11:52 AM EST FEB 9, 2015 By Alen Mattich
Greek Prime Minister Alexis Tsipras on Sunday threatened to open up a whole new can of worms in Europe, arguing that Germany should repay Greece for debts it incurred as an occupying force during the Second World War. “Our historical obligation is to claim the occupation loan and reparations,” he said in a speech to the Greek parliament as he vowed to wipe away austerity imposed by creditors and seek a new deal on debt. For various legal and pragmatic reasons, reparations are highly unlikley to happen. And Germany might well have already paid those reparations—even if its citizens don’t quite realize it yet. Confused? Here’s the short answer.
How do you calculate reparations for something as catastrophic as WWII?
Were Germany to pay reparations for the whole of the destruction it caused during the war–the Nazis were estimated to have been responsible for the deaths of some 35 million people–it would be bankrupted many times over. Instead, what Greece is primarily looking for is restitution of credit Greeks were forced to give Germans during the war. Essentially this is payment for Greek goods that were “bought” with credit issued by the German central bank. Although the Syriza government has argued Germany owes Greece more than €150 billion ($169.5 billion), the actual figure is probably less than a tenth that–in the order of €11 billion to €13 billion based on guesstimates using GDP calculations–argues Albrecht Ritschl, an economic historian at the London School of Economics.
Would it be enough to make a dent in Greece's debt load?
It might sound a lot, but it’s marginal in the context of Greek national debt which exceeds €300 billion. The real worry is if Germany paid Greece and then Europe’s more industrialized occupied countries like France demanded Germany paid them too. Those debts would come to more than €2 trillion, some 70% to 80% of German GDP. Enough “to make Europe’s debt crisis disappear,” Mr. Ritschl argued, but also a big burden to the German economy.
Does Greece have a legal leg to stand on?
Probably not. The terms of the Marshall Plan, the U.S. government-led rescue of war torn Europe, put off any consideration of reparations or past debts. Then in 1990, the treaty under which Germany was reunified following the collapse of the Soviet bloc, carefully failed to include any mention of WWII debt or reparations, in effect taking it off the legal agenda forever as far as Germany’s legal establishment is concerned.
Does Greece have a moral leg to stand on?
Yup. Even setting aside the moral issues surrounding the war, why shouldn’t Greece benefit from a similar sort of debt restructuring and forgiveness that became a platform for Germany’s post-war economic miracle? The Syriza government rightly points to the fact that Germany defaulted on its WWI debts in the 1930s, which were then largely written off by the London accord of 1953 or rescheduled to very long term.
Some argue that this was a trivial matter, the debt was worth only a few percentage points of GDP compared to the Greece’s demands that half or so of its debt, worth 175% of GDP, be lifted. But Mr Ritschl argues that the London Accord negotiators did everything they could to minimize the value of Germany’s outstanding obligations.
It wouldn’t have looked good to those who’d suffered German aggression to see how much was being forgiven. His back-of-the-envelope calculation is that, in all, Germany was let off some 280% of West Germany’s GDP of the time. By lifting Germany’s debt burden, the U.S. in effect ensured economic cooperation across Europe. If Germany could benefit from debt forgiveness, why not Greece?
Is there a better way?
A large number of economists and policymakers accept Greece won’t ever repay all that it borrowed. Enforced repayment would just entrench sub-par growth and mass migration in an economy already struggling to shake off a six-year Great Depression that left a quarter of the working-age population unemployed.
Although the Syriza government is agitating for an immediate restructuring and forgiveness of Greek debts, the politically more palatable outcome outside of Greece would be for more extend and pretend–Greek debts could be stretched out and the repayment terms eased gradually and quietly until where they fade as thoroughly as Germany’s debts from the war.
In a nutshell, Greeks complain that Germans took goods from them during the war in exchange for credit that was never paid back. Which—with the protagonists reversed—is similar to what the Germans complain about now. During the boom times after the introduction of the euro, Greeks bought German high end cars and household goods and paid for it with IOUs. And now they can’t pay.
The result is a wash. Essentially, Greeks have already taken their reparations from Germans, Mr Ritschl argued. Of course, these numbers won’t match perfectly, but it depends on who’s doing the calculations.
If Greece isn't ever going to pay, why not just wipe out the debt now?
The problem with recognizing the inevitable and cutting Greece’s debt principle in one fell swoop is that “this would have balance sheet effects on banks,” Mr Ritschl said. In effect it would cause a banking crisis not only in Greece but in creditor countries like Germany. Discretely ignoring its WWII debts worked for Germany for decades. Greece would benefit from the same now.
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