London Agreement 1953

We find that debt cancellation within the LDA has stimulated economic growth in three ways: the creation of fiscal spaces for public investment; reducing the cost of credit; and stabilizing inflation. Using differential regression models that compare the years before and after LDA, we find that the LDA resulted in a significant increase in per capita social spending in real terms in the areas of health, education, housing and economic development, which was significantly higher than other types of spending. including military expenditures. We also note that benchmark yields for long-term bonds, which refer to default risk, declined significantly in West Germany at the start of the LDA negotiations in 1951 and then stabilized at historically low interest rates after the ratification of the LDAM. Although the Marshall Plan mobilized large sums of financial aid ($13 billion, or 2% of US GDP), financial aid to Germany was relatively small ($1.4 billion) compared to the sums allocated to Britain and France (Eichengreen 2011). We begin our analysis in September 1951, as this is the first month in which trade statistics at the monthly level and for different currency areas are recorded uniformly in the reports of the Deutsche Bundesbank. We tested the robustness of the models on alternative baselines by choosing different times between September 1951 and July 1953 and between August 1953 and December 1955 and finding that none of the main results were different. . .

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