A German History Lesson

Yesterday, the German Parliament relented and agreed to let the Greek debt restructuring go forward, but only the price of crushing austerity for the Greek economy. This is a widespread attitude in Germany, where aid to the Greeks is unpopular.

The other day, Jörg Krämer, chief economist for Commerzbank in Frankfurt, said of the Greeks, “If you live beyond your means, then you can repair your balance sheet only if your consumption goes down.”

But the Germans might take a moment and reflect on their own history.

In the aftermath of World War II, the Allies, remembering the disastrous consequences of German reparations after the First World War, did not insist on their pound of flesh. The entire Nazi public debt, amounting to over 600 percent of German GDP, was written off.

The pre-existing unpaid debt from the Weimar period was written down to a fraction of its original cost. Claims on old debt were strictly segregated from German reconstruction funds. The German Federal Republic finally paid off the last bit only in 2010.

Germany surely lived well beyond its means during the Nazi era, plundering the rest of Europe as well. The allies would have been within their rights to demand that Germany pay for its sins by reducing its consumption, but this time wiser heads prevailed. The Americans not only agreed to write off old debts, but gave the Germans billions of dollars in Marshall Aid.

The German Federal Republic itself, after 1989, did not condemn the former East Germany to austerity as a remedy for its fictitious communist economy. Instead, Chancellor Helmut Kohl allowed the eastern states to exchange their nearly worthless Ostmarks for Deutsch Marks at the inflated rate of 1 to 1, and then poured the equivalent of more than a trillion Euros into the reconstruction of the eastern economy.

If the Allies, and later the government of Germany itself, had practiced what the Germans are now preaching, Germany today would be a much poorer country.

One recalls Edmund Burke’s sage 1775 oration addressed to King George III on the perversity of the British government’s harsh policy towards its restive North American colonies. Burke averred, “The question with me is not whether you have a right to render your people miserable, but whether it is not your interest to make them happy.”

Germany gains little and Europe stands to lose much by condemning the Greeks to misery as punishment for past profligacy. The Germans are also playing with fire. Greece is a nation that had a military dictatorship as recently as the 1974. No democracy can sustain this kind of economic punishment. What, then, to do?

Normally, a country that lost the confidence of its foreign lenders would devalue, disguising the decline in living standards and at the same time making its exports more competitive. But Greece’s membership in the Eurozone precludes that. It is also true that Greek public administration and tax collection are a mess.

So how to emulate the spirit of the allies’ macro-economic mercy towards the Germans after 1945 and the West German far-sighted generosity toward their Ossie cousins after 1989?

In June, the Greek Parliament has voted an austerity program of 28 billion euros in budget cuts and tax increases over five years. Because dwindling GDP produces lower revenues, the latest agreement requires several billion more.  These are devastating sums for Greece, but small in the context of the EU’s entire GDP, of which Greece is just two percent.

Why not couple Greek budget and tax reform with a large infusion of funds for economic modernization and public improvements in the spirit of the Marshall Plan? In the context of the vast sums going to bail out Europe’s banks, a $50 billion Recovery and Investment Plan for Greece would be a rounding error. For another $50 billion, the EU could add Portugal and Ireland.

Young Greeks, instead of looking at 40 percent unemployment, could gain productive jobs. The entire Greek economy would gain a big macro-economic boost and a path to greater competitiveness.

Most importantly, the EU would gain the moral authority to work with Greeks on politically awkward reforms. It’s one thing to grudgingly tolerate technocrats who are bleeding you dry in order to satisfy bankers—quite another to work with development specialists who come to Greece bearing gifts.

Call it the Merkel plan, so that Chancellor Angela Merkel might be remembered not as the jackbooted German who destroyed Greece but as the wise European leader who tempered austerity with sensible mercy.


[This updates and expands a column that ran in the Boston Globe]


Yes, if the Allies had acted the way Germans are acting now, Germany would be a poorer country today. If Germans then had acted like Greeks are acting now, the Allies would have lost all their investment and Swiss banks would have enjoyed significant increases in deposits from clever Germans.

Yes, Greece urgently needs investment in the private sector, preferably foreign investment. And yes, the amount of investment required would be much less than the 3-digit BN EUR figures which have been thrown around so far.

But something like a Marshall Plan would be the wrong instrument. If the EIB were to invest large sums in infra-structure projects, the impact on employment would not be significant and much of the money would return offshore again (either as payment for sourcing or as capital flight).

Greece needs a multitude of individual private sector investments in middle-market operations (5-250 employees). Probably a maximum of 5 MEUR per investment would be more than sufficient. The investors should come primarily from offshore because Greece not only needs investment money but, above all, know-how transfer. Not only technical know-how but, above all, know-how of governance in a middle-market company.

What can Greece contribute? Offer the foreign investors Special Economic Zones where they can operate at internationally competitive conditions. What can the EU contribute? Offer the investors a guarantee for the political risk and provide attractive financing. What is required of the investor? To run a good and profitable operation.

One needs to ensure additional stimulus aid bundled with austerity measures can work.

Helping an indebted man by givng him a job (through stimulus aid) and cutting back expenses (austerity measures) can only be effective if the person being helped work on both diligently. Imagine the person receiving help does not work hard or productively, and continues to spend more than what he draws in. In such a case he will always return to his original debt strapped position, unless the quantum of debt deferment / forgiveness and stimulus aid extended to him is infinite. The donor will find himself throwing good money into an abyss.

Without proper motivation and discipline, Germany would not have benefitted from the stimulus package cum debt forgiveness after the The Third Reich era. When Germany was reunified, the people went through nearly a decade of belt tightening to make things work. So unless the key donor countries are satisfied that those they are helping will work productively , and spend wisely, instruments like the fiscal compact would be necessary to ensure resources from "donor" countries are not misused. Alas the differences in cultural beliefs, human motivations and political / economic agendas will make agreement and enforcement challenging.

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