The economic consequences of the 1953 London Debt Agreement

The London Debt Agreement (LDA) eliminated half of West Germany’s external debt. Subsequent years witnessed unprecedented economic growth. The LDA likely contributed to economic growth by creating fiscal space for public investment and social spending, restoring the full convertibility of the Deutsche Mark, and stabilising inflation. The LDA was associated with a substantial and statistically significant rise in real per capita social expenditure relative to other spending categories. Synthetic control methods also show that under the counterfactual of no debt relief, overall expenditure might have been lower by 17 percent. The LDA also facilitated the reintegration of Germany into global markets and full convertibility of the Deutsche Mark by catalysing accumulation of sufficient US-Dollar reserves.