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Jayati Ghosh, Professor of Economics at Nehru University, discusses the economic history of Germany’s debt relief in both the 1930s and 1950s and why policies of growth rather than austerity led them to become an economic powerhouse.

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JESSICA DESVARIEUX, PRODUCER, TRNN: 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, PROF. OF ECONOMICS, JAWAHARLAL NEHRU UNIV.: 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.


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Dr. Jayati Ghosh is Professor of Economics and currently also Chairperson at the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. Educated at Delhi University, Jawaharlal Nehru University and the University of Cambridge, England, her research interests include globalization, international trade and finance, employment patterns in developing countries, macroeconomic policy, and issues related to gender and development.

Among other books, she has co-authored (with Prof. C.P. Chandrasekhar) Crisis as a Conquest: Learning from East Asia, The Market that Failed: A Decade of Neoliberal Economic Reforms in India and Work and Well-being in the Age of Finance. In addition to numerous academic articles, she is a regular columnist for Frontline magazine and Businessline financial daily, as well as a weekly columnist for several newspapers.

She is one of the founders of the Economic Research Foundation in New Delhi and is on the board of various other social research organizations. Since 2002 she has been the Executive Secretary of International Development Economics Associates (IDEAS), an international network of heterodox development economists She was the Chairperson of the Commission on Farmers Welfare in 2004 constituted by Andhra Pradesh Government. She continues to be closely involved in working with progressive organizations and social movements.