Guilt, debt and interest rates: A comment on double moral standards

Moralising is not a good foundation for macroeconomic policy, especially at a time of Crisis. Still, moral objections to sound policy recommendations must be taken seriously as they have the potential to prevent their adoption, with terrible consequences for all. Here, I respond to a Portuguese reader’s question regarding double standards in the moral assessment of the interest rates a debtor nation should pay.

The context of the reader’s question is the Modest Proposal‘s recommendation that only the Maastricht Compliant Debt (MCD) of Eurozone member-states should be included in the Limited Debt Conversion Programme (to be administered by the ECB). Our point there was that it is much easier (and morallt justifiable) to persuade Northern Europeans, who believe in the sanctity of our agreed rules (e.g. Maastricht) ,that there is a need to help member-states in distress refinance their MCD (sinve this is the part of the debt that they were allowed, by the Maastricht Treaty to have) than it is to convince them that the ‘illicit’ debt (debt exceeding 60% of GDP) should be mutualised (as the Debt Redemption Funds idea proposes). In this context, the reader then asked:

When speaking on “morally justifiable” and nothing is said about the differences between the zero interest granted to Germany in the past and the severe interest paid by  rescued countries, this omission in your conversation means you think this difference is “morally justifiable”?

No, I do not think it is morally justified. Our point here is that it is easier to convince both the German elites and Germany’s electorate that Europe must help member-states with their MDC (since each member-state was ‘allowed’ to run up this debt) than with their debt exceeding their MDC. At a time of intense crisis, when a quick agreement is of paramount importance, it is not a bad idea to go with the grain of your partners’ moral prejudices. However, I take your broader point fully. Indeed, I am prepared to go further than you do:

In 1953, the German state was allowed to write off almost all its, very large debts, including those that were the result of forced loans extracted at gunpoint by the Nazis from occupied nations, Greece being a singular example. So, eight short years after German troops had wrecked our continent, Europe and the United States gave the German people a chance to recover by striking off, at the stroke of a pen, a mountain of debt. Rightly so, I think. That write off was essential in bringing Germany back to the land of the living and kickstarting Europe’s revival.

Nevertheless, back then I do not believe many Germans resisted that decision on the basis that “a debt is a debt is a debt” and that “all debts incur a moral responsibility to repay them”. Compare and contrast this to today when most German commentators refuse to countenance debt relief for the economically ravaged parts of Europe, arguing that if repaying the Periphery’s debts requires that the people of Greece or Portugal must be screwed into the ground, so be it: “a debt is a debt is a debt”. To say the least, this is a case of double standards.

Moreover, you may have noticed that, in the last two years, only Germany’s debt-to-GDP ratio has fallen (a little), while everyone else’s rose. Is this because the German state has cut down its expenditure substantially? No. Certainly not more so than Greece or Italy or Portuhal or Spain or ireland have. One crucial reason for this reduction in Germany’s debt to GDP ratio is that, since the Periphery was torn asunder by the crisis,  the German state refinances its debt at extremely low interest rates (the other reason, of course, being that Germany’s GDP has not collapsed – yet). And why is that so? Is it because the German government is prudent and that Germany has stayed within the Maastricht debt limits? Of course not. It is largely because of the crisis in the Periphery which gives an incentive to investors to abandon Italian and Spanish bonds, not to invest in profitable companies in Portugal and Greece, and instead to buy German government bonds – thus reducing the present value of German public debt.
In short, German debt shrinks because other Eurozone member-states’ debts, as well as their social economy, become non-viable. Have you heard of a German commentator arguing that it is morally unjustified for German debt to shrink directly because Germany’s European partners are being annihilated?