In Germany, unfortunately, the historical lessons are not even discussed. We’re asking debtor countries to repay their debt, but at the same time we are preventing them being able to do so says Heiner Flassbeck.

June 2013

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LYNN FRIES, TRNN PRODUCER: Welcome to The Real News. I’m Lynn Fries, in Geneva.

 In this report we’re continuing our look into the creditor-debtor relationship, what has or has not been learned from history, specifically, German history and the German experience as both a debtor and a creditor nation. In part one of our series, we discussed Germany the debtor nation and the huge debt imposed on Germany after World War I, and then the German debt resolution agreed in the 1953 London Debt Accord. In this final segment, we look at Germany the creditor nation and how debtor countries in Europe today are being treated by their creditors, including Germany.

The Real News invited German economist Heiner Flassbeck to talk to us about all this. Dr. Flassbeck is director of Flassbeck Economics. He’s honorary professor at the University of Hamburg and co-authored Act Now! recently published in Germany. In prior experience, he was chief economist at the United Nations Conference on Trade and Development and vice minister at the German Federal Ministry of Finance. Heiner joined us in Geneva.

HEINER FLASSBECK, DIRECTOR, FLASSBECK ECONOMICS: Thank you for having me.

FRIES: In 2010, around 92 years after the country’s defeat by the Allies, Germany made its final reparations-related payment for World War I.

The German External Debt Agreement signed in London in 1953, London Debt Accord, was more than just debt cancellation. Creditor concessions in the agreement included provisions for consultation, for hardship, for payment limits, for reserve and sinking funds. This boils down to the fact that Germany only had to pay what she was able to pay. Not only was Germany’s existing stock of debt dramatically reduced, the agreement turned the tide so new flows of debt would not pile up on Germany’s shoulders if she ran into difficulties in future payments. The terms of Germany’s ability to pay had been defended by the German chief negotiator in no uncertain terms. That the German position was understood and provided for by its creditors is evidenced in statements made in the U.S. 83rd Congress in 1953 by then president Eisenhower and in the report of his Secretary of State, John Foster Dulles.

Today in Europe, debtor nations’ inability to pay their external debt out of genuine earnings gets little to no creditor consideration. When unable to meet payments, the solution prescribed by creditors is for debtor nations to cut costs, to sell assets, or to take out new loans as their path to improved competiveness. No provision is made for the hardship this imposes on every man, woman, and child in those debtor nations. No concession is made to limit payments rather than force the debtor country into new loans to prevent payment default.

FLASSBECK: Well, one of the important points that we’ve been talking about that is not really understood: debt cancellation at a certain point of time, at a certain point of time, is extremely important for the solution of the problem. What has been done now is so to say premature debt cancellation in the Greek case. That was not very reasonable because it was not combined with a proactive and pro-growth program.

FRIES: While beyond the scope of this report, in Heiner Flassbeck’s new book, Act Now! co-author Paul Davidson explains that applying the same economic austerity approach used for a household debtor to a government debtor has profoundly different implications. Cutting government spending causes a fall in the nation’s income. That in turns causes a fall in government income. When government income goes down, like a seesaw its deficit goes up. That’s why the only sustainable solution to help a debtor nation get its house in order is by helping them increase their national income.

That’s why, as a recovery plan for debtor nations and the world economy as a whole, Paul Davidson points to Keynes’ plan. Had the accord reached by creditor concessions in the 1953 London Debt Agreement taken place nine years earlier in 1944 at Bretton Woods, arguably Keynes’ plan would have gone a long way to correcting the mistakes of Versailles for the entire world economy, not just Germany. With no such mechanism in place, as noted in part one of our series, and no political will for voluntary adjustment on the part of persistent creditors, destabilizing trade imbalances can build up over time between surplus and deficit nations such trade imbalances in Europe today – between Germany, the surplus nation and the European periphery, the deficit nations – are key to understanding the current European sovereign debt crisis.

FLASSBECK: Well, what we have at this moment of time is we have surplus countries, countries where exports are larger than imports, which means that these countries are creditors. They’re crediting the amount between exports and imports to the debtor countries, to the countries that have current account deficits. And current account deficit means to accumulate over time – if you have an ongoing current account deficit it means to accumulate over time – debt from other countries. And this involves the private sector as well as the public sector. And this has happened in Europe over the last ten years. Germany was the creditor country, the country with the surpluses, and the other European countries were the debtor countries, the countries with the deficit.

The channel through which this happened was wage dumping in Germany. It was improvement of competitiveness from the German side–unfair improvement of competitiveness one has to say. But the result is the classical, so to say, the classical debtor-creditor relation.

FRIES: In studies of the London Debt Accord, Jubilee Germany explain their view that quote:

The agreement laid the foundation for Germany’s export strength, as the country could only service its debts as long as it earned money through foreign trade.

the London Agreement makes a clear connection between debt management and trade policy. It recognizes the economic reality that in the long term a country can only release itself from and cancel its debt through a trade surplus. The London Agreement leaves us in no doubt that the achievement of such a surplus requires an effort on the part of both debtors and creditors. Creditors must make their contribution so that debtors are able to pay their debt service from a trade surplus in relation to those creditors. Creditors must accept those deficits as concessions consciously made.

FLASSBECK: In 1953, Germany got quite a bit of debt relief. So the mistakes after the first war were exactly not repeated after the Second World War because people had understood at that moment of time that to place such an additional burden on a country that is anyway on its knees doesn’t make much sense. And this is a very important lesson for Europe, because in Europe we’re doing exactly that. We’re asking debtor countries to repay their debt, but at the same time we are preventing them from doing it. Germany is preventing them from doing it because it is desperately defending its market shares in the international market, it’s defending its current account surplus. And as long as Germany has a current account surplus, the other countries cannot accumulate surpluses or cannot have surpluses and they cannot reduce their debt.

In Germany, unfortunately, the historical lessons are not even discussed. Nobody knows what happened, really, to Germany, what happened to the German reparations payments, that they were cancelled, that they were reduced dramatically to a bearable amount. All this is more or less unknown and is unfortunately not discussed in politics at this moment of time. And so we are not able to learn the lesson of the past and to apply the lessons that we should have learned to the European debt problem.

FRIES: And so we conclude this report. Our thanks to Heiner Flassbeck.

FLASSBECK: Thank you for having me.

FRIES: And thank you for joining us on TRNN.

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Dr. Heiner Flassbeck graduated in April 1976 in economics from Saarland University, Germany,concentrating on money and credit, business cycle theory and general philosophy of science; obtained a Ph.D. in Economics from the Free University, Berlin, Germany in July 1987. 2005 he was appointed honorary professor at the University of Hamburg.

Employment started at the German Council of Economic Experts, Wiesbaden between 1976 and 1980, followed by the Federal Ministry of Economics, Bonn until January 1986; chief macroeconomist in the German Institute for Economic Research (DIW) in Berlin between 1988 and 1998, and State Secretary (Vice Minister) from October 1998 to April 1999 at the Federal Ministry of Finance, Bonn, responsible for international affairs, the EU and IMF.

Worked at UNCTAD since 2000; from 2003 to December 2012 he was Director of the Division on Globalisation and Development Strategies. He was the principal author of the team preparing UNCTAD’s Trade and Development Report, with specialization in macroeconomics, exchange rate policies, and international finance. Since January 2013 he is Director of Flassbeck-Economics, a consultancy for global macroeconomic questions (www.flassbeck-economics.com). Co-authored ACT NOW! The Global Manifesto for Economic Policy published in 2013 in Germany.

Originally published at TRNN

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