The Greek Debt Problem and Selective Historical Memory

Michalis Nikiforos, Dimitri Papadimitriou, and Gennaro Zezza, who put together the Levy Institute’s stock-flow consistent macroeconomic model and simulations for Greece, have just released a new policy note, the upshot of which is that restructuring Greece’s unsustainable public debt is a necessary but not sufficient condition for a sustained economic recovery in that country. They also point to an interesting historical precedent that ought to inform the ongoing discussion of Greece’s debt and the conditions imposed by its official creditors.

The troika’s official story—about how Greece’s debt-to-GDP ratio will be brought down from its current 175 percent to 120 percent by 2022—is, as the authors put it, “wildly implausible.” The official forecasts depend upon large primary surpluses (in excess of 4 percent of GDP beginning in 2016) being accompanied by robust economic growth rates (based on, according to the official story, expanding net export surpluses and dazzling growth in private investment)—which is, the authors point out, virtually unprecedented.

But even if it were possible for Greece to pay down its public debt through continuing austerity, Nikiforos, Papadimitriou, and Zezza argue that this should be opposed on both moral (with respect to consequentialist considerations and principles of fairness) and prudential grounds. In this context, they quote Keynes’s dissent regarding the terms imposed on Germany by the Treaty of Versailles; a quotation which could just as effectively be deployed today in defense of Greece:

The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,—abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe. Some preach it in the name of Justice. In the great events of man’s history, in the unwinding of the complex fates of nations Justice is not so simple. And if it were, nations are not authorized, by religion or by natural morals, to visit on the children of their enemies the misdoings of parents or of rulers. (Economic Consequences of the Peace [1919])

In yet another twist, precedent for how the Greek debt situation ought to be handled can also be found in German history—in the aftermath of its next war. According to Nikiforos, Papadimitriou, and Zezza, Germany’s post-WW2 experience provides us with a template for a bold Greek debt restructuring and recovery plan. The authors calculate that Germany was the beneficiary of debt cancellation amounting to more than four times the country’s 1938 GDP (or West German GDP in 1950). And these calculations don’t include foregone war reparations or foregone interest payments:

around DM3 billion in annual income transfers to foreign countries was avoided. This is a very significant amount given that West German exports totaled no more than DM8 billion in 1950. For Germany to find DM3 billion without a contraction of its GDP and imports would have required a 40 percent increase in exports.

We are often told how the trauma of Weimar hyperinflation shapes the German approach to policy to this very day (here’s a NYTimes headline from 2011: “Haunted by ’20s Hyperinflation, Germans Balk at Euro Aid”). In the context of the renegotiation of the terms of Greece’s bailout, Germany’s post-WW2 experience, in which it was the beneficiary of “the largest debt restructuring deal in history,” seems not to have left so indelible a mark on its national memory (at least as measured by the stance of current leadership toward the Greek plight).

As pointed out by Nikiforos, Papadimitriou, and Zezza, the debt cancellation and subsequent extensive reconstruction efforts orchestrated for Germany and other European economies played a significant role in shaping German economic history: “the postwar German economic miracle and the robust development of the rest of the European economies was not the result of abstract market forces. Instead, they were based on very specific and detailed planning.”

Selective amnesia aside, the key lesson to be drawn from the historical experience is that restructuring Greece’s public debt is only the very first step in what would be required to put the country back on its feet. The restructuring needs to be accompanied by a comprehensive policy program designed around fixing the eurozone’s structural defects and rebuilding a Greek economy that has suffered damage comparable to that inflicted by a protracted war.