Political Animal


March 01, 2013 1:09 PM Do Unto Others….

By Ed Kilgore

In an important column at The Guardian, debt relief advocate Nick Dearden reminds us—and reminds certain people in a certain prominent European country—how sovereign debt was handled after World War II:

Sixty years ago today, an agreement was reached in London to cancel half of postwar Germany’s debt. That cancellation, and the way it was done, was vital to the reconstruction of Europe from war. It stands in marked contrast to the suffering being inflicted on European people today in the name of debt….
The debt cancellation for Germany was swift, taking place in advance of an actual crisis. Germany was given large cancellation of 50% of its debt. The deal covered all debts, including those owed by the private sector and even individuals. It also covered all creditors. No one was allowed to “hold out” and extract greater profits than anyone else. Any problems would be dealt with by negotiations between equals rather than through sanctions or the imposition of undemocratic policies.

Among those creditors accepting a cancellation of debt, BTW, were Greece and Spain.

Perhaps the most innovative feature of the London agreement was a clause that said West Germany should only pay for debts out of its trade surplus, and any repayments were limited to 3% of exports earnings every year. This meant those countries that were owed debt had to buy West German exports in order to be paid. It meant West Germany would only pay from genuine earnings, without recourse to new loans. And it meant Germany’s creditors had an interest in the country growing and its economy thriving.

This is not, notes Dearden, how debt-ridden countries have been handled in the last 30 years:

Following the London deal, West Germany experienced an “economic miracle”, with the debt problem resolved and years of economic growth. The medicine doled out to heavily indebted countries over the last 30 years could not be more different. Instead, the practice since the early 1980s has been to bail out reckless lenders through giving new loans, while forcing governments to implement austerity and free-market liberalisation to become “more competitive”.
As a result of this, from Latin America and Africa in the 80s and 90s to Greece, Ireland and Spain today, poverty has increased and inequality soared. In Africa in the 80s and 90s, the number of people living in extreme poverty increased by 125 million, while economies shrank. In Greece today, the economy has shrunk by more than 20%, while one in two young people are unemployed. In both cases, debt ballooned.

Nor do the more recent debt policies seem to be aimed at the kind of quick recoveries that can not only reduce suffering but can make debt repayment practicable:

When debts have been “restructured”, they are only a portion of the total debts owed, with only willing creditors participating. In 2012, only Greece’s private creditors had debt reduced. Creditors that held British or Swiss law debt were also able to “hold out” against the restructuring, and will doubtless pursue Greece for many years to come.
The “strategy” in Greece, Ireland, Portugal and Spain today is to put the burden of adjustment solely on the debtor country to make its economy more competitive through mass unemployment and wage cuts. But without creditors like Germany willing to buy more of their exports, this will not happen, bringing pain without end.

There are undoubtedly some good arguments for the posture the German government and its financial sector have taken with respect to its debt-ridden neighbors. But an attitude of moral superiority should not be among them.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.


  • bkmn on March 01, 2013 1:27 PM:

    The way I see it is that the bankers who authorized the lines of credit for these countries made bad business judgments. It should fall on them to take the losses that result from their bad business judgments.

  • TomParmenter on March 01, 2013 1:27 PM:

    I surprised you don't mention the Versailles Treaty. Apparently Germany's reparations debt was not paid in full until 2010 and the settlement is commonly adjudged a stimulus to the rise of Naziism.

  • Rick B on March 01, 2013 1:37 PM:

    Here's the thing. Modern industrial and post industrial countries become highly productive because job specialize and become more efficient and effective. But that process requires that workers move to cities and work long enough to gain the specialty skills. It also requires that the workers be highly education and mobile, both of which require a great deal of government investment.

    Austerity punishes the workers while deskilling them. It also cuts back on the government investment that creates a more efficient economy.

    The conservative austerity mania in both Europe and the U.S. means punishing the workers (for the sins of the bankers) and damaging the economies when they should be made to grow more rapidly.

    So the conservatives are effectively stabbing themselves in the eyes and then complaining about being blind and looking for someone else to blame.

  • jjm on March 01, 2013 1:45 PM:

    @TomParmenter on March 01, 2013 1:27 PM wrote:

    I surprised you don't mention the Versailles Treaty. Apparently Germany's reparations debt was not paid in full until 2010 and the settlement is commonly adjudged a stimulus to the rise of Naziism.

    Look at the rise of Golden Dawn in Greece. And the return of the Mussolini wannabe Berlusconi...

  • c u n d gulag on March 01, 2013 2:27 PM:

    The economic model after WWI was punitive, and demanded a lot of austerity.

    The model after WWII was Keynesian.
    The Marshall Plan was Keynesian.

    What's used now is the Austrian/Chicago School of Ecnonomics ideas of "Austerity."

    Naomi Klein appropriately called this, "The Shock Doctrine."

    And that's what the US has been testing abroad, in South and Central America for decades.

    And now, they want to apply the same things that they did in the other America's, right here at home.

    There's no better way to eliminate a middle class, and set-up a Plutocracy/Oligarchy with Fascistic government and business practices.

  • boatboy_srq on March 01, 2013 3:20 PM:

    ditto CUND, jjm and TomParmenter.

    It seems the entire GOTea has experienced Wilson's stroke. Post-stroke Wilson was all about getting the US' money back for the war effort, and the other Allies really were broke after four years of fighting - so Germany became Europe's piggy bank to pay back the US. The biggest trouble with modern economics is that nobody remembers the Great War (and hardly anyone remembers WW2), so the success of the Marshall Plan and the debt forgiveness aren't seen as the solutions to the problems brought on by Versailles but as some bizarrely uncharacteristic generosity from the Great Job Creators. We found a pattern that works - but nobody remembers why we used that fix, and ABSOLUTELY nobody remembers why the plan we're using now failed so spectacularly.

    Could the sequester be considered the US' own Ruhr occupation?