Opinion | An economic miracle: thanks to debt relief?

A significant Greek debt relief has been a recurrent issue since the outburst of the economic crisis and a steady demand of the SYRIZA-led government.

In a recent article by Julia Balk & Norbert Häring in the daily German financial newspaper “Handelsblatt” (“Londoner Schuldenabkommen: Wachstum per Federstrich”, in English: “London Debt Agreement: Growth at a stroke”), the authors underline the importance of the London Debt Agreement of 1953 (the 1953-Allied agreement in London -endorsed also by Greece- to write off over 50% of Germany’s debt) for Germany’s subsequent unprecedented economic growth, and thus wondering, if a Greek debt write off would (or should) be the appropriate solution to restore Greece’s fiscal consolidation und boost the country’s economy.

London Debt Agreement, 1953

In the following excerpts of their article, Julia Balk & Norbert Häring raise their concern and develop a reasoning in favour of a Greek debt write off, based on many international economists arguments and studies:

“Debt relief contributed to Germany’s economic miracle. Can it also be the prescription for Greece? The IMF considers the Greek debt unsustainable and it insists on a debt relief. Wolfgang Schäuble disagrees: “If we just simply write the debt off, we do not change Greece’s problem” […] international economists like Thomas Piketty and Jeffrey Sachs are keen to call attention to the London Debt Agreement of 1953. Half of West Germany’s external debt was written off at the time. Ironically enough, Greece was then among the Signatory States. The London Debt Agreement resulted in the reduction of the pre-war and post-war debts, (Germany owed DM 29.7 bn which was reduced to DM 14.5 bn) while linking repayment of the remaining debt to Germany’s exports (the debt service / export revenue ratio could not exceed 3%).

[…] The Head of the German side, Hermann Josef Abs, declared after the Agreement: “Thanks to the debt arrangement, not only did the Federal Republic restore its international creditworthiness, but the world also began to trust Germany once again”. Is Greece’s position comparable to Germany in 1953? Anglo-Saxon Economists agree with the IMF that Greece is over indebted. “Anyone who studies Greece’s (national) Accounts knows that the country cannot pay off an external debt that currently amounts to 170% of GDP” writes Jeffrey Sachs. Greece’s starting point bares similarities with Germany at the time.[…] Albrecht Ritschl (London School of Economics) points out: “West Germany’s economic miracle, the stability of the Deutsche Mark and the favorable state of its public finances were all owed to this massive haircut”.[…] The Government could create more fiscal space, through new loans at lower interest rates.[…] Deutsche Mark stabilised only after the London Debt Agreement […]

However, the authors see the following fundamental difference: at the time, priority was given to the economic performance of Germany, whereas nowadays what matters most is the scheduled debt-servicing capacity and the compliance with reforms on spending cuts. […] Jeffrey Sachs underlines that the most important point is not whether Greece deserves a haircut or if it has fulfilled the reforms on spending cuts. The point is not whether a country deserves a haircut – as Germany at the time – but whether a country really needs it. […] Jeffrey Sachs and his research team, thinks that a debt relief per se could not end Greece’s problems. The London Debt Agreement of 1953 went along with numerous other reforms und restructuring operations, first and foremost the currency reform in 1948 und the creation of the European Payment Union in 1950, that led to the liberalization of capital movements.”

The article also refers to Gregori Galofre-Vila & Christopher Meissner key study “The Economic Consequences of the 1953 London Debt Agreement” (September 2016). According to this study, the years after London Debt Agreement witnessed unprecedented economic growth. The Agreement contributed to economic growth by creating fiscal space for public investment, lowering borrowing costs, and stabilising inflation. The Agreement was associated with a substantial and statistically significant rise in real per capita social expenditure relative to other spending categories. Spreads on long-term debt dropped substantially when the negotiations began in 1951 stabilising at historically low rates post-1953. The London Debt Agreement also coincided with new foreign borrowing and public investment and the previously volatile Deutsche Mark stabilised after the 1953.

*Τranslation by Avgi Papadopoulou