Lesson in forgiveness for heavily indebted world 100 years after WW1
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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.SEE ALSO :How the Standard covered the First World War
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
