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Germany’s Unpaid Debt to Greece: Economist Albrecht Ritschl on WWII Reparations That Never Were

Albrecht Ritschl, professor of economic history, discusses Germany’s unpaid war debts and reparations to Greece from World War II.

Albrecht Ritschl, professor of economic history at the London School of Economics. (Screen grab via Proud2bGreek1 / YouTube)

In this interview, Albrecht Ritschl, professor of economic history at the London School of Economics, discusses Germany’s unpaid war debts and reparations to Greece from World War II, and characterizes Germany as the biggest debt transgressor of the 20th century.

Michael Nevradakis: Many people are not aware of the occupation loan that the Nazi regime forced Greece to give during World War II. Tell us a brief history about this issue.

Albrecht Ritschl: The very basics of this are that Germany exacted a forced loan from the Bank of Greece during the occupation, and that forced loan was not paid back, and there was probably no intention to. What we had here was an attempt to disguise, to camouflage, so to speak, occupation costs as a forced loan – and this loan had several bad aspects. It fueled hyperinflation in Greece, which was already on the way due to the Italian occupation, and most importantly, it drained Greece of vital resources. It led to a catastrophic decline in economic activity; it probably did nothing to make the German occupation in any way less unpopular than it had been before. It stiffened the resolve of the Greek resistance; it did all sorts of very tragic and bad things.

Did the Nazis also extract forced loans from other countries that they occupied?

Yes, this was a very common and widely used instrument. Just to explain a little bit what was going on, the Nazis implemented a fixed-exchanged currency system in the occupied countries, manipulating the exchange rates to the reichsmark, to the German currency at the time, more or less at will. That system was centralized at Germany’s central bank, the Reichsbank in Berlin, through a system of short-term accounts, like overdraft accounts, and Germany went into overdraft with respect to the occupied countries – that created the illusion of payments.

When German officers went into French, Belgian and Dutch factories – those were the three countries where Germany got most of its resources out, and requisitioned machinery and raw materials – they would pay, and these payments would essentially be credited to the account of their respective national banks at the Reichsbank. The forced loan from Greece followed a very similar pattern. Now as I have already said, the vast bulk of these loans were essentially from Western Europe. Greece, due to the small size of its economy, was only a very small part of this. Nevertheless, the effects on the Greek economy were devastating.

What happened after the end of World War II as far as the forced loans from Greece and the other countries are concerned – and the reparations and the repayments of German war debts in general?

You will be surprised to hear that nothing happened, and the reason is the following: After the Allied invasion and the collapse of the Nazi regime, the first thing the occupation authorities did was to block all kinds of claims by and against the German government, under the legal fiction that that the German government and the German state didn’t exist anymore. And the question was then what to do with it as soon as new state structures were created in the late 1940s. That was highly controversial, because many of the governments in Western Europe were saying, “We are all too happy to restart trade and some sort of economic relationships with occupied Germany, and by the way, we still have these unsettled clearing accounts with the Germans . . . how about the Germans just deliver goods to us in order to run down the deficits on these accounts?”

“The situation during the Marshall Plan period was that all these debts still existed on paper, but they were worthless in the sense that the debt was blocked.”

That became a major policy concern with the occupying powers, especially with the Americans, as the Americans were quite worried that in the end, the occupied zones of Germany would bleed out economically through such a system of repayment of the war loans and that America would essentially then have to restock or refuel Germany. Why they were so worried about this has to do with the history of reparations after World War I, when something similar was put in place after the end of the German hyperinflation. There was an American scheme for the stabilization of the German economy called the Dawes plan, which essentially did the following: Germany would pay reparations to the Western allies and America would provide financial assistance to Germany. That scheme between 1924 and 1929 kind of went out of hand and led to, basically, America bankrolling Germany’s reparations.

So the Americans, after World War II, were extremely worried about a repetition of this thing, so what they did was to block all these things. How did they block it? Through an ingenious and slightly malicious device: Whichever country wanted to receive Marshall aid from the Americans under the Marshall Plan had to sign a waiver waiving all kinds of financial claims against Germany from World War II against Marshall aid. This means that it would not be entirely blocked, but it would have to [be] put on hold until postwar Germany had paid off its Marshall aid from the United States. In technical terms what that did was to make reparation and credit claims against Germany from World War II junior, second rank, lower in rank to Marshall assistance to Germany. And since everybody wanted to get Marshall aid from America, everybody grudgingly signed these waivers. So the situation during the Marshall Plan period was that all these debts still existed on paper, but they were worthless in the sense that the debt was blocked.

What is the total amount of war debt that Germany is said to owe Greece and the other countries as well?

The debt to Greece was to the tune of a little bit less than 500 million reichsmarks; total debt to Western Europe on clearing accounts was about 30 billion reichsmarks. Now this doesn’t sound like a lot, but it becomes a little bit more meaningful if I tell you that the grand total is about a third of Germany’s gross national product in 1938, the last year before Germany started World War II. Now, that is not the only debt, because Germany manipulated the value of the debt through the exchange rate system that it had under its total control.

There are calculations done by German government officials toward the end of World War II, so still under Nazi rule, where they were trying to figure out what is the realistic value of all this debt that was incurred in occupied Europe, and they arrived at a figure that was closer to 85 or 90 billion. That gets very close to Germany’s national product of 1938; let’s say about 85 to 90 percent. Now we are talking really big sums. Just to give you an idea: Germany’s national product last year was somewhere above 2 trillion euros, so let’s take 90 percent of that. We are still above 2 trillion euros, just to give you an idea of what that debt back then was relative to Germany’s economic potential.

Is there any way to quantify that debt and its value today if we adjusted for inflation and the changes in value over the past several decades?

There are several ways of doing it. What I just did is one way of doing it, and here we would say the grand total of that debt, if we take German GDP as the yardstick and don’t try deflating it, the total value of the debt measured as a percentage of Germany’s GDP in one given year, would today be over 2 trillion euros.

What has Germany’s argument been, historically and also in the present day, regarding the issue of the war debts and reparations?

There was an important interim step, which was the London Agreement on German Debt. In the early 1950s, negotiations were started between West Germany and the creditor countries about what to do with all of this. A solution was found – basically imposed again by the Americans and to some extent by the British – that did two things. First, it lumped together the war debts with the reparations – which is not an innocuous step to take. Second, it used slightly fuzzy language, which is open to interpretations, which said that settlement of these issues would be postponed until after future German reunification. Why are these two things important?

The first thing is, if you lump together this war debt with German reparations, you basically create one big pot. And there is no doubt that Germany paid very substantial reparations in kind after World War II, basically through two elements. One was forced deliveries – that was especially important for what later became East Germany – and second through a cutting of the territories, which are now a part of Poland and to a small extent, Russia, which could all be termed reparations in kind. So if you lump together these war debts with reparations in time, then the balance is a little bit lower, because these reparations in kind were no doubt quite substantial. The other thing is this fuzzy language postponing settlement of these things until after German reunification, because then the big question then became whether this clause, article 5 of the London agreement, would become binding after the German reunification, which did indeed take place in 1990.

At the present time, we hear a lot in the press and the media about the German economic success story, about German fiscal responsibility, as compared to the supposed irresponsibility of the Southern European countries, such as Greece. But you have argued that Germany was the biggest debt transgressor of the 20th century. Why do you believe this is the case?

Well, we can just do the numbers, and I already talked about these war debts being almost equal to Germany’s economic output in the last pre-war year, when the German economy was running at full employment. So this was essentially never paid back. Plus we have Germany’s internal public debt, which was all but wiped out in a currency reform undertaken by the Americans in the Western zones of occupied Germany and by the Soviets in the Eastern zones of occupied Germany in 1948. The Soviets wiped out Germany’s public debt entirely; the Americans wiped it out by 85 percent. Now, if we add everything up and try to come up with a super grand total, both internal and external, wiped out in the currency reform and in the London agreement, we arrive at a figure which is roughly – this is very rough, but just to have some sort of an idea – four times Germany’s national product. So to provide this in values of today, if we accept that Germany’s national product is somewhere to the tune of over 2 trillion euros, which is beyond 2.5 trillion US dollars, we would be talking about a default and debt forgiveness of somewhere in the range of 10 trillion dollars. I would tend to think that this is probably unrivaled in 20th century history.

Is there any movement or any activism that you are aware of at the present time to raise awareness about the war debts and war reparations?

There is relatively little. To explain that, let’s delve a little bit into the legal position at the time of Germany’s reunification in 1990. Germany received this kind of baptism certificate for a unified Germany which is incredibly subtly worded and whose only purpose was, apparently, to prevent reparation or restitution claims against unified Germany being raised on the grounds of the fact that there is a unified German state now and that something like article 5 of the London debt agreement could all of a sudden be reactivated. The German point of view is essentially that the so-called 2+4 treaty of 1990 is not making any mention of any reparations or wartime debts of Nazi Germany, and given the fact that this issue is not covered by the treaty, the issue is essentially dead. This has consistently been the position of the German government. The German position has so far been quite successful . . . several attempts to challenge it in the European court have been unsuccessful, and it seems to me that from a legal standpoint, there is relatively little chance that this will be successfully challenged.

“The damage done by Nazi Germany, not just in terms of morality and human suffering, but simply in terms of creating material and financial damage, is so huge that it will simply supersede Germany’s capacity to pay.”

Which leads us to the question of why the awareness in Germany of these issues isn’t greater. And there is one thing that gives an indication of that. It’s clear that official Berlin has no intention to talk about these issues very much, because lawyers are always worried about creating legal precedent for any claim, so official Berlin remains mum on these issues. The one who did say something, and it was quite revealing, was former German chancellor Helmut Kohl, who at the time of the negotiations once walked out to a press conference and when he was asked about these issues, he said: “look, we claim that we cannot pay reparations, because if we open this Pandora’s box, then given the viciousness and brutality of Nazi warfare, the genocides – there were several genocides that the Nazis carried out – given these absolutely horrific facts and the unbelievable scale of these horrific crimes, any attempt to quantify this and translate it into claims against Germany will either come up with ridiculously low compensation or it is basically going to eat up all of Germany’s national wealth.” And this has consistently been Germany’s standpoint ever since: that the damage done by Nazi Germany, not just in terms of morality and human suffering, but simply in terms of creating material and financial damage, is so huge that it will simply supersede Germany’s capacity to pay.

And as an economist, I have to say I’m afraid that this is not entirely far-fetched; there is something to it. So what Helmut Kohl then said next was that instead of opening this Pandora’s box and going down the route of reparation claims, it will probably be better to continue what he viewed at the time as successful economic cooperation within Europe. Back then, this looked good, and it was in those pre-euro days when everybody was wildly optimistic about the future of economic cooperation in Europe. Now we have become a little bit more realistic about this, but back then it was probably not entirely unrealistic or unreasonable to think of these issues that way.

In your view, what would be the best solution regarding the Greek and German governments regarding the war debts and the war reparations issue at this time?

The best solution would of course be to try and depoliticize things to the maximum possible extent. Now, I know that this is entirely unrealistic because it has been political from day one. What I will prefer to do, instead of giving an illusionary personal opinion on this, is probably to provide some forecast as to where I think the whole issue is going to go.

“I do think that we need much more debt forgiveness, and I think we would need it relatively fast.”

Let me say a few things about what I think should be done – I don’t want to evade your question entirely. I do think that we need much more debt forgiveness, and I think we would need it relatively fast. I’m among those who are quite worried about the political situation in Greece right now. The Greek government is quite clearly the servant of two masters. One is the electorate in Greece, which understandably and quite obviously is not pleased with the situation, to say the very least, and the other master[s] are the international creditors, led by Germany, and to a lesser extent by the IMF [International Monetary Fund]. Quite clearly, the interests, at least in the short term, of the creditors and Greece’s population, are not aligned; they are quite contrary to each other. It puts the Greek government in a terrible situation. I’m worried about it for the future of democracy in Greece, and I’m worried about it as a German for two reasons.

First, because of the historical responsibility that Germany cannot deny, and second because Germany once went through a very, very similar experience. That experience was the end of the reparation problem after World War I, in the Great Depression of the 1930s. The German government had been made to pay reparations under a very strict scheme. The scheme, the Young Plan, started in 1929; it was tough, and in many, many respects, it reminds me of what the German Finance Ministry and the troika have been imposing on Greece; the effects were very similar: decline of output to the tune of 25 to 30 percent, mass unemployment, political radicalization. Basically, what the Young Plan did was to put Nazi boots on the streets. Oh yes, I’m quite worried about the situation in Greece, so I do think we should take swift action in order to stabilize Greek democracy. Do I think this is going to happen? I’m a bit skeptical. I’m afraid that two things will happen: First of all, in the end there will be widespread debt forgiveness, but all of this will come late in the day, and that far-reaching damage to Greek democracy will have been done.

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