In an important column at The Guardian, debt relief advocate Nick Dearden reminds us–and reminds certain people in a certain prominent European country–how sovereign debt was handled after World War II:
Sixty years ago today, an agreement was reached in London to cancel half of postwar Germany’s debt. That cancellation, and the way it was done, was vital to the reconstruction of Europe from war. It stands in marked contrast to the suffering being inflicted on European people today in the name of debt….
The debt cancellation for Germany was swift, taking place in advance of an actual crisis. Germany was given large cancellation of 50% of its debt. The deal covered all debts, including those owed by the private sector and even individuals. It also covered all creditors. No one was allowed to “hold out” and extract greater profits than anyone else. Any problems would be dealt with by negotiations between equals rather than through sanctions or the imposition of undemocratic policies.
Among those creditors accepting a cancellation of debt, BTW, were Greece and Spain.
Perhaps the most 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.
This is not, notes Dearden, how debt-ridden countries have been handled in the last 30 years:
Following the London deal, West Germany experienced an “economic miracle”, with the debt problem resolved and years of economic growth. The medicine doled out to heavily indebted countries over the last 30 years could not be more different. Instead, the practice since the early 1980s has been to bail out reckless lenders through giving new loans, while forcing governments to implement austerity and free-market liberalisation to become “more competitive”.
As a result of this, from Latin America and Africa in the 80s and 90s to Greece, Ireland and Spain today, poverty has increased and inequality soared. In Africa in the 80s and 90s, the number of people living in extreme poverty increased by 125 million, while economies shrank. In Greece today, the economy has shrunk by more than 20%, while one in two young people are unemployed. In both cases, debt ballooned.
Nor do the more recent debt policies seem to be aimed at the kind of quick recoveries that can not only reduce suffering but can make debt repayment practicable:
When debts have been “restructured”, they are only a portion of the total debts owed, with only willing creditors participating. In 2012, only Greece’s private creditors had debt reduced. Creditors that held British or Swiss law debt were also able to “hold out” against the restructuring, and will doubtless pursue Greece for many years to come.
The “strategy” in Greece, Ireland, Portugal and Spain today is to put the burden of adjustment solely on the debtor country to make its economy more competitive through mass unemployment and wage cuts. But without creditors like Germany willing to buy more of their exports, this will not happen, bringing pain without end.
There are undoubtedly some good arguments for the posture the German government and its financial sector have taken with respect to its debt-ridden neighbors. But an attitude of moral superiority should not be among them.