Death by Debt: My Response to The German Finance Ministry, by Jeffrey Sachs

Dr. Ludger Schuknecht, senior economist at the Germany Finance Ministry, explains his ministry’s viewpoint regarding Greece. This viewpoint essentially holds that Eurozone countries should live within their means; adjust to their debt burdens; and take their reform medicine as needed. If they do so, they will be successful, as illustrated by Ireland, Spain, and Portugal. Greece has only itself to blame, and indeed was on track to recover as of late 2014 if it had not deviated from its course.  

I have enormous respect for Dr. Schuknecht as an able and thoughtful economist. Yet I believe that he misses a historical reality. While his policy prescription is certainly correct most of the time – countries should repay their debts and take the reform actions necessary to do so – it is also sometimes wrong.  It is wrong when debt servicing, combined with other economic ills, can push society to the breaking point.  The wisdom is to recognize the times that it is wrong and to act creatively at those times.

It was wrong in the case of Weimar Germany in the 1920s and early 1930s, when Germany was pushed into hyperinflation and then depression. Germans pleaded to the US for long-term financial relief from reparations and debt payments, but didn’t get it in time.  First came the hyperinflation; then mass unemployment; then a banking collapse; and then a full run on the German banking system in 1931, leading to a closure of the banks (as in Greece today).  President Herbert Hoover eventually granted a debt moratorium but too late: Hitler came to power in January 1933.

It was wrong in the case of many Latin American countries in the 1980s.  During the 1970s, unwise US bank lending and unwise borrowing by Latin governments led to the calamitous Latin American debt crisis of the 1980s following the sharp rise in US interest rates in 1981.  For several years in the 1980s, the US insisted on a policy of “extend-and-pretend,” that is, to lend the debtor country the money needed to pay debt service. Yet these countries tumbled into high inflation and political instability.  Eventually, the US brokered a package of reforms and debt relief.

It was certainly wrong in Poland in 1989, when Soviet-era debt was killing hope, creating high inflation, threatening to kill the nascent post-communist democracy in the crib.  I was Poland’s economic advisor at the time, and I strongly urged that the G7 countries grant debt relief to Poland.  The US quickly and wisely agreed. The other G7 countries soon joined the US.  Germany joined last, but Poland did get its debt relief, and its economy recovery and new democracy thrived.

It was wrong to insist on full debt servicing by Russia in 1992, when Yeltsin inherited a bankrupt post-Soviet economy.  As in Poland in 1989, I strongly urged debt relief for Russia.  Yet this time, the US, Germany and others rejected the advice. The consequence was that Russia experienced several years of financial upheaval and instability, resulting in the public’s loss of faith in the new and fragile democratic institutions. The West’s approach towards Russia fostered a nationalist backlash inside Russia, similar to the backlash in Weimar Germany to the harsh postwar reparations.

My point is that believing that indebted sovereign governments should always service their debts is a good working principle nine-tenths of the time, but can be a disaster the tenth time around.  We must not push societies to the breaking point, even when they have only themselves to blame for their indebtedness.

Did postwar Germany “deserve” the Marshall Plan?  No.  Was the Marshall Plan and the 1953 debt agreement wise policies to give Germany a fresh start?  Yes.  Did Russia “deserve” debt relief in 1992?  No.  Would it have been wise to offer Russia such relief?  Yes.

Does Greece “deserve” debt relief?  No.  The Greek economy has been badly managed for a long time.  Would debt relief for Greece be a good idea?  Yes.

Greece borrowed too much; failed to crack down on cronyism and corruption; and failed to foster new, competitive industries.  The result is that Greece cannot service its debts in full. The economy is broken.  The export base is too narrow to allow the country to pursue export-led growth – as done successfully in Ireland and elsewhere.  The banks are broken, so firms can’t get working capital to retool.  Greece is in a death spiral of austerity, de-capitalization, brain drain, capital flight, and growing social unrest.

How do I know?  I have watched daily for six years, and have tried to help several Greek governments – left, right and center – to have an intelligent settlement with Germany and the rest of the Eurozone to foster a recovery.  Yet in my experience the German Ministry of Finance has not searched for a true solution during all these years.

Greece has an economic crisis no less dramatic that Germany faced under Heinrich Brüning in 1930-33.  The unemployment rate is equal to 27 percent; the youth unemployment is equal to nearly 50 percent; output is down by 30 percent; the banks are in panic and collapse.  Greece is at the breaking point.  Germany can give Greece all of the lectures it wants and make all of the demands that it wants, but Greece will collapse if it is forced to service all its debt and cut public spending accordingly.  These policies are impossible to pursue – as was also the case in Germany under Brüning. As a result no democratically elected government in Greece will be able to survive for more than a few months at a time. The current path will only lead to disaster for Greece.

The German taxpayers believe that they have been extremely generous to Greece, giving Greece repeated financial loans.  Yet this is partly a mirage.  The taxpayers have been generous to their own banks, not to Greece.

Greece was required to use the first bailout of 100 billion euros in 2010 not for itself but to repay loans to banks, mostly German and French. Greece was similarly required to use the second and third bailouts to repay debts to external creditors.  Hardly any of the bailout funds were used to support the investment that Greece needs to achieve export-led growth or to meet urgent social needs.

Now Greece will get a fourth package, once again to be used to repay the IMF, ECB, European Financial Stability Fund, and other creditors, as well as to put money into its failed banks.  Yes, the German taxpayers have been generous – to Greece’s creditor banks and other institutions, not to the Greek people.

Debt servicing, in short, is a shell game: give Greece tens of billions of euros every couple of years so that Greece can repay the debts that it owes.  Professionals call this policy “pretend and extend.”  The problem is that the debt grows; the Greek banks die; and the Greek small and medium enterprises collapse.  The brain drain from Greece continues.  It is death by debt. The strategy did not work for Latin America in the 1980s, and it will not allow Greece to escape its economic death trap.

In short, when a crisis is as deep as Greece’s, the most powerful creditor on the scene has historic responsibilities.  Germany must help Greece to make a new start, not to collapse.  Germany needs to act and grant partial debt relief to Greece, in the name of European prosperity, democracy, and unity.

Of course, such debt relief must be accompanied by major structural reforms in Greece. However, as Germany knows all too well thanks to its own Agenda 2010 reforms enacted under Chancellor Schröder, reforms to the labor market, public administration, the judiciary, or the opening of “closed professions” take time to translate into higher economic growth. Back then Germany breached the Maastricht criteria in conjunction with its own the reforms. Today, Greece, in vastly worse shape, needs debt relief in order to succeed in its reform efforts.

Jeffrey Sachs, 60, Director of The Earth Institute Columbia University and Special Advisor to United Nations Secretary-General Ban Ki-moon on the Millennium Development Goals.

Another Article by Jeffrey Sachs: Deutschland ist für die Krise mitverantwortlich


  • …it is beginning to dawn on most people that they were tricked [again] all the “way to the bank”, and left standing there, holding the bucket…
    …Alas, with left wing banners flying their colours this time…
    Soon, the sum total of all taxes due and payable by the impoverished citizenry, combined with the almost total stagnation of the economy adding in even more lower salaries and pensions (Delia gratia), will finally make for a highly “flammable” and dangerous mix that could ignite anytime and set the entire nation up in flames…
    And we all know what to expect next, when the neighbour’s house is on fire…. don’t we?.. Mutti..??

  • It seems that you haven’t read Sachs article above given your comments. For you, it boils down to another treachery by Tsipras (Left banners) this time that Greece is in the straightjacket of MOUs again by the creditors. It seems again that you are set on a mindset that no matter what you read is conveniently shifted out…

  • I’m sick to the back teeth of whinging Greeks. If the EZ is so dreadful, then GET OUT!!!!!!! Do a Grexit Greece was doing OK last time it issued its own currency i.e. prior to 2,000. Countries outside the EZ (e.g. UK, Sweden, etc) have done better than those INSIDE. Of course running your own currency involves RESPONSIBILITY, and Greeks are not good at that: they’re the world’s champion tax dodgers, plus they cheated their way into the EZ in the first place.

  • “Debt servicing, combined with other economic ills, can push society to the breaking point” – correct, and that’s what happened in the Weimar Republic. Does it apply to Greece?

    Greece’s nominal interest expense was 5,7 BEUR in 2014, or 3,9% of GDP (according to the OECD). In contrast, at the peak since joining the EU, in 1994, Greece’s interest expense was 12,6% of GDP! Few EZ countries spend such a small portion of GDP (or of tax revenues) on interest as Greece did in 2014. To put 2014 into perspective, in 2000, whan Greece’s debt was less than half of what it is now, the interest expense was over 10 BEUR!

    There are two reasons why Greece’s interest expense was even as high as 5,7 BEUR in 2014: the very expensive IMF debt and bonds held by private investors (I believe both carry rates between 3-4%). Much of the EZ debt is zero and/or close to zero.

    I believe that debt owed to private creditors is about 50 BEUR of the total but I may be off by a few billion. Assuming that the average rate on that is 4% (on the high side), that would translate into an interest expense of 2 BEUR annually. That should be considered as the floor because I doubt that this debt, short of default, could again be renegotiated.

    If only the IMF, instead of reminding others to take a haircut, would bring its interest rates down closer to the EZ levels, Greece ought to be able to contain its annual interest expense at 3 BEUR or so.

    Compare that to a haircut of Greece’s debt so that the remaining debt is 60% of GDP. With a GDP of 180 BEUR, that would translate into 108 BEUR of debt. At what rate would that debt be priced? I don’t know. But assume that it would be priced at 3%, it would translate into an annual interest expense of 3,3 BEUR, i. e. MORE than the above 3 BEUR which ought to be achievable. If it were priced at 5%, it would translate into 5,4 BEUR.

    The debt service (the existing one or the possible lower one as described above) is definitely not the undue burden which everyone talks about. On the other hand, when a country which has lost access to the markets needs to refinance maturities all the time, that IS an undue burden. The traditional solution for that has always been a stretching of maturities. In the case of Greece, they would have to be stretched for a VERY long time, perhaps even including a portion of Evergreen Bonds or 99-year bonds (like Mexico).

    The longer the maturities and the lower the rates, the more debt assumes the character of equity. Much of Greece’s debt already has the character of equity today. The objective would have to be to strengthen that character of equity by stretching maturities and lowering those rates which can be lowered without too much of a problem (IMF).

    Debt, particularly excessive debt, is always the derivative whereas the underlying is the real economy. One can never improve the underlying by playing around with the derivative. For over 5 years now, there is been over-preoccupation with the derivative and, essentially, ignoration of the underlying, the real economy.

    It pains to remember that it is already 4 years since McKinsey had come out with its proposal for “Greece 10 years ahead” and that 40% of that proposal could already be completed by now. The current government probably considers McKinsey’s proposal a creation of neoliberalism. That’s ok. But that does not free them of their responsibility to make their own such proposal (just like it does not excuse previous governments who had ignored the real economy).

    In closing, and to stimulate discussion, I would propose a wager. If the current government took the McKinsey proposal to the world and said: “We are committed to implementing this plan and we guarantee that we will implement the legislative and administrative framework to make the plan possible!”, well, I think that investors would then line up in droves. Any bets against me?

    • Austrian nonsense squared. Let me spell it out for you in the remote hope that you might understand the issue.

      Greek debt service is temporarily low but it goes dramatically up circa 2020-22. Therefore a potential investor looking at Greece contemplating an investment of any kind can not go through with such plans because Greece for certain will again become insolvent (notwithstanding it already is due to the German nonsense of voodoo economics) down the road – it’s just a simple matter of time.

      Throwing interest rate teasers at Greece and pretending that everything is fine is classic GermanoAustrian nonsense.

      You want us to somehow replace low interest EU loans circa 1% with 5%+ market loans at the not so distant future, while pretending that Greece will find willing market lenders when no one will ever touch Greece due to Schauble’s engineering of 185% debt to GDP. Even if Greece manages to lower its debt to GDP ratio somewhat the very existence of high debt balance (approaching 1/2 trillion euros if you include the 100 Bil. ELA and Target 2 disbursements already in place) prevents Greece from ever getting favorable rates towards EU debt rollover and conversion into market debt.

      Who do you think are you kidding with these temporary low mickey mouse rates? Do you actually think a.) that Greek are stupid and b.) the global markets stupider so that we all play Ayatollah Schauble’s game?

      Are you sure you were ever a banker because I have ever seen such punctuated ignorance with these ridiculous Austrian lollipops for infants and shiny little mirrors for the natives.

  • …countries should repay their debts and take the reform actions necessary to do so…

    To paraphrase Warren Mosler, the only way public debt, for all practical purposes, need to be “paid back” is via refinance.

    Does Greece “deserve” debt relief? No. The Greek economy has been badly managed for a long time. Would debt relief for Greece be a good idea? Yes.

    Greece needs large deficits. (I would have written “larger deficits” but this government has promised surpluses.)

    Tom Hickey over at is right — Jeffrey Sachs is a deficit dove.

    • Agree 100% lastgreek.

      He says that.. “.. countries should live within their means; adjust to their debt burdens; and take their reform medicine as needed… ” (as a) “… policy prescription is certainly correct most of the time – countries should repay their debts and take the reform actions necessary to do so…. ”

      Er, no, it isn’t. It is micro founded garbage implying that the Government sector is just another private enterprise like entity, just in the ‘business’ of a few services (increasingly less) and a bit of distribution.

      I live in Ireland where we still have broad unemployment over 20% (ref Constantin Gurdgiev), and over 5% of our workforce – many our best and brightest young people – were forced to emigrate to find work, and remain abroad.

      This is after 7yrs of Troika neoliberal ‘reforms’ – and puulease don’t quote some absurd recent GDP growth figures at me – they are purely MNC sales figures moving thru’ Ireland for tax reasons, plus other MNC scams.

      Public services are chronicly under funded… constant queues of people on trolleys… we all know people having to wait 1yr plus for cancer operations. The weakest and most vulnerable left to their own devices. Sure, we have reasonable dole benefits IF you are over 25yrs old, but if you need more than that, as disabled citizens etc often do, you’re on your own now. If you need rent assistance you will likely need to be able pay the first 6 mths yourself… can’t do that? tough.

      All Sachs is really saying here is that Ireland, Spain & Portugal are doing just fine with the Troika and Eurozone straightjacket… just that Greece’s ‘structural’ problems somehow crossed some magic threshold whereby the ‘medecine’ was too much.

      Absolute drivel. And if you don’t know that Yanis, please say right now. Let’s have some honesty please.

      Sachs from the FT in 2012…

      “… The Greek economy is collapsing not mainly from fiscal austerity or the lack of external competitiveness but from the chronic lack of working capital.

      Oh.. back in 2012, it wasn’t the Austerity conditions of the first ‘bailout’ apparently… and also in 2012, Sachs has this to say..

      “… to save the Eurozone, save the Banks….” Oh, those poor bankers… that would be the same ones who designed the Euro straightjacket, no?

      Has Sachs *ever* really criticised the inherent neo liberal structure of the Eurozone?? Not to my noticing.

      What did Sachs ever have to say about those fantasy IMF growth projections for Greece’s last ‘bailout’ ? (Answer – nothing!)

      Frankly, Sachs is just another mainstream neo liberal lite micro-founded-‘macro’ scumbag.

      And you Yanis, should be ashamed of yourself having anything to do with him.

  • So .Yanis I’m a great admirer of yours but it seems that the reality which you had to face at the meetings with the EU ministers
    and Le Garde knocked you off balance.Practicing plausible transparency in successive post isn’t the old fiery yet lucid you.So,Jeffrey Sachs says…………..What do you have to say about what he says?You’ve always known all economics is politics but now you’ve arrived at the place from where you started and know that place for the first time ( T.S.Eliot) .Rolling your blog over with such stuff has little purpose except to create word salad comments from “politically aware “people . frankly it resembles the accused waiting for the police to arrive.Please get up and get moving debate has become a leisurely activity.

  • I admire you greatly, Yanis, as an economist, as a thinker, and as a compassionate human being, sincerely trying to make things right. However:

    It is hypocritical to ridicule the absurdities of an economic system based on the repayment of debt by incurring more debt, when you’ve been down on your knees for months begging for yet another loan. And to what purpose? So even more debt will be piled on top of what is already owed?

    You had the right idea initially, and then, at the first sign of resistance, you folded. There should be no more bailouts. Period! What you should have said was, very simply: “If you don’t want to do it our way, fine, then we will default and leave you holding the bag.” And you should then have added: “Actually we’ll default anyhow, just to prove we can.” And then you should simply have announced the default even before the payments were due, just to get the monster off your back as soon as possible and return to running your country. Because the problem is not all the debt that’s been incurred, that’s just a symptom. The problem, as well you know, is the neo-liberal global market-oriented financial system: aka capitalism.

    What then? Well, what did people do before this system took hold everywhere? Did they simply fall to the ground and die?

    Does Greece really need to be “competitive”? (Whatever that means.) Does Greece really need to become a manufacturing hub like Germany? Why? Everyone wants to go to Greece, everyone admires the Greek people and wants to be as interesting, creative, intelligent, imaginative and noble as they. Isn’t that enough?

    When I look at the map of Greece all I see is coastline — and islands. Yet I’ve read that poor Greece cannot feed itself. How is that possible with all the wealth of the sea to harvest? I’ve also heard a rumor that Greece has farmland. Well, why not, since there is only one big city in the whole country. The rest is mostly farmland, no? So farm it!!!!

    Cuba, far more isolated from the world of modern economics than just about anywhere else, has one of the world’s finest health systems, with some of the best trained doctors in the world. What is their secret? Why not visit there and ask?

    As far as fuel is concerned, Greece can certainly cut a deal with Russia for cut rate oil and gas supplies. Pharmaceuticals also, why not? I lived on Yugoslavia for several months, a very poor country that had cut itself off from its main supporter, the USSR. Yet I never encountered a beggar, never noticed any slums, never heard complaints that anyone was starving. When I got sick in a small town I was taken to a modern health facility that struck me as excellent — and treated by the first female doctor I had ever encountered.

    Being cut off economically from Europe is not the worst thing that could happen to Greece. The worst thing that could happen would be a failure of nerve. And I suspect this will be your own fate very soon, unless you wake up and act like a true man of the Left.

    • Nice you bring Cuba around. I have been saying since many years ago that, we like it or not, Greece has two choices: to be the Haiti or the Cuba of Europe. As simple as that.

      Want to be “less radical”? OK, Latin America nowadays offers several other more balanced options: Venezuela, Bolivia, Nicaragua and Ecuador. This last one is very pertinent because Ecuador is a state very comparable to Greece in size and relevance that does not mint its own money (except for small change) but uses the US dollar, showing how, after due default, a truly successful social economy can be built even without a national currency and on strictly superavit budgets.

    • Greece is islands and highlands. So many mountains they don’t even have names. But the very few agricultural plains ALL have names. Greece can feed itself and is blessed with millions of fresh water sources from the mountains.

  • “Successful” like Spain or, lo and behold: Portugal! Let us not forget the Great Latvia Success Story: (hilarious and excellent explanation of how austerity “works” in mysterious ways – must watch).

    Don’t worry, when unemployment reaches 100% it can only get better after that. Then claim “success!” 🙁

  • A very small addition, a small sidenote. The agenda 2010, at the end of the article, were very bad for social justice in Germany too. Schröder and the green party introduced politics that represent quite the economical ideas Angela Merkel or Wolfgang Schäuble like. “Agenda 2010” was a nice name for badly paid temporary employment, huge help for banks and rich companies, and low pay. Just the model Merkel and Schäuble think would good for the whole of Europe. It is not.

    With this I compare not at all, not a wee bit, the situation with that of Greece. That would be absurd. Yet praising wrong neoliberal politics just to please some german politicians can still be wrong. The newspeak of “reforms” and “fördern und fordern” which was a newspeak-term that introduced the grim and ugly “Hartz4” pressures in Germany is nothing other countries would wish to have. German neoliberal politics and austerity measures imposed on Greece are wrong – nothing to praise here. Schröder himself is proud that with his “reforms” he established a low pay sector he thinks would be good for all. No. It is not.

    • Sure: nobody is saying German workers are reaping the benefits of the IV Reich, mostly not at least. It is banksters and it is not only German ones. For example “our” BBVA just reported massive profit growth, not that we Basques are noticing: private companies do not redistribute down, they just pay some lesser taxes, if they do at all.

      So this is class war and not international war (that would be a smokescreen). However we do have a serious problem not just with Germany but with all the core Europe bloc, including France and Italy, where nothing at all is moving socio-politically (barring the honorable but rather testimonial exception). Even in Thatcherland (I mean: Britain, of course) things seem to be moving somewhat with the Corbyn campaing but in France, Germany, Italy and the Benelux nothing happens except the return of Sarkozy, apparently.

      So, yeah, we have all those poor German and French workers all oppressed and exploited and doing what? Voting for the ultraliberal right. Angela Merkel would win elections today exactly as last time, in France the workers (90% of every population are workers of some sort) will elect her ideological clone: Sarkozy, in Italy… not much difference since the PCI became the PD, and the Benelux does not seem to even exist in terms of social confrontation. Never mind Baltic Europe: the horror!

      So we do have a serious problem with European workers in general just being defeatist and conformist and not giving hope any chance. They seem rather “content” than “upset” and that needs an explanation, something that nobody is providing.