Germany's debts were forgiven, why deny Greece the pleasure

Jhini Sinha Phiramoneycontrol.com

Once the cacophony over Greece's historic rejection of austerity clauses in the referendum subsides, it will be time to introspect the world's one-sided judgment of the verdict itself. Why is it that the world believes Greece will tear apart the European idea when its prosperous neighbours have written quite a different story not in a very distant past. Everyone is making the issue as one-way steet but surely we are not facing a brand new problem.

With an inflation rate of 0.30 percent as of June 2015 and USD 3.9 percent GDP (2015 estimates), Germany is no doubt a textbook example of country that reinvented itself after the War. Today it is among the most prominent creditors insisting Greece to resort to unprecedented austerity. But Germany has a dubious past when it comes to repaying debts!

Sixty-years back, when the World War II wounds were still raw, both West Germany and East Germany were obliged to pay war reparations to the Allied governments, according to the Potsdam Conference. Other Axis nations were obliged to pay war reparations according to the Paris Peace Treaties of 1947. Germany’s debt amounted to over 200 percent of of its GDP and 10 years later, most of it vanished. How was that possible?

The real story is the world was ready to forgive Germany’s sins by allowing very generous terms to repay its debt under the 1953 London Agreement. The Agreement was actually a debt relief treaty between the Federal Republic of Germany and creditor nations. So the German Wirtschaftswunder or economic miracle was an artful turnaround strategy based on the same kind of debt relief that it is denying Greece today!

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Jhini Sinha Phira

News Editor|moneycontrol.com

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Thomas Piketty, the star economist and writer of "Capital in the Twenty-First Century" disputes the theory that Greece will ruin Europe. Instead it is the "shockingly ignorant conservatives," especially in Germany, who are about to destroy Europe and the European idea, Frenchman Piketty said in a recent interview. Interestigly, Germany remains single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War but has frequently made other nations pay up.

According to Prof Jacob Soll, Greece's debt has been calculated to be larger than it actually is because that country avoids using International Public Sector Accounting Standards, or Ipsas. If you apply Ipsas to calculate Greek debt, the net debt is 18 percent and not 175 percent of GDP. And Germany's net debt under Ipsas is 46 percent of GDP, according to www.freegreece.info. 

Many don’t know the Greek Central Bank was forced to loan 476 million Reichsmarks at 0% interest to Nazi Germany. In 1960, Greece accepted 115 millionMarks as compensation for Nazi crimes but Greece has been insisting that Germany still owe them reparations.

In 1990, immediately prior to German reunification, West Germany and East Germany signed the Two Plus Four Agreement with the former Allied countries of the United States, Great Britain, France, and the Soviet Union. Since that time, Germany has insisted that all matters concerning World War II, including further reparations to Greece, are closed because Germany officially surrendered to the Allies and to no other parties, including Greece.

Scoffing at Germany's attitude, the French economist said: “When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: what a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations.” Piketty explains the Germans could turn around so fast because they adopted inflation control steps, taxed the super rich and most important of all — bagged a huge debt relief.

Moral of the story: If debts are forgiven or appropriately restructured, then a distressed economy can get back on its feet. Germany knows that much.