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.