Thursday, 28 February 2013

The "Wirtschaftswunder"

Deutsche Welle (DW), Germany's international broadcaster carries a piece ( in celebration of 60 years since the chain of events that allowed Germany to perform its "Wirtschaftswunder" and resurrect from the dead.

We read: Many Germans are still proud of the so-called "economic miracle." Post-war growth was extraordinary - the new Federal Republic's economic output doubled between 1953 and 1963 alone. Generations of schoolchildren have since be taught that the Germans are simply unbelievably hardworking people who were supported by US money after the war.
"That is a very regrettable part of the suppression of history in this country," says Joachim Kaiser of, an alliance that campaigns for the cancellation of debts in the developing world. He believes that the Germans have forgotten that they were hopelessly in debt after World War II, not unlike Greece today.

What! The German economic miracle was thank's to a debt relief? A selective default, as we would call it today?

The London Debt Agreement of 1953 established a framework whereby Germany would repay debts on which she had defaulted prior to the WWII, and repay obligations arising out of postwar assistance from the United States and Britain. The Agreement wrote down the total outstanding debt by about 50 percent and established a repayment schedule that spread payments over 30 years. Germany’s obligations in any one year were fixed so as not to exceed her ability to make transfers abroad. The agreement delayed part of the back interest due on the debt until such time as Germany reunified. With unification in 1990, Germany issued a new set of bonds that when retired will have paid off all the debts from the 1920s, 1930s, and immediate post-World War II era.

One important motivation for the debt settlement was to strengthen the German economy. Demanding that the Germans service an enormous debt was incompatible with that goal. The London Debt Agreement covers a number of different types of debt from before and after the second World War. Some of them arose directly out of the efforts to finance the reparations system (WWI), while others reflect extensive lending mostly by U.S. investors to German firms and governments i.e. "The Dawes and Young Loans", business loans between WWI and WWII, loans to German governments including Prussia and Austria -during the period of Anschluss. The agreement specifically excluded several other types of obligations, including claims for damages arising out of the Second World War and any other loan and/or obligation or "expropriation" made by the Nazi lead German government in occupied territories, i.e. Greece.

As historian Albrech Ritschl of London School of Economics points out in a 2011 interview to Spiegel On-line:
(Ritschl) - Yes, then-Chancellor Helmut Kohl (1990) refused at the time to implement changes to the London Agreement on German External Debts of 1953. Under the terms of the agreement, in the event of a reunification, the issue of German reparations payments from World War II would be newly regulated. The only demand made was that a small remaining sum be paid, but we're talking about minimal sums here. With the exception of compensation paid out to forced laborers, Germany did not pay any reparations after 1990 -- and neither did it pay off the loans and occupation costs it pressed out of the countries it had occupied during World War II. Not to the Greeks, either.
And he continues: "If the mood in the country turns, old claims for reparations could be raised, from other European nations as well. And if Germany ever had to honor them, we would all be taken the cleaners".

The London Debt Agreement deferred settlement of the reparations question, including the repayment of war debts and contributions imposed by Germany during the war, to a conference to be held after unification. This conference, however, never took place as the German government has refused to reopen this issue. The only such compensation paid has been mostly to forced workers. Only Greece, from time to time, has challenged this openly but to no avail.

The issue is not going to go down easily as "bankrupt" Greece battles to avoid social unrest, before even trying to repay a humongous public debt that is getting bigger and bigger (instead of smaller) because of the inappropriate treatment by its creditors, the mighty "Troika" (IMF, ECB, European Commission). Unlike Germany in 1950's, the current Greek plan's motivation was not to strengthen the Greek economy but rather to punish it. For spending "beyond its means" funding an exploding trade deficit (to EU partners, mostly due to the Euro) and an uncontrollable budget deficit that has derailed in the post-Lehman era (2009).

The London Debt Agreement laid the foundation for the birth of an export nation. West Germany's export strength was boosted, as the country could only service its debts as long as it earned money through foreign trade. That, as Joachim Kaiser points out, meant creditors had an incentive to buy German products. In his opinion, a similar agreement today would help highly indebted Greece - particularly as the country spent billions on German tanks shortly before the debt crisis began.
"If we said: the Germans will only get their money if they agreed to a Greek trade balance surplus - then the Greeks could export for a long time and bring in German tourists, until they had finally paid for these damned tanks," says Kaiser.

Historian Ursula Rombeck-Jaschinski of Stuttgart University says the situation 60 years ago cannot be transferred to today's problems so easily, but she does think the Germans shouldn't forget that their own country was once hopelessly indebted and dependent on foreign help.

It’s also good to remember that on top of all this, the emergence of the EEC, the EU and the common currency - the EURO – has helped Germany solidify that “export nation” status and also helped it adsorb the unification costs, themselves.

Other Sources: Timothy W. Guinnane, "Financial Vergangenheitsbewältigung: The 1953 London Debt Agreement" (Economic Growth Center, Yale University, 2004)

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