Greece’s Debt Write-Off
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, France-24 reported.
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 program 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.
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.
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.
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”.