In 1952, Germany was debt-ridden and had no access to capital. The war-ravaged country had little industry and infrastructure (left). It needed money to invest and make its economy grow. To regain access to capital, it couldn’t “simply” save and pay off its debt. The Western allies recognised the dilemma and agreed to write off some economic aid they had granted after World War II ‒ if they could also find a solution for Germany’s pre-war debt.
So Germany, 23 of the countries it owed money to, and the Bank for International Settlements met in 1952 to cancel some debt. Especially the US were keen on that because they supported Germany with public money as long as it didn’t have access to capital markets.
The debt in question
The first part of Germany’s debt was 14 bn Deutsche Mark from before World War II. This included a bit of Nazi debt, but the biggest part originated from what Germany had borrowed to pay reparations after World War I. Its creditors had already reduced their demands in the 1920s and early 1930s. But they got really generous when they also cancelled over 14 bn in interest debt that piled up since Germany stopped paying reparations in 1931.1
The second part of Germany’s debt included all the loans it had received after World War II to rebuild everything, for example through the Marshall Plan. This amounted to another 16 bn Deutsche Mark.
You might wonder about the costs that Germany caused by starting another world war: they were to be discussed once Germany reunited and got a peace treaty.2
The London Agreement on German External Debts (27th Feb 1953)
Even better for Germany, its amiably computed 30 bn Deutsche Mark in external debt was now more or less cut in half to 14 bn Deutsche Mark. The pre-war debt dropped from 14 bn to 7 bn and the post-war debt from 16 bn to 7 bn.
The rest had to be paid back in the next 35 years ‒ but only if Germany generated trade surpluses. The repayments could stop if they would have to be financed with new credits or by dipping into the country’s reserves.
The amazing deal for Germany was largely caused by the US. They wanted to groom (Western) Germany as a country on the frontline of the Cold War and to make sure it could contribute to future war efforts.3
Germany fulfilled the agreement and cleared its debt by 1988 ‒ except for Eastern Germany’s part which it paid from 1991 to 2010.
- The Nazis came into power in 1933 and didn’t want to pay reparations. The payments had stopped before because Germany suffered from the Great Depression.
- Around 1960, Germany made reparation deals with 12 Western European countries. Other claims were shelved in 1990, when the two German states and the four allies which occupied Germany at the end of World War II signed the Two Plus Four Agreement instead of a peace treaty.
- Others, for example the British, thought Germany could repay all its debt.