6. 1953, the London Agreement cancels the debt of Germany

After the Second World War, a treaty signed in London cancelled 50% of West Germany's debt, about 15 billion German marks out of a total of 30 billion. Adjusted for inflation, this is equivalent to about $742 billion today.

In 1946, Germany was split between East and West. Soviet Russia (the USSR) gained control over the East, while West Germany became an independent state under supervision of the Allied states (including the USA, England and France).

Immediately after the war, Germany was expected to pay large reparations to the Allies. But the victors had other things to consider. Firstly, the burden of debt and war reparation was one of the causes of the second world war, so inflicting crippling reparations to Germany would have had the same effect and prepared another future conflict. Secondly, the allies had to deal with a new global configuration of the world, divided between the Soviet block in the East and liberal democracies under the influence of the USA in the West. This divide became known as the Cold War. The two blocks were competing for military power and influence over the rest of the world. The fate of Germany was a cornerstone of the model that the USA and the Allies needed to promote against communism: democracy and free market. Furthermore, the other European countries were in dire need for a new economic start, and plundering a devastated Germany wouldn’t have helped the economy of other countries in the long term.   

For these reasons, the creditors of West Germany agreed to erase half of its debt. The largest creditor was the USA, but England, France and a list of other creditor states were involved in the London Agreement. This decision, combined with a wide program of US financial aid called the Marshall plan, led to twenty years of peace and economic prosperity in Western Europe. While the recovery of Europe was a success due to the USA’s financial aid, it was also a strategic move for the USA. Germans and Europeans were rebuilding their infrastructures and industrializing production, but they were also avid consumers of American goods and culture. The result of Germany’s debt cancellation and the Marshall plan was mutual profit between Europe and the USA. The Marshall plan, designed in the USA to promote a free market economy and reduce trading barriers inside Europe, became the blueprint of the European Union as it is today.  

As Time Jones explains in a Debt Justice article, the mutually beneficial aspect of Germany’s debt cancellation makes it unique compared to the other cases listed in the present series. In no other case have the conditions of the cancellation been this favorable for the debtor (Germany), while the creditors (USA and Allies) were willing to let go of their position of advantage to let the German economy grow and prosper. 

Half of Germany’s debt was simply erased. This cancellation concerned both public and private creditors, so private banks were unable to sue Germany in London courts and force the country to pay, as opposed to the recent cases of Chad with Glencore, Zambia with BlackRock, or a few years ago Argentina and the Republic of Congo with Elliott Capital as creditor. 

Moreover, the payment of the remaining debt was conditioned on the health of Germany’s economy. The country only had to pay if it was exporting more goods than importing. In other words, Germany paid its debt from trade surplus. This means that Germany was only obliged to pay when its industry was profitable. The creditors let Germany keep its currency artificially low, so the country was able to export its production to pay its remaining debt without sacrificing public services and political stability. The USA and European countries were content with letting Germany grow because it had a positive impact on the economy and political stability of the rest of Europe, with mutual gains in trade, technology and industry. For the USA, the growth of West Germany was a geopolitical victory against the Soviet Bloc.  

The contrast with the treatment of indebted countries in the Global South is harsh. Fifty-four countries are currently in a debt crisis that prevents them from investing in the future of their youth and the preservation of their environment. The International Monetary Fund and the World Bank, who represent the interests of the largest public creditors (chiefly the USA and the wealthiest nations of Europe, like Germany), dictate austerity measures to debtors that are equivalent to maintaining these countries in poverty so their natural resources can be exploited at a little cost. The World Bank and International Monetary Fund, created in Bretton Woods in 1944, promise economic growth as a result of free trade, but the result of extractivism combined with budget austerity is a weak state unable to maintain the rule of law, dominated by a corrupt oligarchy. 

The cancellation of Germany’s debt is an archetype of the double standard applied by creditor nations of the Global North, who seek mutual growth when they see an opportunity, but maintain colonial rule over the Global South under the pretense of financial “stability”.    

This article is the sixth in a series dedicated to the timeline of debt cancellations in history.