Friday, November 28, 2014

Should Germany pay?

I read this piece "The pathology of Europe's debt" by Benjamin Friedman in NYRB yesterday. It is about the predicament of the South European countries. Friedman makes two key non-technical points.

1) Debt issue is not a morality play as Germans seem to believe. And to help his case, he quotes 19th century Protestant obsession about never being in debt, never borrowing etc.

2) He then describes at length how Germany benefited from not repaying in full its obligations under the Versailles treaty, and had finally practically all of it nullified by UK, US and France in the early 1950s. And then of course Germany benefited from the Marshall plan.

The clear, albeit unstated, conclusion is that Germany should now be more flexible and generous with Greece, Spain etc. because she herself was a major beneficiary of Western largesse.

But Friedman makes, in my opinion, three mistakes.

1) He neglects to engage with the view that the Versailles Peace Treaty that exacted significant reparations from Germany was inequitable. The German delegation signed it under duress, practically with the gun pointed to its head. (They disagreed with the war guilt clause in the Treaty and the enormous reparations that flowed from that clause.) 

Now, I am not blindly defending Germany here because I am aware that Germany just a year earlier imposed on Russia under Brest-Litovsk peace agreement far worse terms than those about which  she complained in Versailles.  And it is also true that Germany made France pay an unreasonable amount after the 1870 Franco-Prussian war. It was nevertheless short-sighted and unjust from the Allies to have applied the same unscrupulous approach to Germany in 1918-19 that Germany applied to them and to the Russians before.  This should have stopped. And we know, it also backfired.

2) When the Western allies forgave all of German previous debts at the conference in London in the 1950s,  it was not only because they did it out of the goodness of their hearts but because they needed a  strong West Germany as a bulwark against Communism in Europe and more specifically against Soviet influence in all of Germany. Thus, they did it as much for themselves as for Germany.

And finally the biggest mistake of all:

3)  While Friedman first makes the case that borrowing  should not be a subject of moralizing he then turns around and starts moralizing Germany about the need to repay for the largesse that she has received from the Western allies by being “nice” to the Southern European countries in trouble now. Well, either one or the other. If economics (or debt) is not a morality play then it is not a morality play period; for anyone. If it is, on the contrary, all about interests, short-term or long-term, the argument needs to be made why it may in German long-term interest to restructure Greek debt, forgive a part of it, or agree to the issuance of Eurobonds, jointly guaranteed by all Euro countries (but of course principally, by Germany). Be consistent if you want to convince.

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