JESSICA DESVARIEUX: Welcome to the Real News Network. I'm Jessica Desvarieux in Baltimore.
As Greece continues to face the repercussions of its debt crisis, one of the strongest forces
advocating that Greece pay its debt in full is the German government. But ironically,
Germany also unilaterally defaulted on its external debt first in the 1930s and again
in the 1950s. Here to give us a bit of history is our guest Jayati Ghosh. She's a professor
of economics at the Nehru University in New Delhi, India.
Thanks so much for joining us, Jayati.
JAYATI GHOSH: It's a pleasure.
DESVARIEUX: So let's start off in the 1930s. How did Germany handle its debt crisis back
then?
GHOSH: Well, remember that this is debt that Germany got essentially because it had to
pay war reparations after it lost the first world war. And at that time many economists
including John Maynard Keynes had said these reparations are simply too high. And the country
will not be able to pay them.
But what Germany had to do is to borrow so as to make these payments. And this of course
became more and more difficult to manage. The U.S. had been lending Germany money to
actually pay this, but when the U.S. had its crash in September '29, it actually said that
it was not going to actually give any more loans and wanted a repayment of the loans
it had made. Now, this created all kinds of problems in Germany and the Weimar Republic,
actually one of the reasons for its collapse was this.
In 1933 when the Nazis came to power, they unilaterally suspended all debt payments and
basically defaulted on the debt.
DESVARIEUX: Okay. Now, let's fast forward to the 1950s. And this was a post-World War
II environment. Germany was granted substantial debt relief. Is that right?
GHOSH: Absolutely. Now, remember that some of this debt was in fact pre-war debt, which
was the debt that had been taken on by Germany and not paid since then, since 1933. But more
than half of this was actually debt again from the U.S. which was part of the Marshall
Plan. The United States after the second world war actually gave a lot of money to Western
Europe for its reconstruction and recovery. In many countries it gave grants, but to Germany
it gave loans.
So more than half of German debt was Marshall Plan loans from the United States. It wasn't
just the war reparations stuff. And another large part of it was the debt that it had
incurred in the pre-war period and hadn't paid.
A group of creditors, about 20 creditors of Germany, which in fact ironically included
Greece at the time, got together in negotiations in London in 1953, and they met between February
and August in 1953. they ended up with something called the London Agreement, which basically
gave Germany very astonishingly generous terms for restructuring its debt and repaying it.
What they did is they cut this debt, which was a total of about $32 billion at the time,
they cut it by half. And they cut both the pre-war and the post-war part. Most of it
was done by the United States, but it was also done by the United Kingdom, and in fact
by all the creditors together including Greece.
DESVARIEUX: But Jayati, some may argue that the circumstances around Germany's default
were quite different in that they were in a pre and post-war environment, and they were
actually punitive reparation payments, not what some see as the Greek government providing
services that they can't afford. So how can we compare Greece's debt crisis to Germany's?
GHOSH: Let's look at the 1930s episode. Germany was in debt because it had borrowed to pay
the reparations. Now, you could argue that they shouldn't have borrowed, that they should
have generated a surplus from inside their economy. So that's the first point.
The second is that they unilaterally abandoned their debt payments and basically didn't pay
at all for about 20 years, but they were not punished for that. In fact, the entire period
they hadn't paid at all, when the London Agreement happened, all of that was canceled. And there
were no--there was no interest attached to any of that.
The third is that in fact the debt, most of this debt, more than half of the debt was
debt incurred after the war for rebuilding the economy. So it was classic debt that most
countries incur.
DESVARIEUX: Okay. How can we write off the debt--how can writing off the debt actually
help Greece grow and prevent another debt crisis? Essentially, what lessons can be learned
from the German situation?
GHOSH: Well, I want to just highlight two more features of this German London debt agreement.
One is that they were not supposed to pay anything unless they could actually generate
a trade surplus, and also their interest payments were limited to 3 percent of their exports.
Now, this was very important because it gave the creditors an interest in making sure that
Germany had a trade surplus, and it actually allowed Germany to recover very quickly in
terms of generating more exports.
So the idea behind the London Agreement was that you can grow out of your debt. That first
of all, when it's completely unreasonable and the debt levels are not sustainable, you
have to reduce them. That's the first lesson. And that's absolutely the case in Greece today
and in a number of other countries.
Second, that you have to enable countries to grow out of this debt. So you can't make
the payment so onerous that they have to do austerity programs that prevent them from
growing. That's the second important lesson. And Germany was a huge beneficiary of both
of these.
DESVARIEUX: All right. Jayati Ghosh, joining us from New Delhi. Thank you so much for being
with us.
GHOSH: You're welcome.
DESVARIEUX: And thank you for joining us on the Real News Network.