Greece relives German’s post-war nightmare

The debt crisis confronting the European Union has some startling parallels in post-World War II history, but on that occasion Germany was the country in trouble

In this file picture from 1945, the wreckage of the Reichstag building is seen at the end of World War II (Two), in Berlin, Germany, with a destroyed German military vehicle in foreground. Picture: Ap

WORLD War II had been over for eight years when, in 1953, Europe faced a new crisis with Germany — but this crisis threatened to drag it into a financial abyss. Staring down the barrel of having to pay debts ­incurred before and during World War II, West Germany was on the verge of defaulting.

People feared the potential for the de-Nazified nation to tumble backwards toward the extremism of the 1930s, a result of the financial crisis of the ’20s brought on partly by punishing reparations from World War I. There was also the risk that western Europe’s fragile work of rebuilding its economies would be undone and that the communist east would exploit the situation to its advantage.

How the world ultimately dealt with the problem would have ­repercussions for Europe today and there are even some parallels and connections to the debt crisis gripping Greece at the moment.

In 1945 the Allies were determined to ensure the conditions that had brought the Nazis to power would never reoccur. After World War I Germany had been economically crippled, partly because of government war finance arrangements that largely involved printing more currency.

Potential inflation was curbed by imposing wartime price controls. After the war the new Weimar government exacerbated the problem by spending recklessly and failing to raise taxes to repay the internal war debt, much less the external debt in the form of war reparations imposed in the 1919 Treaty of Versailles. The reparations were imposed to force Germany to repay money the Allies had been compelled to borrow for the war effort.

In Germany, inflation spiralled out of control in 1923, but a temporary write down of internal debt stabilised the currency. In 1924 the Dawes Plan brought a return of the Germany currency to the gold standard and also brought American aid in the form of bonds.

But the Germans defaulted on repayments that fell due in 1928 and a blowout in German borrowing meant they were hit hard by the contraction of US credit after the 1929 Wall Street Crash. In 1929 the Young Plan once again bailed Germany out of its debt crisis.

Germany’s post-war chancellor Konrad Adenauer.

German anger over the fiscal ­irresponsibility of the Weimar government the reparations imposed by foreign powers helped bring the Nazis to power. In 1931 US president Herbert Hoover called for a moratorium on German reparations and in 1933 the outstanding reparations were cancelled, but Germany still had to repay Dawes and Young Plan bonds. When Adolf Hitler came to power in 1933 he cancelled the debt repayments and got on with the business of ­financing the war he planned to have. Debts continued to mount.

Hitler financed the war largely through loans, selling bonds and, during the war, by forcing conquered states to give Germany cheap loans and raw materials. He gambled on winning the war to settle his account but lost and committed Germany to more hardship and reparations. The nation was divided into communist East Germany and the democratic West.

The country was de-Nazified, the currency reformed in 1948 and to avoid the rise of another Hitler, West Germany was given money to rebuild its economy and its cities in the Marshall Plan in 1949. The plan specified that Germany would first have to pay back Marshall Plan loans before having to deal with other debts. With Marshall money and the UK and France’s 1950 cessation of the dismantling of German heavy industry (meant to prevent rearmament), the economy began to steadily grow with the country becoming a major exporter.

While all the signs were that the economy was powering along, at the end of 1952 unemployment began to rise. Worried about the fragility of the economic gains, and faced with the prospect of having to repay debts and reparations, Chancellor Konrad Adenauer warned of the potential for another default.

In 1953 representatives of 20 ­nations, including Greece, gathered in London to discuss a way of averting a crisis. The resulting deal wrote off half of Germany’s debt and extended the period of repayment by 30 years, with some portion only to be repaid after reunification.

The reprieve allowed Germany to bloom economically and after reunification in 1990 more debts fell due. On October 3, 2010, Germany finally repaid its WWI debts and considers WWII reparations to have been dealt with.

BAD BLOOD

DURING the war Germany forcibly extracted a loan of 476 million Reichsmarks at zero interest from occupied Greece. After the war the Greeks sought repayment of the loan along with reparations. In 1960 Greece accepted a payment of 115 million marks as war crimes compensation but still continues to pursue Germany for repayment of the war loans. Germany argues that the 1953 London Agreement on German External Debts wrote off the loans as war damage.

Originally published as Greece relives German’s post-war nightmare