In a recent Blog on Reuters, ‘Europe’s Dangerous New Phase‘, which also appeared as an article in the Financial Times (July 18th), Lawrence Summers claimed that
“… no country can be expected to generate huge primary surpluses for long periods for the benefit of foreign creditors. Meeting debt burdens at rates currently charged by the official sector for credit – let alone the private sector – would involve burdens on Greece, Ireland and Portugal comparable to the reparations’ burdens Keynes warned about in The Economic Consequences of the Peace.”
The economic history behind these comments is shaky. Total reparations demands made on Germany in the Versailles Treaty were in the region of 132 billion Marks, equivalent to over €600 billion in today’s money. This was about four times Angus Maddison’s estimate of Germany’s GDP in 1919. The burdens placed on Greece, Ireland, and Portugal today are not comparable. Moreover, President Clemenceau wanted to reduce post-war Germany to an impoverished agricultural nation, whereas all President Sarkozy wants to do is to raise our corporation income tax rate.
More importantly, though, it is wrong to claim that ‘no country can be expected to generate huge primary surpluses for long periods for the benefit of foreign creditors’. Ireland did exactly that to get out of the mess we were in by the mid-1980s. We ran a primary budget surplus for over 15 years – from 1984 to as recently as 2007. This surplus exceeded 7% of GDP for several years at the turn of the century and helped us reduce our debt/GDP ratio from a peak of 120 per cent in 1986 to less than 25 per cent in 2007. Foreign borrowing had been paid off by 2002.
In a recent article in the Sunday Business Post Dónal de Buitléir makes the case that the challenges facing us now are more manageable that those we overcame in the 1980s.