Lesson in forgiveness for heavily indebted world 100 years after WW1

World leaders, including US President Donald Trump and Russian President Vladimir Putin, gathered in Paris yesterday to commemorate the armistice of November 11, 1918. The centenary is a natural occasion to reflect upon abiding lessons from the tragic and seemingly pointless carnage of the “Great War.” The central question is why the peace that followed proved to be no more than a fragile and unstable intermission between two global conflicts.

In the run-up to the ceremony in Paris, French President Emmanuel Macron made a journey along the former front in northern France culminating in a meeting with German Chancellor Angela Merkel at Compiègne, where a previous German representative signed the armistice in a railway carriage. Macron is already highlighting the relevance of the troubled years between the wars to contemporary Europe. He finds disturbing parallels in the resurgence of nationalist tensions. And in keeping with his pro-European stance, he insists on the crucial role of the European Union (EU) in combating what he calls the “leprosy” of nationalism.

But an alternative lesson points to the importance of the US, rather than the EU. What went wrong in the interwar period was that America disengaged from Europe after its crucial intervention on the side of the allies in 1917 under President Woodrow Wilson. In particular, the Senate voted against ratifying the peace settlement of the Treaty of Versailles and joining the League of Nations, the forerunner to the United Nations, that Wilson had himself urged. After WW2, by contrast, the US underwrote the rebuilding and defence of western Europe and backed the process of integration that has culminated in the EU. From this perspective, there is further cause for alarm given Trump’s lack of respect for the rules-based international order that Washington itself fostered over the past 70 years.

There is also a third lesson that is relevant to today’s highly indebted world: The importance of debt forgiveness between nations. World War One was fought in not just the trenches, but also the treasuries of Europe. Indeed, the ability to mobilise economic and financial resources became the deciding factor as hopes for an early end to the hostilities swiftly faded and the war became one of attrition. All the countries piled up debts at home to finance their military effort, but France and Britain were also able to borrow from the US to supplement their resources of food, raw materials and munitions. Germany, by contrast, was cut off from such support.

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On Armistice Day the military hostilities ended, but the financial conflict continued in a bitter battle over debt. Ominously, the terms of the armistice included a demand for German reparations, a clause inserted at the behest of the French leader, Georges Clemenceau. That insistence on economic and financial redress in the Treaty of Versailles of 1919 was a grievous mistake. Attempts to enforce the eventual heavy bill (of 132 billion gold marks, or over $30 billion at the pre-war parity) – in effect imposing a huge war debt on Germany – undermined Germany, making it vulnerable to the rise of Hitler.

The largely fruitless quest for reparations became entangled in the skein of inter-allied wartime debts, illustrating the importance of debt forgiveness between friends as well as foes. Britain, which had itself lent altogether about as much as America, was prepared to forgo its claims if the US also did. But America insisted on repayment of its loans in full. This meant that France could only honour its debts to Britain and the US if it received German reparations. The messy business dragged on until the economic crisis of the early 1930s, when reparations were abandoned and the repayments to America ceased.

Lasting peace

The contrast in the treatment of debt after WW2 was telling and helps to explain the lasting peace that followed. America offered aid rather than loans through the Marshall Plan that pump-primed western Europe’s post-war recovery. And West Germany got a sweeping write-down in its international debts in 1953.

The failure of reparations and the impasse over the allies’ intertwined debts during the interwar period sprang from the same source, which still holds true today. Any such payments depend ultimately on countries’ willingness to pay, rather than their capacity to pay. That readiness to comply will be lacking if obligations appear to be unfairly onerous. As much as anything, it was a failure to grasp the need for debt forgiveness that poisoned the peace after WW1.

This lesson is pertinent today for the euro area after the monetary union so nearly came apart during the 2010-12 financial crisis. Following its exit from eight years of bailouts in August, Greece must run primary (before interest payments) budget surpluses stretching out 40 years in order to repay the huge euro zone loans.

If European leaders want to show they have truly learned a crucial lesson of WW1, they should forgive a big chunk of Greek debt.

Mr Wallace, a London-based writer, is a former European economics editor of The Economist

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