. And the question they are asking themselves: Is this now true? And if it isn’t, what should we do about it? It’s quite possible they won’t work out what to do about it.

But I think the—from this point of view, the Merkel-Macron merger—the combination is quite interesting. It makes the chance that they will do something, which is never that high—so I’m not going to say they’re going to do something effective—but it’s certainly much higher than it has been, in my view, at any time in the last 10 years, because I know Emmanuel Macron relatively well. In fact, he’s one of the politicians I know best at the moment. And he’s, I think, a relatively serious person—very young, very inexperienced, and very committed to making this European thing work. And I think Angela Merkel would be inclined to take him more seriously than this two predecessors, which I have to tell you doesn’t mean much. (Laughter.)

ZAKARIA: All right. Let’s open it up to questions. Just identify yourselves. I forgot to mention, but unlike the usual Council rules this is on the record, because of when you’re dealing with an intellectual, the whole point is to get your ideas across and get quoted. So feel free to liberally quote Martin. (Laughter.) Sir.

Q: Guy Erb from the Berkeley Research Group.

Would you factor in North America and the U.S. market in particular, but North America generally under your two scenarios of a hard Brexit and a continuing FTA with Europe?

WOLF: Well, the—obviously once Britain has left the EU, and the customs union, which I am assuming is going to be the same, I could come back on other possibilities. I chose the most malign possibilities, but there are better ones. But assuming that at the end of this two-year process we will leave the customs union above all, we will then be able to conduct trade negotiations with the rest of the world. That will become a very, very busy period. There’s a rather wonderful big piece that I’ve just—which has just put on the FT website today, so I read it this morning—which says, if I remember correctly, the U.K. will have to replace—the number might be wrong—but something like 745 international treaties, which the EU has with the rest of the world, of which we are a part and from which we would be expelled automatically without really the EU.

So since at the moment we basically don’t have a trade department, and there are many other—it’s not just about trade. There are many other issues. Fish, for example, is a—become a big issue. Agricultural questions, partly trade, partly not. A whole host of things. But there’s no doubt that the British government would like to do a free trade deal with North America. If there’s still a NAFTA, I’m sure we would be delighted to join. And I have no idea how easy that would be. I suspect it would be quite difficult. And the reason I suspect it would be quite difficult is that I think some of the things you—the Americans—would like from Britain will be politically very difficult for Britain. And that’s particularly true in two areas—agriculture and health. We can discuss that further. They’d be quite difficult for the British government.

But now then the really big question is how far could such a deal compensate for loss of our current access to the EU. And the answer is it would compensate to a relatively small degree. There’s quite a good analysis which I quoted down by various bodies in the U.K., which make the pretty obvious point, since we do a little less than half of all our trade with the rest of Europe and nothing like that with any other country, including the U.S.—I think it’s about four times as much as the U.S.; I can’t remember the exact figure—then—and the WTO barriers are incredibly high, and we’re not—our comparative advantages are not highly complementary. Or, to put it another way, we don’t have things that we’re fantastically competitive that you aren’t already pretty competitive in yourselves. The chances that this will be transformative for British trade are modest.

But it would clearly be part of what the British government would want to do. It will want to create free trade agreements with as many countries as it can possibly manage. And the U.S., North America more broadly but the U.S., would clearly be the first important partner, by far. By comparison, the other big markets of the world—China and India—are very difficult propositions for trade negotiations. And it’s pretty clear that that’s not where we’re going to go. One final point. Obviously, all of this does depend to some degree on where U.S. trade policy ends up. And I’m finding that pretty difficult to work out at the moment. (Laughter.)

ZAKARIA: Sir, in the back. Yeah.

Q: Thanks, Fareed. Craig Charney or Charney Research.

Following up on the Brexit question, you mentioned that there are some less-catastrophic scenarios. Given the cost of crashing out of the customs union, isn’t it likely that there would be an attempt to be some—establish some sort of interim arrangement with Britain remaining part of the European economic area?

WOLF: Yes. This is the rational thing to do. And I’m—if I may—well, at least I think it’s the rational thing to do, because it’s what I’ve written. I would, wouldn’t I? And I think I wrote it in my Friday column of about 2 ½ weeks ago. Sometimes I get the dates wrong. But anyway, the basic argument is this: The EU will indeed want to punish us. But let’s—there are—in the divorce—thinking about the negotiations—you probably don’t follow this quite as manically as I do, and may be forgiven for that I think. Watching a friend commit suicide is always horrible. There’s the divorce deal, and then there’s the subsequent trade relationship. That’s very—the divorce deal is very complicated, because we are separating from something we’ve been part of since 1973. But it has two absolutely central elements.

The first is money. And the second is people. And is that surprising? No. Money and people. The money, the—Britain is the second-largest net contributor to the EU. In the view of the other members of the EU, one, they want as much of this money as possible. Quite understandable, because otherwise they’ve got a problem with their own budgets. And, two, well, we’ve got you over a barrel now so we’re going to insist on the money, because no money no other deals. And so they put in a preliminary bid, which is estimated at about 100 billion euros, which is about 80 billion pounds, which is, I think, about 5 percent of GDP. Now, it’s a sizeable chunk. Manageable, over—you know, if you look at it rationally, but fairly large.

The people thing is essentially they are going to want that the—they’re going to state that their citizens went to the U.K.—there are about 3 million EU citizens in the U.K., roughly. That’s slightly exaggerated because that includes the Irish. And the Irish have a special status which won’t be changed. There’s about 300,000 of them. But still, the largest group is Polish people, close to a million. So they’re going to be there. And they’re going to insist these people should have the rights they expected when they came to the U.K. as part of the EU forever, because that’s what they expected. And what’s more, we’re going to insist that we can protect those rights, which means that they will remain under the purview of the European Court of Justice.

To put it very mildly, the British government is going to find it difficult to accede to either of those demands. In my view, they should. But then, I was against Brexit. But they’re going to find it very difficult. If the negotiations get stuck on those—there are many other technical issues, but they’re easier to deal with. You know, what happens to all the European agencies in Britain? We’ve got a lunatic secretary of state for Brexit who thinks they’re going to stay in the U.K. But he is a lunatic. There is a not-small problem that many members of the British government are mad. (Laughter.) I mean, this is—well, you’re familiar with these problems, right? (Laughter.) So, OK, this sometimes happens. So Theresa May is not mad, but she doesn’t know much about this stuff. So it’s very difficult.

So the point is, in my view, the British are going to have to accept these demands. This comes to what Fareed said, because they’re not unreasonable demands. In the—in my view, we did make these commitments. If we borrow at current interest rates, we can borrow for 30 years at essentially zero percent real. We borrow the money, essentially we pay it back over 30 years implicitly. We give them the 5 percent of GDP. It’s the price of messing them about. But my view is not a majority view. And on the EU residents, I think we should be as generous as we possibly can, because we want to convince the Europeans that we’re friendly. And one of them is by treating their citizens properly, which will also mean they’ll treat us properly. And from my point of view, that’s quite important, because I want to spend a lot of time in Europe.

And so that’s what we should do. Once we’ve done that, and to get this negotiation to work we basically have to accede to these things pretty quickly. It can’t be spun out forever, because the effectively, the negotiations aren’t going to really start till September because, you know, it’s been brilliantly timed by our prime minister. First, she—first she actually put in Article 50 and then she had elections, which delayed it further two months. Then we—the European summer. Europeans, unlike you fine people, believe in holidays. So they are—or vacation. They are going to go from the mid-July to August—they’re all gone. And then there’s a German election. So when is serious negotiation going to start? November. We’ll have a—they’ll basically mean. And to get all this work, the negotiations have to finish well before the end of 2018. So the negotiation period is a year.

So they’ve got to agree to all this stuff in a few months. Then what they could say is the long game is a free trade area, as we’ve discussed, plus some sort of special deal, sometimes called enhanced equivalence on services and regulation. We’re going to do that. And, because we’ve got a five-year parliamentary term—all this assumes Theresa May will win. Which might not happen. Maybe it’ll be Jeremey Corbyn. But so then we have a five-year time, we knock out—the divorce procedure is done in a year. We pay the price. And the transition is staying in the single market. The transition is set and the customs union. And when the final trade deal is agreed, which we would probably do in the five-year period, around, we move smoothly out of it. That is the way to do it. It might be—that’s essentially what my column says. That would be the rational thing to do.

To do that, would the other side agree? I think if we paid enough money and were—and were nice enough about their citizens, which in my view is in our interest, then they would accede to that. I don’t think that’s at all impossible, from the conversations I had. But it would mean that the prime minister of the U.K. would have to basically force her party to accept this. And if she wins by a small majority now, her position will be greatly weakened and she won’t be able to do it. The governing party will break under her. So I remain of the view, that the chances we will reach a sensible deal in the time we have—which is very few months, as I’ve explained—is unfortunately very small. And the result of that will be a real poisoning of the well between the U.K. and Europe. Very damaging, in my view, to American interests as well—not as much as to us. And very difficult to reverse.

So this is—this process, in my view, has every possibility of ending up in a true disaster. And I wish that our political leaders gave me greater confidence that they understand this and will avoid it. That’s my answer. Yes, you’re right. That’s what should happen. I’m just not sure it’s going to happen.

ZAKARIA: All right. So convinced am I of Martin’s insight on this that I’m going to rule out any more questions about this small, inconsequential island north of Europe that is going to be battered and left irrelevant by the—by the forces of the global economy. So no more Brexit. No more Britain. No more Brexit.

Q: Stephen Blank.

Two, I think, believable assumptions: President Trump moves toward and “America first” policy. At this stage, it is not a big surprise anymore, because people, I think, are beginning to think he may be crazy enough to do this. What are the responses? What are the responses—

ZAKARIA: What do you mean by an “America first” policy?

Q: Trade and security.

ZAKARIA: OK, so why don’t we just take the China piece. What do you think is likely to happen if there were to be a significant deterioration—you know, a deterioration of trade with China—on the China front. And what would it mean specifically?

WOLF: The problem with the—I mean, this comes back to what I thought, the puzzle I’ve had in trying to work out whether there’s any there there, or what there is. I mean, the rhetoric is clear. And the views of one or two of his advisers, most obviously Peter Navarro, because he’s written a book about it, right? You know, there’s some things you can get into are very clear and very true. But his—even among his close advisers on trade, Wilbur Ross is clearly in a somewhat different place. And he seems to be, at the moment, the most effective and powerful of his advisers. The USTR hasn’t sort of surfaced as far as I can see, though I think he’s now confirmed, isn’t he, Lighthizer? And his history I know, because I follow trade policy very closely and, you know, VERs with Japan.

So there are—there’s the “America first” label on trade. Even among the advisers he’s brought in who’ve obviously got views, there isn’t a coherent—they have different views. He, himself, seems to think, when he opens—when he talks, as he’s been recently talking about how wicked the Germans are for selling you cars—I hope none of you drives a German car, even made in America? So his view seems to be that trade will be fine as long as it’s bilaterally balanced. You have a—and I’ve written a column about this. Now, what this will—so how you make a policy for a global superpower with each trade relations linked so profoundly with the entire structure of your economy and your corporate structure on the basis of the ideas that are being put forward by these various figures, including the president, I have no idea. And in my view, I don’t think they do either.

What we have seen in practice so far is a decision to pull out of TPP. Well, I think that was a very serious error, strategic error because it leaves these countries all convinced, OK, China’s the game. It was pretty silly, but that’s—TTIP is dead anyway. That was dead on both sides. I don’t think that’s going to be recovered. You’ve got a renegotiation of NAFTA. I have no idea what that will mean, but I’m assuming at the moment relatively minor. But I don’t know. And then there’s the beginning of a negotiating process with China, which was triggered by his meeting with Xi Jinping with Florida, and the first stage of which was basically extraordinary conventional—the sort of list that I would expect sort of any USTR to come up with historically. I wrote a piece for the FT on the first 10 points of agreement, which were extremely conventional, but I’m strongly attacked by some of Mr. Trump’s supporters on the trade side.

So I’m, at the moment, as far as the trade agenda of this administration, bewildered. But my optimism is, my hope is, that as their ideas come up against the reality of the structure of the economy and the structure of world trade, the crazier ideas will disappear. They might resurface at 3:00 a.m. twitters—tweets from time to time. But they will disappear. And we’ll have an administration whose orientation is protectionist, so there won’t be any further push on liberalization of any significance, but not one that which will fundamentally alter the structure of the world trading system.

But I think at this stage, at least to me, it’s completely uncertain. If they do something one way or another—and there’s lots of things they can do using U.S. legislation which get them into a WTO dispute with a major player, or even a minor player, and the WTO procedures—judicial procedures go through a process at the end of which basically the U.S. is found to have acted outside its agreements, then it will be very interesting to see how the administration responds. That will be a very important moment. But I think the crucial point is, what “America first,” actually means in trade policy in 2017 is, to me, still completely obscure and, coming back to a question Fareed asked, it’s one of the questions that everybody I’ve met, both in Europe and in Asia, who are thinking about trade, wonders about. And the optimism—the optimistic view is that in the end it will turn out to be a slogan not a policy.

ZAKARIA: Do you think on the—just as a matter of—as an intellectual matter—a number of the people who are close to Trump, Wilbur Ross for example, will say and have said to me, look, you cannot have a country that unendingly runs trade deficits with every one of its major partners. That just is not sustainable. Do you think that’s true? What is the theoretical way to think of this? What is the flaw in that argument? Or, you know, the argument is that just at some point you can’t—you know, you can’t just say, well, we’ll take the investment but you guys are making everything and selling everything?

WOLF: Well, my answer to that is the U.S. can run a current account deficit—could run a current account deficit—not forever, nothing is forever, but for a very long time. Almost certainly nothing like as big as it ran before the crisis. Even today’s is somewhat problematic. But the U.S.—basically, you could say the U.S. is consistently selling assets to the rest of the world. As long as the assets being sold to the rest of the world, the net claims on the U.S. are not growing wildly fast relative to the growth of U.S. GDP—so it comes back to the U.S. performance—and it remains an extremely attractive place for foreign investment, the U.S. could run a current account deficit for very—Australia’s run a current account deficit forever. And so I don’t think there’s any fundamental problem with the idea of the U.S. continuing to run a deficit for a very long time. There’s a question about the size.

I happen to believe—and this is a controversial view—one of those people who thinks that extremely large global current account imbalances or net capital flows are linked with, and in my view actually trigger, significant financial problems, financial-sector problems. And indeed, I have written in my recent book that it’s one of—it was a triggering factor for the underlying crisis. But that’s a global macroeconomic problem, it’s not a trade policy problem. It’s a question about how macroeconomic adjustment is done. And there are clear problems in managing that in a world in which the dollar is the world’s principal reserve asset, there is no real rival, and everybody’s prepared to accumulate them, net. And since the U.S. actually quite likes that situation, and in many ways benefits from it, it’s really rather hard to persuade anybody here, when you get to it, to actually do the things that will prevent it.

What would you have to do? You’d have to stop people buying U.S. assets—that would be the effective way of doing this—including foreign governments. You could do that through taxation or other means, but there’s no desire to do it. You cannot change global current account—this is—I mean, I don’t agree fully with the argument, but Marty Feldstein and George Shultz wrote a very short little piece. I didn’t quite agree with them. They made the basic point these are macroeconomic phenomena; they can’t be dealt with through trade policy. And if you think there’s a serious problem, then you have to change the macroeconomics. And to change that, you basically have to focus on the financial account, not on the trade account, and it means basically changing in the most profound way the U.S. dollar’s relationship—the U.S. currency and set of associated financial liabilities’ relationship with the rest of the world. And nobody here is really interested in doing that. It would be very bad for Wall Street.

ZAKARIA: Sir.

Q: Thank you.

In case the Trump doctrine does leave some vacuum around the world—geopolitically, geoeconomically, et cetera—do you actually think China will rise to the challenge to take a leadership role? And do you think China is actually ready for it? Thank you.

WOLF: I suppose it depends what you mean by leadership. We all admire the rhetoric of Xi Jinping’s—President Xi Jinping’s speech in Davos. It was rather brilliantly timed. It was a beautifully put together speech with references to Dickens. (Laughter.) The—

ZAKARIA: The hallmark of a good speech. (Laughs.)

WOLF: Yeah, the hallmark of a—well, it could have been Shakespeare. (Laughter.) Maybe he had Shakespeare too.

So the question, obviously, is—the famous question, you know, Metternich is supposed to have said when told of the death of Talleyrand, what did he mean by that? (Laughter.) So what did President Xi Jinping mean by that, beyond rhetoric?

So there are—there are several aspects of this. The first is, is the—China profoundly committed? Because one of the first things you’re going to—if you’re going to be the leader in world trade, you have to become the market of first choice in world trade. So the first question is, how committed is China to liberalizing its own market? And all I can tell you is that if you talk to businesspeople—and I do, a lot—is they are not, how does one put this gently, unanimously convinced that China is committed to opening its own market.

Number two, the second question, is what sort of system of trade rules and trade order does China wish to promote? So the second—U.S. created the world’s biggest market, and the second thing it has created the rules of the system as we know it, the WTO system and the plurilateral systems that have been developed around it. Does China wish to develop the trading system on the basis of those rules or some quite different rules? At the moment, we don’t know. There’s no—there’s no Chinese, to my knowledge—certainly not in—since I don’t read Chinese, certainly not that I have read—which specifies the sort of trade order that the Chinese want. And when I talk to some very senior Chinese officials about this, I think the answer is they haven’t worked this out, whether they want to—you know, whether they want to promote this. They have RCEP, the—and that’s a relatively limited-ambition trade negotiation.

Then the third thing, which is the most interesting, is—to me—is the Belt and Road initiative, and how that fits in with China’s view—real view—real view of what a trading system would look like. And here I think it is interesting because it seems to me to suggest a trade—a system of trade linkages which is really quite radically different from the system that the U.S., building actually upon the 19th-century treaty system—that’s how it originated—has promoted in the last 70 or 80 years since, well, the Reciprocal Trade Agreements Act of ’33 or—roughly like that. So the Chinese Belt and Road seems to suggest that the Chinese view is that, through a mixture of investment and particularly investment in transport links, essentially you create an integrated economy out of China and its neighbors going all the way out to Europe through a real system, real linkages, linkages in the real economy, not linkages through markets, or markets play a smaller role in it, with China the hub of this.

Now, this is not a system I would be wildly keen on, but that’s not the point here. If that is the conception—and I think it might well be the conception that is developing—it would be a form of leadership, but it would be one that is quite unfamiliar. It would be something new in the modern world trading system. In fact, it would look, to be quite blunt about it, a little bit like some of the imperial systems.

So at this stage, I would say what China means by being the hub of a new world trade order is, to me, very obscure. But we will no doubt find out.

ZAKARIA: All right. A final very brief question. You said that you hate to predict markets, but you look at the current American stock market and you think historically when stocks are priced as high as they are now that there is a greater chance they will go down than up. You said that you moved into cash in 2005.

WOLF: I’m holding mostly cash.

ZAKARIA: So that was my question. You’re holding mostly cash now?

WOLF: Well, I’m very risk-averse, at my age. I want my pension money to survive till I die, and I’m much more anxious about crashes that I won’t be able to recoup than I am about making gains. So I take the view that the prudent thing for me to do is to sit this one out. It’s altogether too exciting, and it’s too uncertain, and the risks are too obvious. And, you know, I feel this is just a bit—a bit nerve-wracking.

Now, the—there is one crucial element in this which we didn’t discuss. At some point in the next few years, not suddenly, monetary policy will move strongly towards normalization after an absolutely unprecedented—in my view appropriate, but nonetheless unprecedented period—of hyper monetary ease. As the great man whom I’ve quoted famously said, you only know who’s swimming naked when the tide goes out. And the relevant tide is the monetary tide. So when the tide goes out—which it will—we will find out who’s been swimming naked, and I would be very surprised if it didn’t turn out after such a long period of immense monetary stimulus that there weren’t a lot of people swimming naked. And I, being my humble little self, would rather not be in the same pool as they at that moment. (Laughter.)

ZAKARIA: All right. So the headline is: Despite synchronized global recovery, Martin Wolf is going to sit out the Trump era. (Laughter.) Thank you all very much. (Applause.)

(END)

This is an uncorrected transcript.

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