The Paradox of the Creditor Debtor Relationship – Germany the Debtor Nation
Dr. Heiner Flassbeck: The debtor has to come back to a situation where they are able to earn money
LYNN FRIES, TRNN PRODUCER: Welcome to TRNN. I’m Lynn Fries, in Geneva.
In this report we take a look at the creditor-debtor relationship, what has or has not been learned from history, specifically German history and the German experience as both a debtor and creditor nation. We look into the huge debt imposed on Germany after World War I and the 1953 London Debt Accord after World War II, and how debtor countries in Europe today are being treated by their creditors, notably their largest creditor, Germany.
The Real News invited German economist Heiner Flassbeck to talk to us about all this. Dr. Flassbeck is director of Flassbeck Economics. He’s honorary professor at the University of Hamburg and co-authored Act Now!, recently published in Germany. In prior experience, he was chief economist at the United Nations Conference on Trade and Development and vice minister at the German Federal Ministry of Finance. Heiner joined us in Geneva.
HEINER FLASSBECK, DIRECTOR, FLASSBECK ECONOMICS: Thank you for having me.
FRIES: Our conversation begins with the World War I armistice and Paris Peace Conference leading to the Treaty of Versailles, a peace settlement signed by Germany and the Allies in 1919. We focus on the reparations Germany was required to pay for damage done to the Allied countries during World War I. The terms of the peace settlement put forward at the Paris Peace Conference included a “war guilt” clause that declared Germany and its supporters responsible for all “loss and damage” suffered by the Allied nations and was the basis for war reparations. With the unbearable financial burdens of the war put solely on Germany’s shoulders, the reparation terms were impossible to carry out.
During the Paris Peace conference, creditors demanding harsh terms won the debate against Germany and against other delegates’ attempt to modify reparation payments to more bearable terms. Among the defeated delegates was principle representative of the British Treasury, John Maynard Keynes. Keynes resigned his post at the conference in the belief that the debate largely ignored the true economic conditions of Germany, as well as the deep economic interrelations of Europe as a whole. Keynes’ central point was that a feasible payment plan for Germany was a precondition for the stable recovery of the entire European continent. Keynes’ objection to the Treaty of Versailles and to the policy of the Paris Peace Conference toward economic problems of Europe was grounded in detailed knowledge of the conference and its debates. Keynes went on to write a book on the subject that became a world wide best seller–The Economic Consequences of the Peace.
FLASSBECK: Well, there was a huge piece of debt imposed on Germany after the first war already when the Allies asked Germany to pay reparations. The reparations were done in a way that it was more or less impossible for Germany to bear them and to get over into reasonable economic development. That is why Mr. Keynes was very critical of the transfer arrangement in the Treaty of Versailles, and that is why he said what you’re imposing on Germany will kill Germany for many generations. And in the end it was an important aspect of Hitler coming to power in Germany. So it is important to learn the lesson of that, which means you should not impose too much of a transfer on a debtor in a short period of time. And that is exactly what is happening now in Europe.
FRIES: With World War II still raging, once again, efforts to fix the debt burden of debtor nations to more bearable terms was defeated. In 1944 at the United Nations Monetary and Financial Conference, commonly known as Bretton Woods, delegates from the Allied nations met to negotiate a post World War II international system. U.K. delegate Keynes presented a plan for a mechanism that was politically neutral, structural, dynamic, and inclusive to all partners in the global trading system. Under the mechanism, countries in trade surplus–creditor nations–would be induced to buy the export goods and services produced by the trade deficit countries–debtor nations. Keynes’ plan, however, was vetoed by U.S. delegates at Bretton Woods.
The US in 1944 was the world’s largest creditor. Nine years after the end of World War II, U.S.-led Allied creditors met in London and in a rare moment in history corrected mistakes of the past. Germany, the debtor nation, was granted what it had been denied in the Treaty of Versailles, a bearable debt burden that was within her ability to pay.
FLASSBECK: In 1953, Germany got quite a bit of debt relief. So the stabilization that comes from the credit side is very important, because this is the only way for the creditor to get back his or her money, because the debtor has to come back to a situation where they’re able to earn money, where they’re able at a certain in point of time then to even have current account surpluses, because only a current account surplus allows you to really repay your debt. So it is in the interest–the paradox is that it is in the interest of the creditor to have the debtor being able to stand on its own feet.
FRIES: The German External Debt Agreement was signed by negotiators in 1953 in London, the London Debt Accord. The scale of the debt cancellation for Germany, represented by West Germany, was transformative. Around half the German war debts were forgiven, the rest restructured for payment over the long term, this on post World War I loans taken out before the rise of Hitler and a legacy of huge reparation payments under the Treaty of Versailles and on loans Germany had taken out for reconstruction following World War II.
The German chief negotiator played a pivotal role in the London agreement. According to Jubilee Germany, quote, iIn response to pressure from Herman Josef Abs, the German chief negotiator, Germany’s transfer capacity, in other words, its ability to earn the necessary foreign currency to cover the ongoing debt service through exports, became the principle criterion for estimating the debt relief necessary”.
Not only were the terms of the agreement highly concessionary; they were implemented rapidly and without dissenting creditors then or later unraveling the restructuring, this an exceptional event in an international financial system with no established international insolvency framework. International law and sovereign bankruptcy expert Michael Waibel, writing in his book called Sovereign Defaults before International Courts and Tribunals, had this to say about the London Debt Accord, quote: the largest and most comprehensive multilateral debt restructuring conference in financial history played a crucial role in allowing the newly democratic Federal Republic of Germany a fresh start.” The agreement marked a watershed in international finance for its emphasis on how much Germany was able to pay, in contrast to how much she was legally obliged to pay.”
FLASSBECK: The cancellation of debt was determined by the Allies mainly, but it included a number of countries, many countries–even Greece was part of them. But the important point is the decision to do it and to understand what the logic of this thing is. And, unfortunately, nowadays in Germany nobody understands it anymore, how important it had been not to have this additional burden.
FRIES: In this segment we looked into Germany the debtor country. In our next segment, we’re going to look into Germany the creditor nation and how debtor countries in Europe today are being treated by their creditors, including Germany. Please join us for part two of our series with Heiner Flassbeck on The Real News Network.
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