French economist Thomas Piketty found unexpected fame with his book on wealth inequality, Capital in the 21st Century, and has now turned his attentions to the situation in Greece. The country is struggling under a mountain of debt and is resisting German-led demands for more austerity in exchange for aid, culminating in a landmark referendum yesterday that rejected creditors’ proposals and may send Greece out of the euro zone.
In a forthright interview with newspaper Die Zeit (original in German, translation here by Gavin Schalliol), Piketty pricks the balloon of Germany’s moral superiority and argues for a major debt conference to clear the continent of its debts. “The history of public debt is full of irony,” he said. “It rarely follows our ideas of order and justice.
On Germany’s history:
Piketty: When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: what a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations.
…after the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece… Think about the London Debt Agreement of 1953, where 60% of German foreign debt was cancelled and its internal debts were restructured.
Die Zeit: Many Germans believe that the Greeks still have not recognized their mistakes and want to continue their free-spending ways.
Piketty: If we had told you Germans in the 1950s that you have not properly recognized your failures, you would still be repaying your debts. Luckily, we were more intelligent than that.
You can read more on the history of German debt forgiveness in this paper from the London School of Economics (pdf). Piketty’s point on the cruelty of lending to an indebted nation and then lending them money to pay you back is also particularly strong:
Die Zeit: Do you believe that we Germans aren’t generous enough?
Piketty: What are you talking about? Generous? Currently, Germany is profiting from Greece as it extends loans at comparatively high interest rates.
Germany, the largest creditor to Greece from the euro-zone nations, can borrow at very low interest rates—currently around 0.75% for 10 years—so in theory it makes money from lending to Greece at a higher rate—though successive rate cuts and payment deferrals on the bailout loans have made this increasingly less lucrative. (Do also note another member of Greece’s creditors, the IMF, charges an effective interest rate of 3.6% on its loans.)
What is the French economist’s solution to all this?
Piketty: We need a conference on all of Europe’s debts, just like after World War II. A restructuring of all debt, not just in Greece but in several European countries, is inevitable. Just now, we’ve lost six months in the completely intransparent negotiations with Athens. The Eurogroup’s notion that Greece will reach a budgetary surplus of 4% of GDP and will pay back its debts within 30 to 40 years is still on the table. Allegedly, they will reach a 1% surplus in 2015, then 2% in 2016, and 3.5% in 2017. Completely ridiculous! This will never happen. Yet we keep postponing the necessary debate until the cows come home.
And if Europe doesn’t forgive Greece’s debt?
Piketty: Those who want to chase Greece out of the euro zone today will end up on the trash heap of history.