Sir, John Plender’s wise warning to Berlin (“Forgive the debt or earn the wrath of its victims”, December 30) did not mention that the Allies’ post-1945 “act of macroeconomic mercy” towards west German debt sprang from lessons painfully learnt after the first world war.
In 1919, the US, then the world’s leading creditor, insisted on viewing British and French pleas to reduce war debt repayments as unconnected to the reparations the two countries were seeking from Germany. As Liaquat Ahamed recounts in Lords of Finance, Washington rejected a British plan, drawn up by Maynard Keynes, which would have capped reparations, forgiven some war loans, and set up a circular scheme enabling America in effect to lend Germany money to pay the Entente powers to in turn reimburse the US in turn. The next decade was marred by reparation crises, restructurings, moratoria and ultimately, default.
Germany never had to pay more than a fraction of what was demanded of it, but the vilest forces in German politics exploited public resentment over reparations to terrible effect. Modern German politicians unwittingly echo President Calvin Coolidge’s correct but short-sighted attitude towards Entente war debt: “They hired the money, didn’t they?”
The irony is that it need not have been thus: Angela Merkel’s government could have framed the eurozone bailouts as necessary to save the German financial system after banks squandered voters’ hard-earned savings on ill-judged loans to irresponsible sovereigns and dubious private borrowers. It may not be too late for generosity to prevail.