Pay it forward, Germany

Angela Merkel raises a glass at a traditional folk festival in southern Germany on 2012. Photo: Reuters

If you made a list of countries you hope have learned from their past 100 years of mistakes, Germany would have to be at the top.

Happily, the staunch opposition to a nativist fringe that the nation’s government and citizenry have shown in recent weeks makes it clear, again, that Germany understands the costs of bigotry and the virtues of tolerance.

Unhappily, it has not learned the costs of a mad adherence to fiscal orthodoxy, despite the fact that its prosperity is rooted in the decision of its World War II adversaries to allow West Germany’s postwar government to write off half of its debt.

Indeed, the policies that Angela Merkel’s government have inflicted on the nations of southern Europe could not be more different from those that European leaders and the United States devised in the early 1950s to enable West Germany to rebuild its damaged economy.

Since the crash of 2008 Germany, as Europe’s dominant economy and leading creditor, has compelled Mediterranean Europe, and Greece in particular, to sack their economies to repay their debt.

Germany’s insistence has reduced Greece to a condition like that of the United States at the bottom of the Great Depression. Unemployment has soared to 25 per cent, and youth unemployment to more than 50 per cent; the economy has shrunk by 26 per cent and consumption by 40 per cent. Debt has risen to 175 per cent of the nation’s gross domestic product.

And the funds from the loans that Germany and other nations have extended to Greece have gone almost entirely either to cover interest payments or repay past loans. Only 11 per cent has actually gone to Greece’s government. Stuck on a treadmill of debt repayment and anaemic economic activity, Greece, as the Financial Times noted, has been reduced to a “quasi-slave economy” run “purely for the benefit of foreign creditors”.

Not surprisingly, when Greek voters went to the polls last week, they elected a new government that is demanding a renegotiation of its debt. German and European Union officials have opposed any such changes.

Fortunately for Germany, its creditors took a different stance after World War II. In the London Debt Agreement of 1953, the 20 nations, including Greece, that had loaned money to Germany during the pre-Nazi Weimar Republic and in the years since 1945 agreed to reduce West Germany’s debts by half.

Moreover, they agreed that its repayments could not come out of the government’s spending but only and explicitly from export income. They further agreed to undervalue the German mark, so that German export income could grow.

By the consent of all parties the London Agreement, and subsequent modifications, were crafted in proceedings that made West Germany an equal party to its creditors. It could, and sometimes did, reject the creditors’ terms and insist on new negotiations.

The United States was particularly insistent on making the terms of West Germany’s repayments as lenient as possible. It needed the nation to be a strong ally in the Cold War. Besides, West Germany’s government, headed by Christian Democrat Konrad Adenauer, was (presumably) Nazi-free. To further punish Germany, its onetime mortal enemies concluded, was strategically, and possibly morally, unwise.

No such scruples have governed Germany’s policies towards Greece. As a member of the euro zone, Greece cannot undervalue its currency, and rather than enabling Greece to increase its exports, Germany has done everything possible to increase its own trade balance with Greece and its European neighbours.

Far from rebuilding the economies of southern Europe, Germany has pillaged them in the name of fiscal rectitude.

But the considerations that guided Germany’s creditors six decades ago are just as pertinent today. Strategically and economically, it would be a disaster for Germany if Greece was compelled to repudiate its debt and leave the euro zone, because such a move would threaten the zone’s continued existence.

The new Greek government represents at least as clean a break with Greece’s previous mis-rulers as the Adenauer government did with Hitler’s. Its early appointments signal a novel development in Greek governance – a fight against the corruption and crony capitalism that have long corroded the nation’s economy.

Why can’t Germany apply the lessons of its past to today’s economic challenge? As Jurgen Kaiser noted in a brilliant paper for the think tank of Germany’s Social Democrats, “little knowledge about Germany’s debt relief is to be found among the broader public in Germany”.

The world will be a better place when Germans know their history – all of it.

Washington Post

http://www.smh.com.au/world/pay-it-forward-germany-20150131-131ppd.html