Countless countries suffer under the strain of external sovereign debt, forcing governments to implement austerity measures while simultaneously making massive payments to financial markets and international institutions. Most affected by this system is the Global South, whose states are forced to provide at least $2.6 trillion in debt service per year. While China’s role in the global lending landscape has grown ever more important, the vast majority of sovereign debt is held by private creditors in the Global North and multilateral institutions such as the International Monetary Fund (IMF).
This mechanism exacerbates social inequality, pushes people into precarity, destroys health care and social services, intensifies gender inequalities, and harms the lower classes the most. Austerity, the technical term for state spending cutbacks, is a global problem. However, it primarily affects states in capitalism’s peripheries — not only the vast majority of countries in the Global South, but also Greece and many countries in Eastern Europe.
Today, the grassroots campaign Debt for Climate is holding an international day of action for the cancellation of the Global South’s sovereign debt, giving them the financial capacity to leave fossil fuels in the ground and transition their own economies. Activists will hold rallies at German embassies around the world to call attention to Germany’s historical responsibility and obligation to support a debt write-off today.
The date of the actions, February 27, is no coincidence, as it also marks the seventieth anniversary of the London Agreement on German External Debts, a global agreement to cancel a large part of West Germany’s Nazi-era sovereign debt — a chapter of economic history that is often forgotten or consciously ignored. Yet the very existence of this agreement proves that even the massive cancellation of sovereign debt is possible. It also reveals the hypocrisy of the contemporary international order: while the nation responsible for the horror of the Holocaust was economically rewarded after World War II, today the world’s richest states claim that the cancellation of sovereign debt in the Global South is impossible.
Making Germany Stable Again
Following the defeat of Nazi Germany at the hands of the Allies, the country was heavily indebted in both the public and private spheres. This was due, on the one hand, to prewar debts for which the Nazis had largely stopped interest and general payments. High interest payments piled up as a result. The debt incurred from the Dawes and Young Plans, which were devised to finance reparations from World War I, made up a large chunk of these debts. The Dawes Plan in particular made Germany highly attractive to US investors, who invested capital in German companies on a large scale. A large chunk of the rest of the debt originated from the economic aid provided by the Allies after the war, above all from the Marshall Plan.
On February 27, 1953, public and private representatives of the creditors from twenty-one states and representatives of the German debtors convened in London to find an answer to the German debt question. The guiding principle was settled a year before: the debt agreement should “neither unbalance the German economy through undesirable effects on its internal financial situation nor place undue demands on existing or potential German foreign exchange resources.” The overarching goal of the agreement was to “restore normal financial and trade relations between the Federal Republic of Germany (FRG) and other countries.” In contrast to today’s debates and negotiations regarding sovereign debt rescheduling or cancellation, Germany’s economic stabilization — not the maximization of creditors’ profits — was the primary objective.
The London agreement realized this target via a high degree of concessions to the indebted country. Prior to the agreement, Germany’s pre- and postwar debts amounted to approximately 32.3 billion Deutschmarks — a sum that was subsequently reduced to 14.5 billion. Overall, more than half of German debt was canceled. However, this only included 2.6 billion marks in interest payments on prewar debts, which experts regarded as far too low of an estimate, given that twenty years’ worth of unpaid interest had accumulated after the freeze on foreign debt payments imposed by the Nazi government in 1933. Assuming an interest rate of 3 percent, that would be 7.7 billion marks — without compound interest. The Dawes and Young loans, which made up a large part of prewar debt, carried 7 percent and 5 percent interest, meaning that, effectively, Germany’s real debt haircut was far higher than 50 percent.
The terms for the country’s outstanding debt payments were also designed with the goal of stabilizing the West German economy in mind. For the first five years, 567 million marks were to be paid annually, after which the sum would rise to 765 million. These figures were chosen as the purpose agreed upon was that costs for debt service should not exceed 5 percent of German export earnings — a stark contrast to how the Global South is treated today. Ecuador, for example, spent about 36 percent of its export earnings on debt service in 2019, Zambia spent 31 percent, and Lebanon as much as 88 percent. Moreover, clauses similar to the one providing for a possible change in payment terms in case of a significant deterioration of Germany’s economic strength were and are categorically rejected in agreements with countries of the Global South as well as Greece or Portugal.
Well beyond Germany’s debt haircut, the Allies agreed to stop exports of goods to West Germany that the country could produce itself. In this way, they encouraged the development of an independent German industry. In today’s debt system, by contrast, the exact opposite is the case: debt service prevents the development of independent industry, ensuring that the Global North retains its access to raw materials at a bargain.
The London Agreement transformed West Germany from one of the greatest criminals in modern history to the strongest economy in Europe. The outcomes of the agreement proved to be a true marvel in this respect and even exceeded the expectations of most of the conference’s participants. The years that followed were characterized by growth rates around 7 percent and full employment, remembered today as the years of the “Miracle on the Rhein” and the heyday of the country’s “social market economy.” But the necessary prerequisite for these developments, the debt haircut granted by the London Agreement, is quietly overlooked by globalized capitalism’s apologists.
Why was defeated Germany treated with such benevolence? Above all, its treatment corresponded to interests of the United States, which emerged as the undisputed leader of the emerging postwar order. Early on, West Germany was chosen as the most important part of the Western alliance against the USSR and Warsaw Pact states. Yet, an economically devastated West Germany would not be able to live up to this role. This calculus motivated not only the Marshall Plan and further economic aid, but also the US offer in London to cancel Marshall Plan debts. France and the UK, on the other hand, were expected to pay back their debts to the United States without any compromise. The United States still was in the midst of the Korean War in 1953 and aggressively seeking loyal allies. Those who signed the London Agreement could hope for partnership and grants from Washington.
In this process, the denazification so often invoked in public memory had to take a back seat. After all, a large part of Germany’s debt had accumulated because of the Nazis’ refusal to pay foreign debts, helping, at least indirectly, to finance the war. And who was to profit from those decisions? Most of German capital. Corporations from Siemens and IG Farben (BASF, Bayer & Co.) to Mercedes Benz and Deutsche Bank profited handsomely from the war, forced labor and Nazi rule that kept trade unions at bay. None of these capitalists faced serious material consequences for the atrocities committed, nor was any of their property seized. No one wanted to “put capitalism on trial,” as historian David de Jong put it, whether in its fascist or parliamentary guise.
The negotiator on the German side in London speaks volumes in this context: West Germany was represented by Hermann Josef Abs, a member of the board of the Deutsche Bank, a member of the supervisory board of IG Farben, and one of the central actors behind the Nazi government’s expropriation of Jewish property. After the war, he not only remained an influential character in Deutsche Bank and became an advisor to the first power-war chancellor, Konrad Adenauer, but was also chosen to negotiate the cancellation of Germany’s debts in London — from which he may have even benefited on a personal level.
Same Same, but Different?
The cancellation of West Germany’s sovereign debt thus proves that it is possible to write off even large piles of sovereign debt. Thus, anyone who claims that debt cancellations are technically impossible in this day and age is falsifying history in order to justify a political position. It is unsurprising that almost all arguments brought forward against debt haircuts since the disputes over Greece’s sovereign debt are political and not technical in nature. Clearly, US geopolitical interests in the context of the Cold War were crucial to canceling Germany’s debt. The London debt cut was in the interests of the most powerful states — which is not at all the case when it comes to debt cancellation for the Global South. It is, however, clearly in the interests of the large majorities of people, despite claims to the contrary.
These claims shaped the debate on how to deal with the Greek sovereign debt crisis back in the 2010s. A seemingly progressive argument was dredged up: the “rescue,” i.e., financial support as well as cancellation of Greece’s sovereign debt would mean a redistribution of the wealth of German taxpayers to Greek elites. These claims have been refuted in the meantime, and it has been shown that of the 215.9 billion euros that the Greek state received from its alleged bailout until 2015, only 9.7 billion were used to support the Greek state budget. The rest went directly to creditors, the majority of whom are financial institutions based in Germany. In real terms, therefore, the “rescue” of Greece was a merciless redistribution of wealth from the bottom to the top and from the South to the North. Canceling the Greek debt would have had the exactly opposite distributive effect.
Ten years ago, Alexis Tsipras, international political movements, radical leftists, and the Greek population learned the bitter lesson that the financial system did not regard the technical feasibility of debt cancellation to be a valid argument. Rather, the decisive factor was and remains the balance of political power. This also holds true in the context of Debt for Climate’s demand today.
Distributive and Climate Justice Go Hand in Hand
Canceling public debt in the Global South means redistributing wealth from top to bottom and North to South. In that sense, it is a demand for climate justice that also takes on neocolonial relations. It means liquidating financial value in the hands of wealthy institutions of the Global North in order to expand the scope of action for people and governments in the Global South. This newly gained autonomy could be used to upgrade public infrastructure, social services, community programs, and environmental projects. Of course, canceling public debt should be accompanied by public investment in order to avoiding reducing the money supply in local currency too much.
Since the populations of Pakistan or Nigeria, unlike postwar West Germany, cannot rely on a generous US-funded reconstruction program, debt cancellation has to be the first step to undermine the leverage multilateral and private sector lenders have over governments in the Global South and enable a degree of self-determination and sovereignty. This approach has the decisive advantage that the needs of people in the Global South will no longer be determined from abroad but can be organized and coordinated locally.
In this way, initiatives against extractive industries and the environmental destruction they cause would have better chances at success, and the hierarchies inherent in globally coordinated climate protection measures could be reduced. This stands in stark contrast to status quo development projects or structural adjustment measures, where human needs are “defined” according to the interests of big capital in the Global North.
The mechanisms of external sovereign debt stand for the continuation of colonialism. Modern colonialism does not require military occupation or coups staged by secret services against governments that seek to break out of dependence on the West. Instead, monetary neocolonialism primarily appears in the even more lucrative form of a debt spiral. These spirals force poor countries to sell cheap raw materials in order to buy foreign currencies to finance the interest on their debts, oftentimes repaying the original amount several times over.
Former colonies in the Global South are most affected by the climate crisis, but their scope for action to mitigate and adapt to the consequences of the climate crisis is drastically limited by the financial and economic status quo. Where floods, droughts, and landslides occur most frequently, there is a lack of money to finance protection measures, because that money is used to pay off sovereign debts and interest — i.e., directly to the financial institutions of the Global North.
Debt: The Biggest Climate Killer
Debt cancellation may not be in the interests of fossil and financial corporations in the Global North, it is in the immediate interest of everyone who wants to survive on this planet.
Servicing sovereign debt not only deprives the affected countries of the ability to protect people from the effects of climate catastrophe, but also fuels the climate crisis. When a state is forced to funnel large portions of its revenues into the pockets of the Global North through debt service, there is little room for maneuver in denying companies access to oil, gas, and metal resources. After all, every available dollar must be earned — that is, assuming the expansion of the fossil fuel industry is not directly dictated into the debt terms by the World Bank and IMF anyway.
In Argentina, for example, fracking in the world’s largest shale gas deposit is regularly justified by pointing to the need to service IMF loans. Senegal and Mozambique were also recently coerced by World Bank and IMF creditors to push ahead with fossil fuel extraction. They claim that exporting raw materials is simply the only way to service loan payments.
The climate perspective can also be expressed in numbers: roughly $150 trillion would have to be invested over the next thirty years to convert the global energy system to sustainable energy production. Canceling the piles of debt in the Global South is an important part of gathering together the necessary financial means. At the same time, it is a way for the Global North to pay back the climate debt it owes the Global South for its historical responsibility in causing the climate crisis.
The conclusion seems obvious: if we want less oil, gas, and metals to be extracted and argue that “just one country like Germany can’t do anything alone,” then we need a global movement for debt cancellation. If debt cancellation was possible for the economic reconstruction of a state that carried out systematic mass murder only a few years before, then granting monetary sovereignty to the Global South and creating the conditions for human survival on Earth is the last we can do.
Greece, Pakistan, and South Africa also sat at the negotiating table in London in 1953 and participated in canceling Germany’s debt. The latter two are now facing debt levels of about 70 percent of GDP. Why shouldn’t Germany repay this moral debt? It was only ten years ago that the German ruling class made millions off the staged “rescue” of Greece. Today, leading German politicians like finance minister Christian Lindner and Bundesbank president Joachim Nagel are blocking moves to cancel the Global South’s debt. This is the moral depravity, disregard for history, and neocolonialism we have to fight against.