Home > Greece > An inconvenient historical truth

An inconvenient historical truth

from David Ruccio

Thomas Piketty, in an interview with the German newspaper Die Zeit, is the latest to recognize an inconvenient historical truth: in 1953, Germany was able to negotiate a large (50-60-percent) reduction in its outstanding foreign debt (owed to many countries, including Greece).

ZEIT: So you’re telling us that the German Wirtschaftswunder [“economic miracle”] was based on the same kind of debt relief that we deny Greece today?

Piketty: Exactly. After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece. Instead, both of our states employed the second method with the three components that I mentioned, including debt relief. Think about the London Debt Agreement of 1953, where 60% of German foreign debt was cancelled and its internal debts were restructured.

Mike Bird argues that there are holes in Piketty’s argument. But his main source, a discussion paper by Timothy W. Guinnane, actually shows that the main principles guiding the 1953 agreement—especially the “the premise that Germany’s actual payments could not be so high as to endanger the short-term welfare of her people or her long-term ability to rebuild a shattered economy and society”—run counter to the austerity measures demanded by the troika in its handling of the current debt crisis in Greece.

There are, of course, significant differences, which Guinnane also explains:

Surely the London Agreement’s relative generosity reflects not abstract notions of justice, which can be applied to any situation on the basis of some sort of “precedent,” but two concrete facts of the German case. First, increasing tension with the Soviet Union had led to a strong desire to rebuild a sound, democratic Germany. Harsh repayment terms would not serve that end. When the U.S. decided to forgive much of Germany’s Marshall plan debt, in effect treating it on a par with other European recipients of that aid, it was just recognizing that what in 1945 had been a defeated enemy was now a valued ally.

A second point was also something Keynes insisted upon as a reason to oppose reparations. Prior to World World I, the German economy was central to the European economy as a whole; a healthy Europe could not exist alongside a sick Germany. The same held true after World War II. The German economy was so important to the world economy, and to Europe in particular, that the country was in a strong position to demand concessions that would enable her to return quickly to her traditional role as the engine of the European economy.

Then as now, the negotiations over the terms of repaying outstanding foreign debt have nothing to do with “abstract notions of justice,” or for that matter economic rationality, but to pure and naked power.

But the fact that Germany was able to successfully renegotiate is external debt in 1953, on terms that assumed “that reducing German consumption was not an acceptable way to ensure repayment of the debts,” demonstrates that historically there have been many ways of repaying debt.

The current hard line on Greece turns out to be the exception to that historical truth.


  1. graccibros
    July 9, 2015 at 10:46 am

    It’s so much easier for contemporary policy makers when there is little or no historical memory.

  2. July 9, 2015 at 11:51 am

    The truth with historical memory is this. The Europeans welcomed the Greek to the EU because their forefathers had saved Europe at the Battle of Thermopylae in 480 BC and had invented democracy. Just because of this historical awareness the EU shoved aside all rational and sound economic arguments as well as the credit ratings of international agencies. The inconvenient awakening is that the Athens of the 21st century is no longer at the political and social heights of the Athens of Pericles. Every European who walks over the Ancient Agora of Athens cannot help weeping about lost ideals. It’s not all about debt and money.

  3. graccibros
    July 9, 2015 at 12:57 pm

    Greek heroism and resistance to tyranny had instances much closer to contemporary times, EKH, such as the revolt against the Ottoman Empire in the early 19th century, and against Italy and then Germany in World War II. I notice that you shifted the discussion away from the history of German debts at the end of both World Wars in the 20th century, and onto the Greeks and democracy of the 5th Century BC.

    If we are going to open the history books on debt, deficits and balanced budget “bull” (the title of one of my old, long essays), why not take a look, debt and deficit “hawks,” at the ratio of debt to GDP for England at the end of the Napoleonic Wars. I’ve seen it placed between 200-230%, far higher than the contemporary bad boys of fiscal rectitude’s admonitions, and the United States at the end of World War II was very high as well, something in the range of 180%. Both nations went on to have the best years of their economic lives, if you can forget the 1830’s and 1840’s in England, and perhaps even longer. I concede that contexts are very important, and Greece’s is not anywhere near as positive as either of the two Western powers cited here from many different and important perspectives. The point though, with these high debt numbers, that the rigid boundaries being drawn in Europe have not held as “universals,” and it wasn’t until I read Fernand Braudel’s “Civilization and Capitalism, 15-18th Century” that I was reminded of the English situation in the 1815-1840 years. Crowding out? Where did the capital to buy all that new industrial machinery come from?

    No wonder such heretics as Lord Skidelsky want economic history to be taught as well as the mathematical obsessions. Then it would be harder to keeping sweeping things that didn’t quite fit under the rug of “pure reason.”

    • July 9, 2015 at 2:36 pm

      The economics of here and now
      Comment on ‘An inconvenient historical truth’

      I agree, graccibros, let us return to the economics of here and now. With regard to the correct macroeconomic formula that describes the actual Greek situation, see my post: Poisoned, hanged, and shot. Comment on ‘Austerity policies — prescribing rat poison for ailing economies.’*

      The Greek situation, however, is only exemplary for a really profound question, that is, the relationship between growth of debt, profit, and employment. Put simply: can the markets system (global, not Greece, not Germany, not US, not China, etc) survive without steadily growing public/private debt?

      The answer is that a local debt reduction leads to local recession (2013), this is the case of Greece, and a global debt reduction brings the whole system down (2014).

      This is, with regard to the future, the really inconvenient historical truth.

      Egmont Kakarot-Handtke

      Kakarot-Handtke, E. (2013). Redemption and Depression. SSRN Working Paper
      Series, 2343561: 1–28. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=
      Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism.
      SSRN Working Paper Series, 2375578: 1–21. URL http://papers.ssrn.com/sol3/

      *See on the RWER blog
      or here

  4. July 9, 2015 at 1:57 pm

    Everyone is ignoring the big difference, which is that a large slice of Germany was in the communist bloc. The US and its allies knew that the Soviet Union could not match their investments and debt write-offs, and that with the GDR doing no worse than West Germany, and mass Communist Parties just over the borders in France and Italy, they would have to do something.

  5. July 9, 2015 at 2:40 pm

    Reblogged this on iGlinavos.

  6. July 9, 2015 at 5:55 pm

    The truly “funny” thing about the gracious nature of debt forgiveness…is that even those who lost the most (the Banks) afterward prospered right along with (and even more than) the rest of society. From this we need to learn the following things:

    1) Forgiveness of excessive and onerous debt, no matter from who or what its cause, is wise and economically sound
    2) Debt is the “product” of the Banking/Financial system and the way they make money.
    3) Banking and Debt has always been a problematic business model for at least the last 5000 years.
    4) Private Banking has no structural balancing counterpart making it a monopoly in this sense
    5) Debt as an idea, as a monopolistic paradigm/zeitgeist is even more importantly a domineering lifestyle forced upon us by our failure to understand and demand its balancing with an idea of equal and freeing strength, namely Gifting, that must be integrated into economic theory and policy…if we are ever to evolve the discipline and peaceably maintain civilization.

  7. July 9, 2015 at 6:57 pm

    Egmont, so you are saying people are in debt because it says so in the bankers’ books? What if the problem is the bankers’ books being wrong due to their blowing bubbles by lending too much to big speculators and not correcting their book valuations of collateral, unearned incomes and property mortgages when the bubbles burst? Why should local debt reduction decrease trade when with earned incomes and debts proportionate to prices people can actually buy more of what they need and pay off investment debts more quickly?

    Steve, point taken, but the pity is the US and its allies didn’t learn from the success of this how to make friends instead of scaring people in the Soviet block.

    Chdwr, I’m with you in spirit, but debt is giving credit, and it is usury as a business model which is turning it into a domineering lifestyle. The discipline needed is to not buy on credit unnecessarily, and if possible to repay debts on agreed timescales, reinterpreting interest charges for unnecessarily late payments as penalties. Usurious (profit seeking) private bankers allowed to charge interest have perverse incentives to lend out more than is necessary, and to penalise by theft of necessities those unable to make repayments from earned income. Of course Christians once understood this, and Mohammedans still do.

    • July 9, 2015 at 7:23 pm

      At Chdwr, I forgot to add that the workman (even a banker) is worthy of his keep.

      The problem of paying the banker is resolved if we ALL have to live within a credit limit appropriate to the available resources and value of the work (including self-development) we have previously done, and if we are able to pay off our debts by doing our jobs and looking after ourselves insofar as we are able. Perverse motivation by fear of losing our jobs can be replaced by prizes for excellence in just about anything other than monetary profiteering, i.e. acquiring unnecessary credit.

  8. Garrett Connelly
    July 9, 2015 at 11:31 pm

    The economics of here and now:

    Greece has the largest per capita military expenditure of all Europeans. Giant Turkey is there yet it cannot defeat Greece more than it already has.

    Kurdistan is anathema to Turkey, which won’t fight Deash. The US has become mired in the rapidly thinning quicksand of the Middle East.

    The US helps overthrow the government of Ukraine. Germany imposes austerity on the Greeks, who held down two divisions of fascist german troops in WW2, and delayed Hitler’s assault on Russia until mud and bad weather were a strong ally.

    This is high chess; the Russians and Chinese against Europe and the US. It’s almost checkmate:

    Greece chooses democracy and freedom and leaves Europe behind; the new transportation corridor from Beijing to Moscow is quickly extended to Athens.

    Then it is checkmate. The vast middle continent has high speed rail and pipelines from the Pacific to the Mediterranean.

  9. Dave Raithel
    July 10, 2015 at 2:56 am

    Mostly, I’m befuddled that a place of 11 million people could so upset a union of half a billion people.

    • Lyn Eynon
      July 10, 2015 at 10:33 am

      Look at the politics rather than the economics.

      Having decided to protect the interests of the financial elite however much that would cost its people, Europe’s political leadership now have to deny the viability of any alternative, however moderate in its proposals or willingness to compromise. So Syriza has to be broken, either by driving it from government or by forcing Tsipras into a capitulation that will split his party.

      This is not just about Greek debt but about the whole politics of austerity at a European level.

  10. July 10, 2015 at 2:14 pm

    Reblogged this on Forwardeconomics and commented:
    History, Germany, Greece and the Bail out

  11. graccibros
    July 10, 2015 at 3:07 pm

    Good morning everyone. I started a comment yesterday but decided to hold off until at least the outlines of where the Greek government stands were clearer. Apparently, they have written a pretty austere austerity proposal, 80-90% of what the Troika was demanding. But it is not at all clear that they will get anything close to the write downs in debt they wanted. And even if they had, what they have placed on the table seems to me to be miles away from the Varoufakis-Galbraith-Holland “Modes Proposal” outline of infrastructure spending, a “New Deal” type expansionary spending program – but written within the guidelines and funding of existing Euro zone programs. So will this stage of the negotiations bring the Greek economy out of debt, and more importantly, out of its Depression? It seems very, very unlikely. And will their be a backlash against Syriza for betraying their anti-austerity planks? That is certainly possible.

    I’m still deeply troubled by the strong possibility that Syriza has played out their hand for seven months now without apparently having any, much less a well thought out Plan B – which would have to have been, in my mind, their policies to support an exit from the Euro zone and to begin printing their own currency again. I still have a hard time imagining that this was agreeable to Varoufakis, and that he didn’t worry about this glaring gap in preparation. It makes no sense given his understanding of German influenced neoliberalism and the strong possibility that the Eurozone powers would hard ball them. Ironically it appears that the Troika was better prepared to manage an exit scenario than Syriza. Yes, yes, I know what the public pledges of Syriza were, and the polls about citizen feelings; yet it doesn’t take away from the logic contained in the likely dynamics…which pointed to exit or at minimum, their own currency.

    And I think we all are paying entirely too little attention to the nature of the Greek economy in relationship to the stages of the rest of Europe, and usually left out of the picture, the rest of the globalized world. We do this only at our own intellectual peril, because the nature of the overall European economy and the rest of the globalized world have taken options away from the Greeks. I began to explore the nature of the Greek economy back when the troubles started, soon after 2010, and I began by reading some of the long academic studies which were background to the re-structuring that was felt necessary to get Greece into the Euro in the first place. In many ways, it shared a lot in common with Spain, a truly fragmented country half in the modern world, half still well out. Ship-building and shipping, tourism and a few chemical industries, the modern parts, were obvious, but the Greek state was not functioning in the modern world, couldn’t collect taxes, and as one young woman attorney who left the country wrote in the Washington Post, Greek society is still strongly patriarchal, and she said the increasing number of young educated Greek women faced enormous prejudice in attempting to start or even enter the business world. So they emigrate. My point is even the most modern and independent Greek sectors function within an overall societal framework which is far from what we would consider a modern, efficient administrative private-state nexus. And the infamous corruption is part of that picture, hard to measure but discounted at our peril…

    Of course agriculture had too many people, too many small farms, which these experts judged as a sign of backwardness, but supposing they got their way, it implied not Greek agricultural modernization inside the country, but a dependence on large external ag. suppliers…a path which France has turned its back on famously. And it seemed to me that what the Greeks did raise competed directly with all the other European Mediterranean countries, and also some in the Middle East, who can grow citrus crops, dates and olives as well.

    And manufacturing? Well, what exactly do Spain and Greece propose to make, as even the leather goods industries are being outflanked by Asian manufacturing? Parts of Eastern Europe have the edge on certain types, a holdover from the time lag of the cold war, but it is not clear that even where they are competitive they can hold out against Asia…

    When I add all these too hastily sketched out components together, I ask myself how exactly the “prescribing” economists of the Troika would ever expect Greece to right itself, given where it is now, even if it could suddenly turn into a more modern culture to meets their expectations? And if the price is the privatization of remaining public economic assets, and they are turned over to foreign owners, won’t the capital flows and reduced labor (layoffs are implied in greater efficiency, as are lower wages in “structural reforms) take money out of Greece, and shelter it from Greek taxes? And how many Irelands can find a home in Europe, if that’s the model that the Troika has, only half formulated and never stated publicly?

    Isn’t it interesting that both Greece and Spain fought famous civil wars; in good part they were reflections of exactly the type of deep splits caused by societies half in the medieval world, half in the modern. Russia between 1890-1924 comes to mind as well.

    If Greece can only find the way out of these dilemmas on terms which offer at best long-shot odds, and I still think they are going to have to go it alone, unless the Troika has an enormous change of mind and heart, what would their “independent” economy look like given the realities I have sketched out here, that are never discussed in the simplistic formulas dispensed from the major European capitals, and echoed by the Republican Right in the US?

    That’s why I keep mentioning Richard Smith’s “Green Capitalism: The God that Failed.” Only it has grasped the magnitude of the changes that Greece would face on its own – admittedly written from a much more deeply committed green perspective. I can’t find much evidence that Greece is ready to use that ecological rethinking as the template to re-organize everything. Just to be clear, I think a renewed civil war is a distinct possibility unless those parts of Greek society most integrated with Europe would decide to pack up and leave if faced with the magnitude of restructuring they would face.

    Muddling through from where the negotiations and proposals stand this Friday morning? Not likely going to work.

  12. July 12, 2015 at 12:32 pm

    one example left out from this inconvenient history is the enormous bailout given by West Germany to East Germany to during the re-unification.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: