On Debt, Greece, and Germany – and a small history lesson

At the end of the first world war, Germany was stuck with a huge reparations debt, designed to cripple the country. I have read this in Keynes, who blamed this for the second world war.

In 1953 half of Germany’s debt was forgiven. No holdouts allowed. No exceptions, all forms of debt. And, repayment was limited to 3% of exports earnings each year. So, debt holders were motivated to import German products in order to get paid.

You can find all this here, an article in The Guardian a couple of years ago.

Greece and Spain helped Germany recover.

For those of you too lazy (or too time-pressed) to click a link and read some fascinating facts, I will include a few quotes here, in italics. Emphasis mine.

That cancellation, and the way it was done, was vital to the reconstruction of Europe from war. It stands in marked contrast to the suffering being inflicted on European people today in the name of debt.

Germany’s creditors included Greece and Spain, Pakistan and Egypt, as well as the US, UK and France.

German debts were well below the levels seen in Greece, Ireland, Portugal, and Spain today, making up around a quarter of national income. But even at this level, there was serious concern that debt payments would use up precious foreign currency earnings and endanger reconstruction.

Needing a strong West Germany as a bulwark against communism, the country’s creditors came together in London and showed that they understood how you help a country that you want to recover from devastation. It showed they also understood that debt can never be seen as the responsibility of the debtor alone. Countries such as Greece willingly took part in a deal to help create a stable and prosperous western Europe, despite the war crimes that German occupiers had inflicted just a few years before.

The debt cancellation for Germany was swift, taking place in advance of an actual crisis. Germany was given large cancellation of 50% of its debt. The deal covered all debts, including those owed by the private sector and even individuals. It also covered all creditors. No one was allowed to “hold out” and extract greater profits than anyone else. Any problems would be dealt with by negotiations between equals rather than through sanctions or the imposition of undemocratic policies.

Perhaps the most innovative feature of the London agreement was a clause that said West Germany should only pay for debts out of its trade surplus, and any repayments were limited to 3% of exports earnings every year. This meant those countries that were owed debt had to buy West German exports in order to be paid. It meant West Germany would only pay from genuine earnings, without recourse to new loans. And it meant Germany’s creditors had an interest in the country growing and its economy thriving.

Following the London deal, West Germany experienced an “economic miracle”, with the debt problem resolved and years of economic growth. The medicine doled out to heavily indebted countries over the last 30 years could not be more different. Instead, the practice since the early 1980s has been to bail out reckless lenders through giving new loans, while forcing governments to implement austerity and free-market liberalisation to become “more competitive”.

If we had no evidence of how to solve a debt crisis equitably, we could perhaps regard the policies of Europe’s leaders as misguided. But we have the positive example of Germany 60 years ago, and the devastating example of the Latin American debt crisis 30 years ago. The actions of Europe’s leaders are nothing short of criminal.

Now for the dumb questions.

Is that straightforward enough? Is it now clear that ‘austerity’ is not a solution?

Is the hardship in Greece not already, to quote Popeye, a case of ‘enough is too much?’

Will Germany be better off with Greece stagnant, and Italy and France risking recession?

and finally,

Churchill (I think) once said, war is the continuation of politics by other means. Would you agree that economic war is the continuation of war, by other means?


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