By John Sfakianakis
Germany’s Chancellor Angela Merkel has at last opened the door to the possibility of writing off Greek debts, but only several years from now. As they decide on the right thing to do, Germans should take a close look at their own history.
As Merkel indicated in her Dec. 2 interview with Bild, a German tabloid, for the country to trigger the unraveling of the euro area by letting Greece default would damage its own economic and political interests. The economies of trading partners in Europe might collapse, costing Germany far more than the Greek debt forgiveness it refused.
More than this, Germany should recognize that it has a moral obligation to help, just as the U.S. and its allies, including Greece, helped Germany after World War II. This is a largely forgotten history that, if recalled, might counter the false narrative of virtuous Germans and feckless Greeks that has hardened popular opposition to bailouts.
Under the aegis of the U.S., the introduction of the deutsche mark in 1948 wiped out most of Germany’s domestic debt, both public and private, which amounted to roughly four times the country’s 1938 gross domestic product. This move helped Germany to start afresh and begin the economic miracle at which we all still marvel.
Germany was granted a waiver on its external debt, including the deferral of interest payments, from 1947 to 1952 as the Marshall Plan was implemented. In 1953, the U.S. also imposed the London Debt Agreement on its wartime allies, which wrote off Germany’s external debt.
Albrecht Ritschl, an economic historian at the London School of Economics, estimated earlier this year that the total debt forgiveness West Germany received from 1947 to 1953 was more than 280 percent of the country’s 1950 gross domestic product, compared with the roughly 200 percent of GDP that Greece has been pledged in aid since 2010.
Greece also contributed to the postwar German debt relief. Signatories to the London agreement, including Greece, agreed to defer settlement of war reparations and debts incurred after 1933 until a conference to be held after Germany’s reunification. Although Germany paid compensation to individuals in the 1960s, the conference never took place and many Greeks think that more was due.
The bailout of Germany was at least as controversial as the Greek one today. Just like Greece, Germany’s tax system in the 1950s was imperfect. Difficulties in changing it had led to revenue shortfalls in the interwar period.
Throughout the negotiations, discontent was voiced in the U.S. Congress, where legislators objected to taxpayer money being written off. The German Bundestag initially rejected the London agreement, with many legislators disagreeing on the treatment of postwar repayments to France, because they thought this would legitimize what they considered to be French occupation of German territory. It took U.S. pressure to push the agreement through at a second Bundestag vote.
The 1953 agreement reduced the repayable amount of Germany’s external debt by 50 percent and spread out its payment by three decades. It allowed Germany to return to international capital markets and join the International Monetary Fund, World Bank and the World Trade Organization. While the rest of Western Europe in the 1950s struggled with debts of about 200 percent of GDP, West Germany, because of the restructuring, enjoyed a debt of less than 20 percent of GDP.
Germany relinquished some sovereignty in this process, but it owes its economic success since then to the massive haircut that it was granted in 1953, as well as to the determination of the U.S. leadership — and to a lesser extent its allies — to rebuild Germany. That generosity provided Germany with an escape route from an unsustainable debt situation, and it provided the allies with a stable and prosperous neighbor through the Cold War and beyond.
Today, Germany should have the same foresight. A long- lasting debt-relief deal that removes uncertainty over Greece’s place in the euro area would trigger a virtuous cycle, encouraging much-needed foreign investment and growth. In doing so it would reduce deficits in Greece, while at the same time remove doubts about Spain, Italy and the viability of the euro.
Critics accuse Greece of being dilatory, anti-reformist, corrupt and crony-capitalist. They’re right. Germany’s Konrad Adenauer was a visionary and a leader, traits that Greece’s politicians lack. Greece does now need to step up and reform, and at least Prime Minister Antonis Samaras and his fragile government are making slow progress, in contrast to the hapless dithering of George Papandreou.
The rhetoric of blame in Germany ignores that Greek society has reached the limits of endurance, meaning that additional taxes can’t be levied nor salaries cut without inciting social unrest. The rise of the neo-fascist Golden Dawn party, which ranks third in recent opinion polls, is a menace to democracy.
Countries can change in crisis, as Germans should know all too well. Germany’s inter-war experience, marked by harsh reparations after its defeat in World War I and unyielding creditors, led to social unrest and the rise of fascism. The Marshall Plan and debt forgiveness after World War II were designed by the U.S. to avoid a repetition of that bitter experience. They helped to forge a different Germany and a different Europe.
In 1953, West Germany was reassured that its debt would remain manageable. Foreign policy interests preceded pure returns on capital and West Germany was safeguarded. It helped that the Soviet Union was on the other side of a fence that Germany’s wartime foes wanted to strengthen. The Marshall Plan and the London agreement made Germans confident that the U.S. and its allies would safeguard German prosperity.
A similar agreement with Greece would reassure its people that the excruciating measures they are being asked to accept in the short term will eventually pay off. As it stands, Greece today does not feel safeguarded.
Delaying a meaningful, long-term debt solution means that Greece’s growth prospects continue to dwindle as the economy implodes. At the core of Germany’s negotiating position in 1953 was the awareness that growth and exports had to be fostered in order for the country to be able to pay off debt. Harsh repayment terms wouldn’t have helped achieve that end. This is why the U.S. in 1953 forgave most of Germany’s Marshall Plan loans.
After the war, everything ultimately depended on the U.S. In the euro crisis, everything depends on Germany. Time is running out for Germany to do the right thing and show it’s willing to do what’s necessary to support Greece and the currency that binds Europe.
(John Sfakianakis is a Greek economist. The opinions expressed are his own.)
To contact the writer of this article: John Sfakianakis at email@example.com