The debt write-off behind Germany's 'economic miracle'

Text by Benjamin DODMAN 2015-01-30

Six decades ago, an agreement to cancel half of postwar Germany's debt helped foster a prolonged period of prosperity in the war-torn continent. The new government in Athens says Greece – and Europe – now need a similar deal.

When discussing Greece’s whopping $310 billion debt, the country's new Prime Minister Alexis Tsipras likes to recall a time when Europe's great debt offender was not Greece, but Germany, today's paragon of fiscal responsibility. The leader of the radical-left Syriza party refers in particular to an international conference held in London in 1953, during which West Germany secured a write-off of more than 50% of debt, accumulated after two world wars. Back then, with memories of Nazi atrocities still fresh, many countries were reluctant to offer such generous debt relief. But the US persuaded its European allies, including Greece, to relinquish debt repayments and reparations in order to build a stable and prosperous Western Europe that could contain the threat from Soviet Russia.

“Tsipras is right to remind Germans how well they were treated, with both debt relief and money from the Marshall Plan,” says Professor Stephany Griffith-Jones, an economist at Columbia University, referring to the US programme to help rebuild European economies after World War II. She believes Greece is justified in demanding a more generous approach from its creditors, despite obvious differences between its current plight and that of war-ravaged Germany. “In fact, Greece’s situation is perhaps more urgent because the pressure from markets and the financial sector is so much stronger than in the 1950s,” she says.

West Germany’s debt at the time was well below the levels seen in Greece today. But German negotiators successfully argued that it would hinder efforts to rebuild the country’s economy – much as Greek governments have in recent years, in vain. Under a crucial term of the London Agreement, repayments of the remaining debt were made conditional on West Germany running a trade surplus. In other words, the German government would only pay back its creditors when it could afford to – and not by borrowing even more money. Reimbursements were also limited to 3% of export earnings. This gave Germany’s creditors an incentive to import German goods so they would later get their money back, thereby laying the foundations of the country’s powerful export sector and fostering its so-called “economic miracle”.

Germany ‘the biggest debt transgressor’

“Germany's resurgence has only been possible through waiving extensive debt payments and stopping reparations to its World War II victims,” economic historian Albrecht Ritschl told Der Spiegel in 2011, describing Germany as “the biggest debt transgressor” of the past century. “During the 20th century, Germany was responsible for what were the biggest national bankruptcies in recent history,” Ritschl said, pointing to the collapse of the German economy in the early 1930s, which sent shockwaves through global markets. “It is only thanks to the United States, which sacrificed vast amounts of money after both World War I and World War II, that Germany is financially stable today and holds the status of Europe's headmaster. That fact, unfortunately, often seems to be forgotten.”

In recent years, Greece has been subjected to a very different treatment, described by some as “shock therapy”. In return for two bailouts worth €240 billion, the country was forced to impose savage spending cuts and tax rises that, critics say, effectively killed off any chance of economic recovery. Only 10% of the bailout money made it into public spending, with the rest going to debt repayment. What little money the country made was used to service the interest on its debt, which has actually grown larger as a percentage of GDP because of the shrinking economy. After a six-year depression, industrial output has fallen by a third and millions have been pushed into poverty, with little or no prospect of living standards returning to pre-crisis levels in the near future.

As unemployment skyrocketed in Greece, so did anti-German sentiment among the population, with anger at Germany’s insistence on austerity mingling with residual resentment of its role during the war. Once again, the London Agreement is at the heart of the dispute. Back in 1953, the money Greece gave up included a loan extorted during the gruesome Nazi occupation of the country, when thousands of resistance fighters and civilians were murdered and hundreds of thousands starved to death. Even before Syriza’s electoral triumph, Greek newspapers were awash with calls for Germany to repay the loan, the exact amount of which is a matter of historical dispute. Estimates range from $24 billion to five times the amount. While few Greeks expect Berlin to pay up, many believe that Germany was let off the hook after the war and should now be more generous in Greece’s hour of need.

Lessons forgotten

Alexis Tsipras’s decision on Tuesday to lay a wreath at a memorial to Greek communists murdered by the Nazis, in his very first outing as prime minister, was widely interpreted as a reminder of Germany’s historical debt towards Greece. But Greece’s new leader has not built his case for debt relief on the debatable premise that his country "deserves" it. He believes a write-off of at least part of Europe's unsustainable debt is, ultimately, in everyone’s interest. A growing number of economists share this view. Syriza and its Spanish ally, Podemos, were recently singled out as the only European parties currently backing "sensible policies such as debt restructuring" in a widely quoted article by the Financial Times. "The tragedy of today’s eurozone is the sense of resignation with which the establishment parties of the centre-left and the centre-right are allowing Europe to drift into the economic equivalent of a nuclear winter," the article read, warning of decades of economic stagnation if Europe insists on using austerity as the sole remedy to its debt crisis.

The contrast between the postwar write-off of German debt and today’s intransigence is a measure of how much economic thinking has changed since the London conference. “The lessons of Keynesian economics about how to respond to economic crisis have been forgotten,” says Professor Griffith-Jones, likening the present treatment of Greece to the drastic belt-tightening imposed on Latin American countries in the 1980s. “It was only when debt relief kicked in that the situation improved in Latin America,” she says, adding that Greece’s new government “also needs some breathing space to boost spending and promote economic growth”. Indeed leaked minutes of IMF meetings in 2010 have shown that Latin American countries expressed serious misgivings about putting Greece through the same ordeal.

Though crediting the German government with having helped save the euro, the Columbia professor says European policymakers have lost touch with the “vision of peace and prosperity” that underpinned the European Union and inspired negotiators in 1953. The view at the time was that the punishing terms imposed on Germany by the 1919 Treaty of Versailles had scuppered the country’s chances of recovery and favoured the rise of Nazism. Six decades later, that lesson has been largely forgotten. Warnings that the austerity imposed on fragile economies in the wake of the 2008 financial crisis could lead to similar upheaval have fallen on deaf ears. Mercifully, a new ruling party with a progressive agenda has emerged from the ruins of Greece’s economy. But the third place secured in Sunday’s snap election by Golden Dawn, a neo-Nazi party, and the rise of xenophobic parties across Europe offer a reminder that things could have gone – and indeed may yet go – very differently. more