by Ted Walsh
A Special Thank You to Nick Dearden, whose piece in the Guardian inspired this blog
Few countries are better examples of economic strength in a weak international financial system than Germany. As the largest economy in Europe with high economic standing, Germany is often in a position to prescribe economic policies within the Eurozone for countries teetering precariously on the verge of defaulting on their debts. What makes Germany’s situation remarkable is the fact that 60 years ago, the post-war German economy was in ruins. As such, Germany’s rise to economic prominence is of significant relevance to heavily indebted countries today.
By 1953, the Iron Curtain had descended across Europe. As part of an overall effort to fight communism and restore the economic vitality of Western Europe, a conference of creditors for West Germany—the portion of the country within the Allies’ sphere of influence—was called to deal with the debt crisis. Representatives of countries as diverse as Greece, Spain and Pakistan gathered in London to discuss ways to save West Germany. The actions taken were impressive: 50 percent debt reduction for everyone, from the government to individuals.[i] All creditors were equally affected, meaning there were not any “holdouts” resisting a deal. Debt repayment was capped at three percent of national exports, which meant investing in West German products was the best way to be repaid.[ii]
After this deal, West Germany flourished. For the past sixty years Germany has grown relentlessly, and is once again the economic powerhouse of Europe. And yet very few, if any, countries that have found themselves in a similar situation have received similar support in the years since. Instead, the IMF and World Bank extend loans, and debtor nations must accept the conditions or default on their debts. This has been the strategy with Spain, Greece, Italy and Portugal; countries that had once come to Germany’s aid. The question remains: why can a similar approach not be taken to relieve the debt burdens of other nations in a time of international economic distress?
The problem of overwhelming debt has not gone away; in fact, it has become much, much worse. Too many of the world’s poorest nations are struggling under debts they cannot afford, forced to pay interest rather than invest in their citizens’ needs. This idea of a nation’s creditors getting together to alleviate its debt needs to be revised, but with the added transparency and objectivity that an international bankruptcy system can provide. We extended this offer once before to a country that was languishing in the heart of a divided Europe. Today, in the wake of the international financial crisis, the time is right to do it again.
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