Germany Deserved Debt Relief, Greece Doesn't

Syriza can't use Germany's 1953 debt restructuring as a precedent for its debt relief demand.

False analogy.

Photographer: Sean Gallup

Syriza, Greece's new ruling party, makes an attractive argument for writing off Greek debt: Wasn't Germany, now the biggest opponent of debt relief, itself the recipient of unprecedented largesse in 1953, when its foreign debt was halved? Attractive, however, doesn't mean convincing. Parallels between today's Greece and 1953 Germany are demagoguery, pure and simple. 

The Federal Republic of Germany's creditors -- 20 countries including Greece -- indeed agreed at a London conference to write off 55 percent of the country's 32.3 billion Deutsche marks of foreign debt. "More than 50 percent of Greek debt needs to be written off," says top Syriza economist John Milios. "The solution that was given to Germany at the London conference in 1953 is what we must do for Greece.”

Milios went to college in Germany; he has a Ph. D. from the university of Osnabrueck in Lower Saxony. He knows well that reminding Germans of their 20th century history and then appealing to their conscience can be effective. The devil is in the details, however.

About half the total amount of German debt discussed at the London conference -- 16.1 billion Deutsche marks -- came from before World War II. Some of it had arisen from the unpaid reparations to the winners of World War I. Those unbearably high demands on the German economy had helped the Nazis, who promised to do away with the reparations, win power. Yet Konrad Adenauer, Germany's first post-war chancellor, had recognized the debts in 1951 as part of an effort to turn Germany from a ruined, deadbeat state to a responsible member of the Western world's economic system.

This was a goodwill move. Much of the debt had been issued in currencies that later lost most of their value and interest from the years between the wars was hard to calculate. So when Adenauer took on the obligations at conversion rates acceptable to creditors, "it was recognized at the outset that Germany would not be expected to pay the full bill that would emerge from a purely technical reckoning of the outstanding debt," Yale's Timothy Guinnane wrote in 2004 in the most authoritative paper to date on the 1953 debt write-off. 

As for the post-war debt, here's what Frankfurt, Germany's current financial center and seat of the European Central Bank, looked like in 1953:


There are ruins at the center of Athens, too, but they are rather more ancient.

Germany needed a lot of money to restore the infrastructure and housing wiped out by the war. In some German cities, there are no pre-war buildings left apart from those painstakingly restored in the last 70 years. Besides, after Germany was split in two by the World War II allies, 10 million refugees from the Soviet-controlled eastern part of the country -- about as many people as there are in Greece now -- flooded the west, creating a humanitarian catastrophe of major proportions. 

Germany had brought it on itself, of course, but it was no longer ruled by the Nazis: It was doing its best to expiate its past, work that still continues and that defines the consensual, value-based nature of German leadership in today's Europe. The creditors felt they needed to help that effort.

The circumstances under which Greece accumulated its debt are strikingly different. After restoring democracy in 1974 after seven years of military rule, the Greek government splurged on a full range of socialist benefits, including higher pensions and universally accessible health care, as well as on a big government. It financed a railroad that had more employees than passengers; even before the military coup, it started paying salaries to Orthodox priests, and it still does so, though there has been a pay cut after international creditors demanded it. For three decades, Greece ran unsustainable fiscal deficits, borrowed to cover them -- and then lied about them to Eurostat so it could join the euro in 2001.

There is a not-so-subtle difference between voluntarily taking on debts made by previous, rogue governments at a currency rate favorable to the creditors -- and heedlessly accumulating debts of one's own while concealing the true size of budget deficits. In the first case, the implication is harsh self-imposed discipline and penitence. In the second case, profligacy.

It might still be argued that if Germany deserved a second chance after all it did to Europe, then surely Greece should also be granted one.

There's a technical answer to that. As Guinnane wrote, "The people of some countries today are working to repay international debts incurred by earlier governments that they did not elect or want. Often the debt was used either to provide luxurious lifestyles for a corrupt few, or to pay for the repression of the mass of the population. Yet under the rules of the international financial system, the people of the country are still responsible for the debt or risk loss of access to international credit markets." 

There is, however, a stronger reason why it would be wrong to write off Greek debt while the country is run by Syriza.

In 1953, countries of the eastern bloc were conspicuously absent from the London talks. The Soviet puppet state, the German Democratic Republic, did not shoulder any of the old German debt: In 1953, workers were rioting in the east, and Soviet tanks were called in to put down the disturbances, so the GDR did not need any extra economic burdens. After Germany reunited in 1990, it had to pay some of the east's share of debt under the London agreement.

Part of the reason West Germany was granted debt relief lay in the Federal Republic's importance as a Western bulwark in the fight against Communism. As Jurgen Kaiser wrote in a paper for Friedrich Ebert Stiftung last year, 

In Germany’s case, these were the times of the Cold War and the system competition between the West on the one side, and the Soviet Union and its allies on the other. There was a great deal of interest on the part of the major creditors, the US and to a lesser extent the UK, in stabilising the country both politically and economically as quickly as possible.

The West German governments that benefited from the debt relief were resolutely anti-Communist and anti-Marxist. CDU, now the party of Chancellor Angela Merkel, ran West Germany for the first two decades of its existence. It was less economically liberal than it is now, and it built a sizable welfare state over the years, but it was still a center-right, capitalist force that believed that only private initiative could lead to more or less universal prosperity. 

The far-left political forces were outside the London process in 1953; they were in the GDR. Now, far-left Syriza wants to be on the inside, with its plans to nationalize banks and utilities and its costly promises to voters. It will use the debt relief to provide free electricity to households, subsidize rents, restore Christmas bonuses to pensioners, raise minimum salaries -- that is, to return to the practices that led to the accumulation of Greece's debt. It is an extreme case of moral hazard, which the post-war German governments conscientiously avoided. 

Of course there are political arguments for Greek debt relief, as there were in the German case 62 years ago. European leaders are worried that Greece might leave the euro zone and trigger its disintegration. It might be less costly to write off some of the debt than to deal with such dire consequences of a tougher stand. Then, however, the problem should be framed in these stark terms: Greece's creditors would be paying ransom to its far-left government so it doesn't mess up the common currency, which Greece had no business adopting in the first place. 

If that is the case, we should be spared parallels with the 1953 London conference. It had far nobler goals, and Germany was much better positioned to put creditors' generosity to good use than is Syriza's Greece.

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