Germany Never Paid; Why Should the Greeks?

Thomas Piketty became a very famous economist with his book, Capital. You can imagine how popular that book was by the fact he even gave a TED talk on it.

Recently he gave an interview on the German led demand that the Greeks must pay their debts. What’s wrong about that, I wondered. Piketty’s answer:

“Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War. However, it has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them…The history of public debt is full of irony. It rarely follows our ideas of order and justice.”

Wait a minute: aren’t we taught that the punitive Treaty of Versailles on Germany was one of the root causes of the Second World War? Piketty points out that the Germans just stopped paying after a point! And after the Second World War ended, 60% of German debt was cancelled by the London Debt Agreement of 1953, says Piketty.

But I feel Piketty misses one of the big reasons after Second World War: the fear of communism caused the US to pump enormous amounts of money into Europe (including West Germany) and Japan. Unfortunately for the Greeks, they are not in the frontline of any such war or threat.

Also, as we learnt during the 2008 financial crisis, some entities are “too big to fail”. Greece is not one of them: it’s just 2% of the Eurozone economy. J Paul Getty famously said:

“If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem.”

Greece owes the Eurozone the equivalent of $100, not $100 million.

Further, Europe cannot risk setting a dangerous precedent by wiping Greece’s slate clean. If they did, tomorrow Italy, Portugal, Spain and Ireland would demand the same. And as Anil Kashyap wrote:

“The money needed to save Greece could easily be found…(but) the money needed to forgive debt in the other countries, especially Italy and Spain, is not affordable for Germany (and all the other Northern European countries that would have to foot the bill).”

In his book, Adapt, Tim Harford talks about the need to try out new things on a scale where failure is survivable. Europe (and the world) can check out how the global markets and economy react to the Greek vote of No. If they got it wrong, failure would definitely be survivable: Greece cannot take the world down with it.