In May 2023, when the British Office of National Statistics (ONS) released the March-quarter national…
There is a lot of discussion at present about the historical inconsistency of the German position with regard any debt relief to the Greek government. Angela Merkel has reiterated over the weekend that there would be no further debt relief. Why she is now a spokesperson for the Troika that does not include the German government is interesting in itself. In this context, I recall a very interesting research study published in 2013 – One Made it Out of the Debt Trap – by German researcher Jürgen Kaiser, who examined the London Debt Agreement 1953 in great detail. After becoming familiar with the way the Allies handled the deeply recalcitrant Germany and its massive debt burden in that period, one wonders why the German government is so vehemently against giving relief to Greece. This is especially in the context that the only mistake that Greece made was joining the Eurozone and surrendering its own capacity to deal with a major financial crisis. The ‘mistakes’ of the German nation before the London Agreement have been paraded before us all again with the 70th anniversary of the liberation of the Auschwitz death camp featuring in world events last week.
Jürgen Kaiser is the “co-ordinator of Jubilee Germany – which is “an NGO with about 700 member organisations that strives for a fair and transparent international insolvency framework”. In other words, it analyses and comments on debt restructuring deals from a viewpoint of achieving equitable outcomes with the details being publicly-disseminated.
His 2013 study, published by the – Friedrich Ebert Stiftung (FES) – which was founded in 1925 by the first democratically elected German President, Friedrich Ebert, a social democrat.
The foundation aimed to promote the political and social education of all citizens, to enable talented young people to undertake higher education irrespective of their family circumstances and to enhance international cooperation.
It was banned by the Nazis in 1933 and re-emerged in 1947 and has operated continuously since then with similar aims to its original goals. It is firmly focused on enhancing economic and social justice, promoting socially democratic outcomes, deepening the dialogue between unions and the polity and commenting on global social justice issues.
It is interesting to reflect on these matters given last week’s 70th anniversary of the Auschwitz death camp liberation. Germany, remember, had murdered millions of jews, gypsys, communists, homosexuals and others they considered deviant.
They had waged war on Europe and caused untold material and emotional damage.
Greece has done nothing of that. Indeed, Germany inflicted massive and cruel hardship on Greece during its Nazi era.
Further, Germany was sovereign in its currency at the time while Greece is not.
It is also rather far-fetched to call the Greek bailouts (the two already in place) – debt relief for Greece. As I discuss below, Greece was unable to use very much of the bailout funds to expand domestic spending and actually improve their economic plight.
It is more accurate to say the bailouts were to the benefit of the French and German banks which were exposed to the risky Greek public debt.
Jürgen Kaiser’s research is very interesting in this context.
He notes that on February 27, 1953, the London Debt Agreement was signed between the various nations that had been at war with each other during the 1940s.
… relieved … [Germany] … of external debts to the sum of nearly 15 billion Deutsche Mark – i.e., about 50 per cent out of a total external debt of 30 billion Deutsche Mark, consisting of both pre- and post-war debts. This debt relief repre- sented roughly 10 per cent of West Germany’s GDP in 1953, or 80 per cent of its export earnings that year.
So it was significant relief in the context of the state of the economy at the time.
Kaiser concluded that the:
London Debt Agreement, with its very generous conditions, made a significant contribution to West Germany’s post- war »economic miracle« of the 1950s and 1960s, and to a speedy reconstruction of the war-torn country.
The motivation for giving Germany the relief was to stabilise “the country both politically and economically as quickly as possible”, especially in the context of the growing Cold War tensions.
The Allies had learned their lesson from the faulty Versailles Treaty at the end of World War I, which made “the mistake of burdening a defeated war enemy with an economic tribute, that would destabilize it for decades and thus pave the way for political radicalisations of all sorts”.
The rest of the Research Paper provides significant detail about the Agreement and how it might represent a model for current public debt restructuring.
But Jürgen Kaiser makes another very significant point:
Surprisingly, little knowledge about Germany’s debt relief is to be found among the broader public in Germany or in former creditor countries.
Groupthink has a tendency to suppress information and public debate, which might prove inconvenient to the current orthodoxy. Why did the Nazis lock up the dissenters, for example.
The suppression also creates space for historical revisionism.
It is now convenient for Germany to hold itself out as the paragon of virtue and frugality so that it can demonise other nations such as Greece.
The language of morality has been prominent in the way leading German politicians have spoken of Greece.
We have read that Greece “wasted potential savings in a spending frenzy” that “Germany committed itself to the virtuous path …” and the German Finance Minister Wolfgang Schäuble told the press before a two-day summit in Brussels in March 2010 on whether there should be Community support for Greece, that “an automatic system that hurts those who persistently break the rules” was needed to punish the “fiscal sinners”.
So it is no surprise that the Germans would not want to educate its public widely on details regarding the London Debt Agreement 1953. Would the public’s reaction to Greece be any different if it understood how their nation was treated generously by the Allies who had suffered grievous losses under the inhumane actions of the German war machine?
The other point lost in the debate is the nature of the bailouts that have loaded Greece up with debt. If a party provides a service to another which has no chance of success then who is liable?
The Greek bailouts
The first mistake the European policy makers made was to claim that excessive government spending had caused the crisis.
In the early days of the collapse, the news media was full of stories of lazy Greeks who didn’t pay taxes and a lax government, spending beyond its means. This was meant to explain why private bond investors were pushing up public borrowing costs.
But that occurred because the bond investors had realised that Eurozone governments were at risk of insolvency because they had surrendered their currency sovereignty.
The real cause of the crisis was the spiralling and unsustainable private debt build-up and the exposure of the European banks to that debt.
This was pushed quietly to the background by the Troika and only occupied their minds when they forced the Spanish, Irish and Greek taxpayers to foot the bills necessary to keep the big French and German banks from failing.
The fact that these ‘bailout loans’ were added to the outstanding sovereign debt of these nations only exacerbated the situation.
Further, there was no evidence that government spending among the Member States was in any way ‘out of control’. Greece, alone was running larger deficits than most. But Spain and Ireland were exemplars of fiscal prudence as defined by the nonsensical SGP rules.
The other aspect of the bailout loans that is not often understood is the incompetent behaviour of the Troika partners themselves.
When the European Commission was faced with nations unable to fund themselves but with pending liabilities maturing, they turned their focus to bailouts.
A new European bully formed, the so-called Troika (the European Union, the ECB and the IMF), to spearhead the austerity push.
Once again the unelected and unaccountable IMF felt its role was to trample on the democratic rights of citizens in Greece and elsewhere.
While these interventions initially protected Greece and other nations from insolvency, they imposed destructive conditionality, which made it impossible for the nations to grow.
The first major bailout came in May 2010, when Greece was given a three-year €110 billion loan from the Troika with strict conditions attached. The austerity package was breathtaking in its harshness. Greece was compelled to reduce its deficit by 15 per cent of GDP within three-years, which was an impossible task.
The IMF claimed that the fiscal policy changes were “frontloaded with measures of 7½ percent of GDP in 2010, 4 percent of GDP in 2011, and 2 percent of GDP in 2012 and 2013, each, to turn around the fiscal position and help place the debt ratio on a downward path”.
It was obvious that the austerity plan would, in fact, increase the deficits given the loss of tax revenue that would accompany the output and employment losses.
The Troika demanded that public sector pay be cut by around 18 per cent and pensions cut by 10 per cent, that wages and pensions be subject to a three-year freeze, that taxes on fuel, alcohol and tobacco be increased by 10 per cent and across-the-board VAT increases of 2 per cent be imposed, among other measures.
When announcing the terms of the bailout to the Greek people, Prime Minister George Papandreou wore a dark purple coloured tie, the colour that Greeks wear to funerals. But his days were numbered. Soon after, the Troika got rid of Papandreou and put one of ‘their men’ into the role, the central banker Lucas Papademos. It didn’t matter what the people who vote might think!
Key personnel in the Troika were unflinching in their claims that austerity would be good for Greece.
Soon after the bailout was pushed onto Greece, a centre-left Parisian daily newspaper published an interview (July 8, 2010) with ECB boss Jean-Claude Trichet – Jean-Claude Trichet: Interview with Libération.
He was asked whether the austerity plans “pose the risk of killing off the first green shoots of growth” (Quatremer, 2010), He replied:
It is an error to think that fiscal austerity is a threat to growth and job creation. At present, a major problem is the lack of confidence on the part of households, firms, savers and investors who feel that fiscal policies are not sound and sustainable. In a number of economies, it is this lack of confidence that poses a threat to the consolidation of the recovery. Economies embarking on austerity policies that lend credibility to their fiscal policy strengthen confidence, growth and job creation.
The IMF had the audacity to put numbers to this Ricardian nonsense and predicted that by 2012, Greece would return to increasingly robust growth. The IMF (2010: 8-9) predicted growth would follow a “V-shaped pattern” and that:
… the frontloaded fiscal contraction in 2010-11 will suppress domestic demand in the short run; but from 2012 onward, confidence effects, regained market access, and comprehensive structural reforms are expected to lead to a growth recovery. Unemployment is projected to peak at nearly 15 percent by 2012.
[Reference: International Monetary Fund (IMF) (2010) ‘Greece: Staff Report on Request for Stand-By Arrangement’, IMF Country Report No. 10/110, May].
The following Table (drawn from my soon to be published book on the Eurozone crisis) shows the IMF growth forecasts against the reality. The forecasts they had used to justify their harsh austerity package for Greece were very inaccurate.
Source: IMF (2010), Eurostat.
Moreover, the actual outcomes were more in keeping with what a reasoned assessment, which was uncontaminated by neo-liberal ideology, would have suggested.
Cuts that deep and that quick were always going to devastate both public and private spending and lead to a Depression with very high unemployment. By April 2014, the national unemployment rate in Greece remained at 26.5 per cent.
Any other professional practitioner would be liable for the payment of significant damages if their judgements (that were acted upon) we so inaccurate and so damaging. The IMF and its Troika partners should therefore be liable to the Greek people for their incompetence in this regard.
Why isn’t that part of the discussion and public debate?
And remember the sequel to this story. As the Troika were busily imposing austerity on beleaguered European nations, such as Greece and Portugal, the IMF consistently claimed that their ‘modelling’ showed that if governments cut their fiscal deficits quickly, private sector spending would respond and growth would soon return.
In the IMF’s October 2012 World Economic Outlook, we learned that their past recommendations for fiscal austerity in Europe, which conditioned, for example, the harsh terms embedded in the Greek bailout packages, were based on ‘modelling errors’.
[Reference: International Monetary Fund (IMF) (2012) World Economic Outlook (WEO) October 2012, Washington D.C.].
They admitted (page 43):
… that actual fiscal multipliers have been larger than forecasters assumed.
Fiscal multipliers tell us what will happen to total spending (both public and private together) for every extra $1 of public spending.
The IMF had assumed that they were very low (below 1) so that cutting public spending would actually lead to higher total spending. In October 2012, they admitted that the ‘multipliers’ were well in excess of 1, which means that if the government cuts spending by 1 Euro, the total decline in spending and output will be well in excess of that.
The reality told us that would be the case. More credible economic modelling (such as that by Modern Monetary Theory (MMT) economists) told us that would be the case.
But the neo-liberal biases in the IMF models simply refused to allow that to be the case because it would have been inconvenient to their ideologically motivated desire to cut deficits and reduce the size of government.
So the combination of some shoddy spreadsheet manipulation, incompetence from the IMF, and the usual European Groupthink justified policies that have led to millions of people losing their jobs – unnecessarily!
In June 2013, the IMF released a suite of new reports on Greece. At the press conference accompanying the release the head of the IMF Greek Mission Poul Thomsen was asked “Is it true that the IMF admits mistakes on the Greek bailout?”.
[Reference: International Monetary Fund (IMF) (2013b) ‘Transcript of a Conference Call on Greece Article IV Consultation’, Washington, D.C., June 5, 2013].
Sure. There is in this bundle of papers, there is a discussion of the past and, in the context of the Article IV Consultation, a full report … And, sure, in reviewing what we have done the whole time, there are certainly things we could have done differently. We already had that debate six months ago on these multipliers and that if we should do it again, we would not use the same multipliers.
The arrogance notwithstanding, the accompanying report (IMF, 2013b) admitted that the IMF had altered its own rules in order to provide the bailout.
[Reference: International Monetary Fund (IMF) (2013c) ‘Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement’, IMF Country Report No. 13/156, June].
It was clear to them from the outset that the austerity program would not reduce the Greece’s public debt ratio, which was one of four criteria that the IMF rules dictate must be satisfied in order to provide funding.
They proceeded not as a result of any concern for what the austerity would do for Greece but “because of the fear that spillovers from Greece would threaten the euro area and the global economy” (p.10).
Defending the interests of international capital has always been a priority of the IMF even if the welfare of ordinary citizens is compromised.
Extraordinarily, the IMF also admitted that in retrospect Greece actually failed to meet three of the four criteria for funding (p.29), which indicates how poor the initial assessment was, in part, because the “negotiations took place in a very short period of time” (p.49).
The IMF has a history of parachuting officials into nations who within a day or so come up with radical structural adjustment programs, which ravage the local economy.
The neo-liberal free market paradigm is seen as being a ‘one-sized-fits-all’ solution, irrespective of the circumstances.
Finally, the huge IMF forecasting errors in relation to Greece were not one-off incidents. While forecasting errors are a fact of life, the IMF and other major neo-liberal inspired organisations produce systematic errors, which means they consistently make the same errors, which are easily traced to the underlying ideological biases, which shape the way they create their economic models.
Thus, the IMF typically overstates the benefits of austerity and understates the costs. Further, they also overstate the inflationary impact of fiscal deficits.
Each systemic error reinforces their free market approach. Yet, each systematic error also demonstrates the poverty of that approach.
As we noted earlier, any major professional group exhibiting this level of incompetence would be stripped of their right to practice and open to major legal suits for damages and imprisonment.
In the case of Greece, the damage caused by the IMF errors were massive.
Some IMF officials, at the very least, should have gone to jail given that the damage that the institution has caused dwarfs that of fraudsters such as Bernie Madoff who was sentenced to 150 years imprisonment for his criminality.
As economic and social conditions deteriorated in Greece, it became obvious that the country would not be able to meet its on-going liabilities without further financial assistance and would be forced into default by March 2012.
After an emergency European leaders’ summit in July 2011, the 10th in 18 months concerning Greece, a second Greek bailout package was proposed. This bailout was the first to suggest that the private banks and other private bond holders would provide some of the debt relief.
The so-called ‘haircut’ or private-sector involvement (PSI), proposed that investors would either roll over their stock of maturing Greek government bonds or sell the bonds back to the government at a discount.
In return, the Greek government agreed to even harsher austerity measures including further tax increases, more public sector job cuts, a 20 per cent cut in workers’ wages, pension cuts and reduced trade union rights.
In September, the Greek parliament passed some of the tax increases but civil unrest was mounting. On October 19, the day before the vote on the rest of the austerity measures in parliament, a national strike began supporting large-scale protests in Athens. Amidst violent riots outside the parliament, the Government passed the bill.
On October 26, 2011 the details were fully worked out between the parties. The Troika would extend €130 billion to Greece in return for more austerity and all private Greek government bond holders would be invited to accept lower yields and discounts on the face value of their assets.
The total bailout sum included an estimated €30 billion in revenue, which the Troika hoped Greece would get from the large-scale privatisation plan it had agreed on as part of the first bailout.
Further, some 40 billion euros of the bailout sum would go to buying back debt (safeguarding banks) or recapitalising zombie Greek banks. In other words, the interests of capital were privileged.
Virtually no new funds were made available to support spending in the Greek economy to stimulate employment. Further, for all the angst surrounding the negotiations, it was estimated that the deal would not provide any significant debt relief anyway.
While the political leaders and the ECB did not refer to this as a default, it was clearly that. The German government once again dominated the negotiations by constructing the plan, which forced the private banks to take some of the loss. The French and ECB had been opposed to such a move.
All parties finally agreed to the deal on February 21, 2012 including the 53.5 per cent ‘haircut’ on the face value of any bonds held. The Troika demanded that the Greek government set up a special ‘off-budget’ escrow account which had to be prioritised and contain enough cash at all times to service its liabilities.
The Germans and French had at one stage proposed that a European Commissioner take over running economic policy in Greece. Facing increasing hostility, the Troika decided to create a ‘task force’ of inspectors who would rough ride over the democratic process to make sure that the Troika got their pound of flesh.
Later in 2012, the Greek government was forced to ratchet up the austerity cuts in order to receive the next instalment from the Troika.
By June 2013, the Government closed its public broadcaster, marking a further blow to democracy. Greece was now, more or less, a German colony.
The reality was that Greece could never fulfil its obligations under the agreement given the harshness of the austerity measures, which guaranteed that it would remain in Depression for many years to come.
Even with the reduced debt burden, insolvency was a continual threat and increasing poverty was a certainty.
So after reading the research study by Jürgen Kaiser on the way the London Debt Agreement gave oxygen to the shamed Germans, one wonders why history has been forgotten in the way the Greeks have been dealt with.
Their only mistake was joining the Eurozone and surrendering their own capacity to deal with the financial crisis on their own terms. When stacked against the crimes of Germany in the 1930s and 1940s you can only wonder how the Germans can justify their position in this matter.
It is clear that Germans have convenient but very flawed historical memories.
They focus on the 1920s (Wiemar) and forget the early 1930s recovery (Keynesian-style).
They focus on the lazy Greeks and puff themselves up with the self-importance of their perceived frugality and forget or don’t even know about the London Debt Agreement 1953.
But neo-liberalism has actively tried to suppress historical understanding and when facts are inconvenient they seek to redefine them.
I will write in coming blogs about the growing democratic fightback against austerity and neo-liberalism. But it is now clearly evident in a number of jurisdictions and levels of government.
Just as social democratic forces emerged in the late C19th to combat the growing excesses of an unfettered capitalism, we are once again witnessing people-power.
What form it will take and how successful it will be remains to be seen. But it is happening.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.