To date, I have resented comparisons between today's Greece and the then Weimar Republic vehemently. My simple reasoning was/is: When an economy has an industrial base (like Germany in the 1920s), stimulating it may work (and extreme austerity may kill it). When an economy has become a zombie-economy (like Greece in the late 2000s), stimulating it before structural reforms are implemented may not work (and it will be killed even without austerity once the foreign funds flow stops).
Prof. Albrecht Ritschl is a German Economic History Professor at the London School of Economics who has made a name for himself by referring to facts of German economic history which most Germans would prefer to forget. I have once before written about his argument that "Germany was the biggest debt transgressor of the 20th century".
Mainstream German economists/historians accuse Prof. Ritschl for 'distorting historical facts'. Sadly, I have not seen any literature identifying those distortions and the only way to eliminate distortions is by presenting facts which prove the distortion.
In this 24-page paper, Prof. Ritschl describes the handling of Germany's sovereign debt during the 1920s and makes interesting comparisons with the EU's handling of Greece's sovereign debt since 2010. If you only want to read part of it, read Chapter III. German speakers may wish to prefer listening to this 10-minute interview.
Despite all the differences between Germany then and Greece now regarding industrial strength, etc., there are, indeed, some striking similarities. Prof. Ritschl argues that the major reason why the 1920s unfolded in Germany as they did (eventually leading to Nazism) was that the creditors had been too lenient on Germany. What? Too lenient? Wasn't it the overburdening of Germany with war reparations which caused all the trouble?
Prof. Ritschl points out that Germany's final reparation bill was presented in early 1921, and it was shockingly higher than what Germany had reason to expect. As long as Germany had xpected 'manageable reparations', very constructive policies were pursued during 1920 and a reasonable level of economic stability was reached. Once the reparations were no longer deemed 'manageable', Germany started playing tricks with its creditors. To use the professional expression: The willingness to pay declined dramatically.
The Dawes Plan of 1924 should have corrected this 'overburdening' but led to the exact opposite development (this is what Prof. Ritschl means by referring to 'leniency'). The Dawes Plan allowed/enabled Germany to borrow in order to service debt. How could a bankrupt country return to borrowing? The Dawes Plan had a feature which can be considered as 'noble intentions gone wild' or, in the words of Prof. Ritschl: "All kinds of well-intended but highly dangerous safeguards had been built into the Dawes Plan. These allowed Germany to fool her reparation creditors in a flagrant case of moral hazard". Trade debt was made senior to reparations and other long-term financial debt. Thus, the lenders had an incentive to lend (because of their senior rank) and Germany had an incentive to take up trade debt (imports) because the more trade debt it had, the less it would have to pay as reparations. A classic case of 'crowding out' reparations and other long-term financial debt. Prof. Ritschl: "Germany attracted huge amounts of foreign capital and actually experienced its own version of the Roaring ‘Twenties, and even reparations were being paid". All of this with money Germany borrowed! By the late twenties, US banks and even Central Banks became worried about the debt-financed consumption-based growth in Germany, and the rest is history.
Prof. Ritschl's arguments are summed up in this paraphraph:
"The propaganda made by Keynes against the Versailles Treaty turned out to be fatal in its consequences, as it opened the gates for a reparation policy that postponed the hour of reckoning into the future, making its consequences probably much more severe than they would have been in the 1920s. Without the Dawes Plan of 1924, the German slump of 1929-32 would have occurred already in the 1920s, probably in milder fashion. Our conclusions from this will necessarily have to remain speculative. However, with memories from the Ruhr occupation still fresh on either side, it seems less than likely that anything like the rise of Nazism to power could have occurred in the 1920s, or would indeed have been tolerated by the Allies. Germany’s trajectory would have been less volatile but also less violent, had not a well-meaning doctrine been applied to reparations that alleviated the problem for some time, only to create a self-made transfer problem later".
And where are the parallels with Greece?
* From 2010-11, the illusion was upheld that Greece had both the capacity as well as the willingness to repay 'every cent' of its debt. This relieved pressure on Greece to make reforms. Instead, one should have admitted that Greece could/would not pay all of its debt; that some of the debt would have to be forgiven at some point in the future and that Greece would have to 'earn' this forgiveness though the implementation of reforms.
* Since Greece had lost access to capital markets, it had to agree to new official loans for the purpose of repaying loans to private creditors, reinforcing moral hazard on the part of private creditors.
* Almost 90 BEUR of bank deposits were withdrawn by some Greeks and replaced with ECB-funding which is now the liablitity of all Greeks.
* A harsh (as opposed to 'lenient') treatment would have caused a near-sudden stop to Greece's current account deficit which accumulated roughly 50 BEUR the outbreak of the crisis. That would have been harsh but it would have saved Greece valuable resources and it would have accelerated import substitution and new eonomic activity.
The above is only a superficial commentary on Prof. Ritschl's paper. Those who are really interested should definitely read his entire paper.
Prof. Albrecht Ritschl is a German Economic History Professor at the London School of Economics who has made a name for himself by referring to facts of German economic history which most Germans would prefer to forget. I have once before written about his argument that "Germany was the biggest debt transgressor of the 20th century".
Mainstream German economists/historians accuse Prof. Ritschl for 'distorting historical facts'. Sadly, I have not seen any literature identifying those distortions and the only way to eliminate distortions is by presenting facts which prove the distortion.
In this 24-page paper, Prof. Ritschl describes the handling of Germany's sovereign debt during the 1920s and makes interesting comparisons with the EU's handling of Greece's sovereign debt since 2010. If you only want to read part of it, read Chapter III. German speakers may wish to prefer listening to this 10-minute interview.
Despite all the differences between Germany then and Greece now regarding industrial strength, etc., there are, indeed, some striking similarities. Prof. Ritschl argues that the major reason why the 1920s unfolded in Germany as they did (eventually leading to Nazism) was that the creditors had been too lenient on Germany. What? Too lenient? Wasn't it the overburdening of Germany with war reparations which caused all the trouble?
Prof. Ritschl points out that Germany's final reparation bill was presented in early 1921, and it was shockingly higher than what Germany had reason to expect. As long as Germany had xpected 'manageable reparations', very constructive policies were pursued during 1920 and a reasonable level of economic stability was reached. Once the reparations were no longer deemed 'manageable', Germany started playing tricks with its creditors. To use the professional expression: The willingness to pay declined dramatically.
The Dawes Plan of 1924 should have corrected this 'overburdening' but led to the exact opposite development (this is what Prof. Ritschl means by referring to 'leniency'). The Dawes Plan allowed/enabled Germany to borrow in order to service debt. How could a bankrupt country return to borrowing? The Dawes Plan had a feature which can be considered as 'noble intentions gone wild' or, in the words of Prof. Ritschl: "All kinds of well-intended but highly dangerous safeguards had been built into the Dawes Plan. These allowed Germany to fool her reparation creditors in a flagrant case of moral hazard". Trade debt was made senior to reparations and other long-term financial debt. Thus, the lenders had an incentive to lend (because of their senior rank) and Germany had an incentive to take up trade debt (imports) because the more trade debt it had, the less it would have to pay as reparations. A classic case of 'crowding out' reparations and other long-term financial debt. Prof. Ritschl: "Germany attracted huge amounts of foreign capital and actually experienced its own version of the Roaring ‘Twenties, and even reparations were being paid". All of this with money Germany borrowed! By the late twenties, US banks and even Central Banks became worried about the debt-financed consumption-based growth in Germany, and the rest is history.
Prof. Ritschl's arguments are summed up in this paraphraph:
"The propaganda made by Keynes against the Versailles Treaty turned out to be fatal in its consequences, as it opened the gates for a reparation policy that postponed the hour of reckoning into the future, making its consequences probably much more severe than they would have been in the 1920s. Without the Dawes Plan of 1924, the German slump of 1929-32 would have occurred already in the 1920s, probably in milder fashion. Our conclusions from this will necessarily have to remain speculative. However, with memories from the Ruhr occupation still fresh on either side, it seems less than likely that anything like the rise of Nazism to power could have occurred in the 1920s, or would indeed have been tolerated by the Allies. Germany’s trajectory would have been less volatile but also less violent, had not a well-meaning doctrine been applied to reparations that alleviated the problem for some time, only to create a self-made transfer problem later".
And where are the parallels with Greece?
* From 2010-11, the illusion was upheld that Greece had both the capacity as well as the willingness to repay 'every cent' of its debt. This relieved pressure on Greece to make reforms. Instead, one should have admitted that Greece could/would not pay all of its debt; that some of the debt would have to be forgiven at some point in the future and that Greece would have to 'earn' this forgiveness though the implementation of reforms.
* Since Greece had lost access to capital markets, it had to agree to new official loans for the purpose of repaying loans to private creditors, reinforcing moral hazard on the part of private creditors.
* Almost 90 BEUR of bank deposits were withdrawn by some Greeks and replaced with ECB-funding which is now the liablitity of all Greeks.
* A harsh (as opposed to 'lenient') treatment would have caused a near-sudden stop to Greece's current account deficit which accumulated roughly 50 BEUR the outbreak of the crisis. That would have been harsh but it would have saved Greece valuable resources and it would have accelerated import substitution and new eonomic activity.
The above is only a superficial commentary on Prof. Ritschl's paper. Those who are really interested should definitely read his entire paper.
There is one thing that makes any comparison with the Weimar republic blood curdling: the fact that, like Germany in the 20's, Greece is full of men with extensive military experience. In conditions like this things can go badly wrong, pretty fast.See Iraq as a modern example.So delicate political management is required.
ReplyDeleteAs to economic analysis about Weimar I agree with the basic position of Prof. Ritschl. Willingness to pay is paramount. Basically we have the Laffer curve:replace taxation revenue with reparations and we have the same analysis. However from then on I depart with most, if not all, economic analysis. In any system, whether our audio amplifier or an economy, powerful inputs(harsh treatments in the article)tend to force the system into unpredictable directions (political instability in countries,screeching or blow ups and fires in audio amplifiers) from which it may be impossible to return easily. It requires the power of divination to make reliable predictions for such matters. The last economist that could do such things reliably was Keynes. I have serious difficulty believing any other economist, although I think Prof. Ritschl analysis is better on the reparation subject.