How to get repaid

Greece has to agree with its creditors a long-term repayment schedule. However, the benefits of the loans have long since been invested and consumed. Only some remain, in better infrastructure, for example, such as the Athens metro. But for the majority of Greeks now suffering under the weight of these loans, it must feel more like transfer payments, payments by governments to other countries for which you receive nothing.

Success of reparation payments, or not

Here is a quick outline of the story of German reparation payments, a previous set of transfer payments, all known to us, following its defeat to the victorious Allied Powers in WWI (1914-1918)

1919 Treaty of Versaille, imposing principle of reparations on Germany
1921 London Payment Schedule sets out reparation
1923 Occupation of industrial Ruhr area by French Troops as Germans did not pay up
1923 Hyperinflation – New currency in Germany
1924 Dawes Plan
1929 Young Plan
1933 Hitler comes to power

Altogether a disaster from start to finish, a right shambles, continued restructuring with ultimately a very nasty outcome. Although, it has to be said, financially there was some success, despite lowering previously agreed payments continually during restructuring: Germany paid in total approximately 25% of one year’s GDP in reparation payments. In 13 years, with much huffing and puffing.

Surely that could have been expected from the beginning? Keynes warned us at the time. But what was the previous experience with reparations?

Indeed, there was another country which paid reparation payments of 23% of its annual GDP. France paid the French Indemnity, following its defeat in the Franco-Prussian war (1870-1871). These payments were received in two years, two years EARLIER than they needed to be paid. The timeline here is short:

1871 Treaty of Versailles (Franco-Prussian War)
1873 Last payment of reparations received

What was the effect on France? Surely disastrous, as they paid in two years what Germany paid over 13 some fifty years later. Here Michael Pettis from his excellent blog post about the situation

One might at first think that France’s indemnity, at nearly 23% of GDP over three years, might have been devastating to the economy. It certainly left France with a heavy debt burden, but its immediate economic impact was not nearly as bad as might have been expected. Wikipedia’s assessment is pretty close to the consensus among historians:

It was generally assumed at the time that the indemnity would cripple France for thirty or fifty years. However the Third Republic that emerged after the war embarked on an ambitious programme of reforms, introduced banks, built schools (reducing illiteracy), improved roads, spreading railways into rural areas, encouraged industry and promoted French national identity rather than regional identities. France also reformed the army, adopting conscription.

How to extract money from another country, successfully

The political context of the payments from one country to the next, in this case reparation payments, will have a substantial influence on their ability to meet the goals for which they were set. Swift negotiations and financings agreements lead to success, drawn out discussions and negotiations to failure.

After WW1, Germans felt humiliated, the same as the French did some 50 years earlier. Hence the French got the Germans to sign the Versaille treaty at the same spot where Bismarck had accepted a French surrender earlier. So why was it different?

French reparations to Germany were successful at the end of the 19th century, because the French had other things to get on with, an infrastructure building programme, reforms to start one of its many republics (this one was the 3rd after the abdication of Napoleon III). There was an initial uproar, but quick financing of loan bonds (one-third of the money came from Germany – the Rothschilds opened their French bank in those days, following their success in Frankfurt) allowed France to raise the money quickly, and pay it over to Germany. Only then did German troops leave France, leaving Germany in turn with the problem of how to invest that flood of money wisely.

In contrast, in Germany’s case in the early 1920s, the reparations they had to shoulder became the bug-bear for the nation on which all ills could be hung, a constant reminder of the humiliation of Versailles. Protracted negotiations and continous restructuring reminded everyone of that failure.

Clearly there were also different macroeconomic circumstances during each period, but the reparations in Germany were never accepted as legitimate and fought at every level. In France they were more easily forgotten.

The current situation in Greece, of course, is similar to Germany in the 1920s. The problem then, as now, were the little niggly issues which hampered the development of good-will during continued negotiations. Then it was the number of wooden telegraph poles Germans were expected to deliver as part of the reparation deals. Currently it is the issue of Greek pensions, micro managed at every level, from the IMF chief economist’s blog to the comments sections of German tabloids. All with the implied connotations, are the Germans (then) or Greeks (now) cheating to get out of their obligations?

What is the lesson which all negotiators should draw from the above?

  • Clearly, the repayments have to be agreed as acceptable by debtor and creditor alike.
  • The speed with which a sustainable repayment schedule is reached is important. Out of sight, out of mind.
  • Loans should amortise slowly like a mortgage, or have long maturity dates, and not subject to constant refinancing, over a multitude of countries and institutions.
  • Then, once an agreement is reached it is worthwhile to get on with some other task, like building railways, or investing in education, as the French did in the 1870s. In other words, have some economic growth.

Troika: designed to fail

The Troika, often bickering amongst itself, has obviously failed to reach any of these minimum conditions in Greece. Now it is too late, of course.

But in any case, this is an IMF led programme. Troika policies demand ever-increasing austerity. A tightening of thumb-screws. Even if, having succeeded in its deflationary policy to bring things into equilibrium, it is NOW not necessary any longer. The Greek budget is balanced, more or less, so is the current account and unit labour cost are back to year 2000 level. Greece is competitive again, it needs some investment. It needs to do something for its unemployed. The callous disregard of the plight of the unemployed in Greece has undermined the legitimacy of the EU institutions. The Troika’s imposition on rules – the putting of pressure on Greece to deflate and repay is not the Europe which people thought they sign up for.

The Troika’s constant meddling in the situation, setting up Greece at each stage for new uncertainty is poisonous. Dictating, like some Roman pro-consul, tax rates in this and that, in a nose-diving economy due to the Troika-prescribed austerity measures, is disastrous. What do they know? Why follow them? The Troika’s estimated growth measures have always been missed. By a massive margin. Why follow their prescription? In fact, the Troika programme would only make sense if one wanted to devalue the assets of Greece on purpose, to make them more attractive to outside investors.

Of course, that is the IMF adjustment program, and that might well be the intent. But even the efficiencies which can be garnered from deflation and any supply side measure agreed and implemented are quickly destroyed by the continuous circus which has accompanied these adjustments. Add the minor inconvenience of having to do this in a democracy, which is bound to throw up a government against these measures, and the legitimacy of the Troika to do anything has now come to an end.

Who would invest in Greece condemned to deflation by Troika?

As far as the Greek economy is concerned, it needs investment. Stability and prospects for growth are the minimum which each investor expects in any country. Unless that can be delivered, and a five-year Troika track record says it cannot, Greece should loosen its ties and find a way to guarantee that stability. It is time to leave the circus, because it will not stop. And is has no chance to grow or repay the debt.

Thanks to the internet one can now  follow the main protagonists in this drama. Not the digested news which the media presents to you. The press conferences are streamed. Negotiation documents can be downloaded. There is always one side that strikes me as reasonable, the other obsessed with bureaucratic rules and an interest in the financial sector above all else. First it was save Deutsche Bank, who cares about tripling unemployment in Greece. But now, even worse, it is save the German pensioner, who cares about the Greek pensioner. This surely is not a Europe which we want.

Time to leave the Troika behind

The Troika programme, equivalent to the failed German reparation saga, should make way for Greece to emulate the relative “French indemnity success” in paying its creditors. Investing in its own country, in peace and quiet, generating employment and growth. Without any Schaeubles or Lagardes heckling at the sidelines. If Greece can only do that through a unilateral moratorium, so be it.

What that moratorium should look like, and how it could put Greece’s creditors on the spot, I have outlined in previously posts here.

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