Greece’s wind of change

In an interview with Der Spiegel, economic historian Albrecht Ritschl argues that Germany has been the worst debtor nation in the past century. The complete interview is worth reading at its entirely, but here’s the gist of it:

During the past century alone, [Germany has become insolvent] at least three times. After the first default during the 1930s, the US gave Germany a “haircut” in 1953, reducing its debt problem to practically nothing. Germany has been in a very good position ever since, even as other Europeans were forced to endure the burdens of World War II and the consequences of the German occupation. Germany even had a period of non-payment in 1990.

[In the default in 1990] then-Chancellor Helmut Kohl refused at the time to implement changes to the London Agreement on German External Debts of 1953. Under the terms of the agreement, in the event of a reunification, the issue of German reparations payments from World War II would be newly regulated. The only demand made was that a small remaining sum be paid, but we’re talking about minimal sums here. With the exception of compensation paid out to forced laborers, Germany did not pay any reparations after 1990 — and neither did it pay off the loans and occupation costs it pressed out of the countries it had occupied during World War II. Not to the Greeks, either.

Nick Dearden, the director of Global Justice Now, pointed out that even during the period when they were obliged to pay their debts the Germans still had it easy:

[Under the London Agreement on German External Debts of 1953], 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.

As a result, Germany experienced an “economic miracle” with years of strong economic growth, with their debt problem miraculously resolved.

By contrast, after Reagan’s Great Deregulation in the 1980s the way the world treats indebted countries could not be more different. In the Chicago-school era since early 1980s reckless debtors who got themselves into trouble will almost exclusively bailed out with new loans, with the argument of preventing “systemic failure”, while at the same time forcing the governments to implement the neoliberal holy trinity of austerity, liberalisation and privatisation to “ease the debt.”

In other words, they bailout the perpetrator of the crisis, but then shift the burden of the responsibility to the ordinary citizens that have nothing to do with the crisis in the first place. In Greece’s case, the Greek citizens are forced to pay for the bailout made to safeguards European banks who have huge inter-bank interests with the Greek economy (€94 billion exposure, with French banks alone exposed up to €40 billion and German banks up to €24 billion).

Moreover, while Germany can get out from their mess with the help of its creditors buying German exports, Greece’s creditors like Germany have no obligation nor interest to buy more of their exports, hence bringing pain without end into the Greek economy.

Some might think that it is therefore hypocritical for German Counsellor Angela Merkel to remain adamant that Greece should pay its debt, especially after looking at Germany’s past debt problems where, ironically, included non-payment to creditor Greece. Indeed, Greece was one of the signatories of the London agreement in 1953, where they agreed to postpone Germany’s “settlement of war reparations and debts incurred after 1933” until a conference to be held after Germany’s reunification, an event that never took place till this day.

Moreover, Albrecht Ritschl also estimated that “the total debt forgiveness West Germany received from 1947 to 1953 was more than 280 percent of the country’s 1950 gross domestic product, compared with the roughly 200 percent of GDP that Greece has been pledged in aid since 2010.” In other words, West Germany received much larger debt forgiveness than Greece ever needed today.

Hence, with the knowledge of positive lessons from the way the world dealt with Germany’s debt 60 years ago, and devastating lessons from the way the world wrongly dealt with Latin American debt crisis 30 years ago, Nick Dearden concluded that the well-informed actions of Europe’s leaders today in dealing with Greece are nothing short of criminal.

Because first and foremost, austerity fails. David Stuckler and Sanjay Basu in their book The Body Economic, explains the reason why Greece’s austerity failed in terms of the well being of the citizens by commenting that:

When the government cuts its spending during a recession, it drastically reduces demand at a time when demand is already low. People spend less; businesses suffer, ultimately leading to more job losses and creating a vicious spiral of less and less demand and more and more unemployment. Ironically, austerity has the opposite of its intended effect. Far from decreasing debt, austerity increases it as the economy slows. And so debt gets worse in the long run when we don’t stimulate economic growth.

Bizarrely, the IMF themselves even admitted that austerity has disastrous consequences, while recently Bank of England governor Mark Carney attacks eurozone austerity.

But of course, as Naomi Klein argues in her book The Shock Doctrine, austerity is not designed for recovery. Just like the plunder occurring in previous victim countries, not long after their banks were bailed out and draconian cuts on its welfare system kicked-in, Greece then forced to embark on a firesale – despite the fact that the Greek government is scrambling to pay off the debts they were forced to take – in a similar fashion like Ecuador was forced to give up their rain forest, while the local Greek oligarchs that control large parts of Greek businesses, financial sector, the media and politicians have also participated in the looting.

With the country’s assets being stripped apart, the effects of the draconian cuts were even more dreadful for the Greek citizens, as critical government programs such as health programs were cut HIV case rise by 200% and malaria returns to the country. The spread of HIV in particular was mainly caused by the largest cuts to housing safety nets in all Europe, where homelessness in Greece then rose by a quarter, and created a conditions of crowding and drug abuse in downtown Athens, thus raising the spread of HIV.

Moreover, due to economic problems homicides rates rise and in 2012 alone 600 Greek citizens committed suicide, an alarming number considering prior to the recession Greece had the lowest suicide rate in Europe. As at October 2014 around 60% of Greeks (that’s approximately 6.3 million people) now live at or below poverty level.

So is it any wonder that in their election Greece finally picked a left wing government, – an anti-thesis of “free-market” ideology – while most of Europe look to the right? As Matt O’Brien of Wonkblog put it “it turns out that forcing a country into a 1930s-style depression creates 1930s-style politics.”

To be fair, despite all the media frenzy, Syriza is not really a radical left wing party. But nevertheless their anti-austerity attitude is clear enough to send a wind of change from across Greece all the way to Spain, and prompt former German Vice-Chancellor Joschka Fisher, among others, to declare a Greek burial for German austerity.

This is going to be fun to watch.

Note: a big chunk of my arguments here are excerpts from my bigger-picture argument piece on the current state of world economy.