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A German debt lesson for Greece

ONE of the thorniest issues in the negotiations leading up to the recent accord to keep Greece economically afloat, was the question of the country’s towering state debt. At the end of June that debt stood at €303.5bn, or 177% of the Greek gross national product.

If nothing is done, it will probably rise to 200% in the next two years.

Greek Prime Minister Alexis Tsipras demanded that this debt be forgiven at least in part if his country is to stand a chance of getting back on its feet. He got support from leftist economists like Paul Krugman – from whom it is to be expected – but last week also from a very unexpected source, the International Monetary Fund (IMF).

In an internal document, which was leaked to the media, the IMF stunned the economic establishment by saying that the accord was unsustainable as it stood. The organisation recommended that, as the Reuters news report put it, “European countries would have to give Greece a 30-year grace period on servicing all its European debt, including new loans, and a very dramatic maturity extension, or else make explicit annual fiscal transfers to the Greek budget or accept ‘deep upfront haircuts’ on their loans to Athens.”

The irony is that German Chancellor Angela Merkel, who was one of the most hardline leaders demanding harsh measures from Tsipras, also stood on making the IMF part of the team overlooking the Greek compliance to the accord.

Forgiving part of the Greek debt is not, as another hardliner, Dutch Prime Minister Mark Rutte, said, open for discussion. And indeed, politically it will be extremely difficult for Merkel, Rutte and the leaders of other countries to explain to their voters why billions are given to the “lazy, lying Greeks”, while these are told they don’t have to pay it back to the last cent.

After all, the Baltic countries Ireland, Spain and Portugal in recent years went through similar economic hardship, it is said. They bit the bullet and took it on the chin, and today their economies are on the mend. They are paying back their loans. Why should things be different for the Greeks?

The devil, one supposes, is in the details. It all depends.

There is, of course, an example in history of where such huge debts were imposed on a country that it very nearly went belly up. That was Germany, which was told at the Peace Conference of Versailles in 1919, that it had to pay 259 billion reichsmarks in reparations to the victors – the equivalent of around 100 000 tonnes of gold.

This was in addition to the debt an impoverished Germany already had in order to pay for its war machine in 1914-’18. This was especially at the insistence of French Prime Minister Georges Clemenceau (nicknamed “Le Tigre” or “The Tiger”), who hated the Germans implacably and wanted to crush that country so that it could never be a threat to France ever again.

The debt was unserviceable to a country already on its knees after a crippling war. South Africa’s General Jan Smuts, disgusted by the humiliation forced on the Germans, even seriously considered refusing to sign the peace treaty, but in the end bowed to the inevitable.

The gigantic reparations played no small role in the worst bout ever of inflation the Germans experienced in 1923. Exactly because they simply could not afford the instalments forced on them and got behind, French and Belgian troops occupied the industrial Ruhr area, and very soon inflation spiralled out of control. By November of that year a single US dollar was worth 4 210 500 000 000 reichsmarks. People paid tens of millions for a loaf of bread.

Something had to give. Luckily for the Germans, saner views prevailed after a while. In 1924 and 1929 the German debt was reduced to 112 billion reichsmarks, and the country was moreover granted loans to pay the reparations.

Interestingly enough, when Adolf Hitler took control of Germany in 1933, he unilaterally cancelled the debt. After World War II, the Western powers decided to postpone the outstanding debt until after a German reunification, which happened in 1990. The last payment of €70m was only made in October 2010, more than 90 years after the Peace Treaty of Versailles.

This history is an excellent example of how not to do things. When demanding pay-back, one should not demand so much that the operation is a success, but the patient dies, so to speak. After all, the purpose with Greece is not reparations for damage or punishment, but to keep the country on its feet.

Economists are highly divided about the matter. Some say the loan conditions are so strict that it will choke the Greek economy; others point to the fact that the money will have to be paid back over a period of 30-40 years and an interest-free period of a decade, making the yearly payments affordable.

In any case, Merkel has intimated that she is open to discussing reduced interest rates and extending maturity dates even further, provided the Greeks make haste with the restructuring of their economy.

We will have to see what happens. If the pessimists are correct, no doubt further concessions will be forthcoming.

* Leopold Scholtz is an independent political analyst who lives in Europe. Views expressed are his own.

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