A debt to history?

16/1/2015

By GillianTett

To some, Germany faces a moral duty to help Greece, given the aid that it has previously enjoyed

As the crucial election looms in Greece later this month, newspapers have been full of pictures of demonstrations (or riots) in Athens. But there is another image hovering in my mind: an elegant dining hall on the shores of Lake Lucerne in Switzerland.

Last summer I found myself in that spot for a conference, having dinner with a collection of central bank governors. It was a gracious, majestic affair, peppered with high-minded conversation. And as coffee was served, in bone-china crockery (of course), Benjamin Friedman, the esteemed economic historian, stood up to give an after-dinner address.

The mandarins settled comfortably into their chairs, expecting a soothing intellectual discourse on esoteric monetary policy. But Friedman lobbed a grenade.

“We meet at an unsettled time in the economic and political trajectory of many parts of the world, Europe certainly included,” he began in a strikingly flat monotone (I quote from the version of his speech that is now posted online, since I wasn’t allowed to take notes then.) Carefully, he explained that he intended to read his speech from a script, verbatim, to ensure that he got every single word correct. Uneasily, the audience sat up.

For a couple of minutes Friedman then offered a brief review of western financial history, highlighting the unprecedented nature of Europe’s single currency experiment, and offering a description of sovereign and local government defaults in the 20th century. Then, with an edge to his voice, Friedman pointed out that one of the great beneficiaries of debt forgiveness throughout the last century was Germany: on multiple occasions (1924, 1929, 1932 and 1953), the western allies had restructured German debt.

So why couldn’t Germany do the same for others? “There is ample precedent within Europe for both debt relief and debt restructuring . . . There is no economic ground for Germany to be the only European country in modern times to be granted official debt relief on a massive scale and certainly no moral ground either.

“The supposed ability of today’s most heavily indebted European countries to reduce their obligations over time, even in relation to the scale of their economies, is likely yet another fiction,” he continued, warning of political unrest if this situation continued.

There was a frozen silence. Indeed, the room was so stunned that when the conference organisers asked for questions, barely anyone moved. Friedman did not name Greece in particular. But everyone knew what he meant. And while central bankers are normally a genteel, collegiate breed who go to great lengths to avoid causing any offence to each other, Friedman had exposed a deep divide.

To many of the Germans and representatives of other northern European nations present that night, it seemed outrageous — if not immoral — for anyone to suggest that Greece’s debts be written off. After all, they muttered over their coffee, Athens was mired in years of corruption and bureaucratic incompetence, if not fraud. “How can you forgive debt when a country has a retirement age of 50?” one official observed.

Officials from Europe’s periphery nations were even more indignant. To them, Germany faced a moral duty to help places such as Greece, given the aid that it had previously enjoyed (and which Friedman so obligingly listed). In any case, with a debt to GDP ratio reaching 175 per cent, it seemed impossible to see how the country could ever pay off its debts — even if it tried.
. . .

Either way, what became clear that night was that the question of how to handle Greece is a deeply emotional issue, not just a matter of economics — even (or especially) among central bankers. In one sense, that is no surprise.

As David Graeber noted in his seminal book Debt: The First 5,000 Years, credit is a social and political construct. And whenever societies have operated in the past with few constraints on how much credit they can create, this has invariably caused debt to spiral until it either triggered social implosions or the society has used rituals to forgive that debt. In the past, there have been many such safety valves, be it the debt jubilees used in biblical Israel or the practice of “wiping the slate clean” (that recorded debts) in ancient Mesopotamia.

The problem in Europe today, however, is that it is unclear who has the power to wipe the slate clean. For while the western allies had enough control of Germany to restructure its debt after the second world war, power is diffused today in a more muddled and muddied way. Meanwhile, the idea of forgiving debt has acquired so many moral overtones that Americans struggle to accept mortgage write-offs, as the economists Atif Mian and Amir Sufi note in their recent book House of Debt. And in Europe, Friedman thinks that the mood is so punitive that it is akin to the 19th-century “retributive philosophy” that created debtors prisons. Default is deemed immoral.

But the longer that Greece writhes under that debt burden, the more that passions get inflamed — on all sides. Even inside the sombre halls of central banks. Perhaps it is time for someone to distribute Graeber’s book more widely among Europe’s central bankers. Luckily, it is now available in both German — and Greek.

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