Eduardo Porter of the New York Times makes a closely reasoned argument that echoes Piketty’s recent comments about German short memories, namely they got their post WWII reboot because the Allies cut their debt in half.
Referring to the image above, Porter notes,
But beyond serving as a reminder of German hypocrisy, the image offers a more important lesson: These sorts of things have been dealt with successfully before.
The 20th century offers a rich road map of policy failure and success addressing sovereign debt crises.
The good news is that by now economists generally understand the contours of a successful approach. The bad news is that too many policy makers still take too long to heed their advice — insisting on repeating failed policies first.
The recurring, historical pattern? Major debt overhangs are only solved after deep write-downs of the debt’s face value. The longer it takes for the debt to be cut, the bigger the necessary write-down will turn out to be.
Nobody should understand this better than the Germans. It’s not just that they benefited from the deal in 1953, which underpinned Germany’s postwar economic miracle. Twenty years earlier, Germany defaulted on its debts from World War I, after undergoing a bout of hyperinflation and economic depression that helped usher Hitler to power.
Porter goes on to note that Germany is now making the argument of ‘moral hazard’, saying that they can’t possibly cut the debt of Greece since then all the other countries that owe will want debt relief too. And sure enough, in the same issue of the NY Times we have Jochen Bittner, a political editor for the weekly newspaper Die Zeit, saying exactly that in an editorial subtly entitled It’s Time for Greece to Leave the Euro:
Unemployment in Italy, Portugal and Spain remains high, and anti-European Union populists are on the rise in all three. The conclusion that people there could draw from a third bailout program for Greece would almost certainly be that voting for radical parties and obstructive behavior are eventually rewarded. You just have to be cocky enough. And if that happened — if, say, a Syriza clone came to power in Spain, or if the leadership in those countries expressed a strong sympathy for Greece’s position — the counterreaction in the creditor countries could be harsh, even hostile. Europe could end up with a calamitous north-south divide along camps known from the Cold War: the “socialists” there, the “capitalists” here.
Bittner plays true to form, continuing the specious lies that it was the profligacy of Greeks, taking on too much personal debt, that has led to this crisis. The reality lies in the lenders, who knew better, who agreed to those loans and who are now unwilling to take a haircut when it is obvious that the loans cannot be repaid, especially if Greece is forced to motor on in austerity.
The historic facts of Germany’s debt relief does not matter to the Germans, and Bittner never mentions it. But we should not be so quick to forget. If we come to a Grexit this week – against the will of the Greeks – the blame should fall to Germany.