Short memories in Berlin

January 27, 2015

Here is some fairly recent German financial history. It appears to have been mostly forgotten especially in Berlin.

Germany became insolvent at least three times during the 20th century and ran up the largest debts of any nation during the 20th century in pursuit of its ambitions and was forgiven almost all of them. 

It defaulted on almost of those debts and it’s debts were written off by Germanys creditors in order to promote stability and social justice. Germanys debt mountain during the 20th century was larger in real terms than all the combined current debts of all the Eurozone countries now.

Germany’s default on it’s loans from the USA precipitated the Great Depression. These loans were never repaid. After World War 2 no financial reparations were imposed on Germany and any remaining outstanding loans were deferred until such time as Germany was reunified. 

Two post-war deals, one in 1948 and another in London in1953 wrote off most of Germanys debts from the two world wars and 1930s depression and delayed the remainder for almost 40 years. This was done because it was understood that Germany was in no position to repay it’s loans and what was important was to stabilise the German economy, restart German growth and rebuild living standards.

A clever, and for the time, innovative feature of the London agreement was a clause that said West Germany should only pay for debts out of its trade surplus, and any repayments were limited to 3% of exports earnings every year. This meant those countries that were owed debt had to buy West German exports in order to be paid. It meant West Germany would only pay from genuine earnings, without recourse to new loans. And it meant Germany’s creditors had an interest in the country growing and its economy thriving.

Compare that to the situation with Greece, Ireland, Portugal and Spain today where the burden of adjustment rests solely on the debtor country who have to make their economies more competitive through mass unemployment and wage cuts. On top of that Germany is still pursuing a low wage high export economic policy model which means that it is not buying more from the debtor nations and so they cannot actually grow and earn enough to repay their debts.

In 1990 Germanys reunification triggered the possibility of repayments on the residual outstanding German loans. Chancellor Helmut Kohl refused at the time to pay any outstanding debts agreed under the London Agreement on German External Debts of 1953 saying that it had no relationship with Imperial Germany of the 1920s, 1930s, and 1940s and therefore owed nothing. 

Under the terms of the agreement, in the event of a reunification, the issue of German reparations payments from World War II would be revisited. In fact reparations payments were never raised following reunification. With the exception of compensation paid out to forced labourers, Germany did not pay any reparations and neither did it pay off the loans and occupation costs it pressed out of the countries it had occupied during World War II. This included the Greeks (who had suffered a widespread famine during the later stages of the German occupation). 

In 2010 Germany paid the last tiny amounts of leftover war loan having seen the vast bulk of it’s debts written off over the course of the preceding century.

More information about the 1953 The London Agreement on German External Debts

Copies of the actual 1953 London Agreement on German External Debts

lynne January 27, 2015

Interesting research, Tony. You should put this out more widely, especially now that Tsipras is on his collision course with Berlin, from this day on.

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