Can Germany buy some Lebensraum in exchange for debt relief?

The short answer is: no, they can't; but since stopping at the short answer is little fun I'll elaborate.

Two members of German parliament have recently said that Greece should consider selling some of its assets to reduce its enormous debt. Quoting from one of the German MPs:

Those in insolvency have to sell everything they have to pay their creditors. Greece owns buildings, companies and uninhabited islands, which could all be used for debt redemption.

Some of the Polish blogosphere is extremely worried by this. "Germany wants Greek islands in exchange for helping them pay their debt," bloggers write; "When will Germany offer to help Poland in exchange for assets?," they add. The nightmare scenario is that Polish finances get so bad that the government is on the brink of bankruptcy, and then the German government tells Poland that it'll bail it out but only in exchange for, say, some land. This is a charmingly naive way to view politics, but also an entertaining thought experiment. And it is true that Polish government could be in some deep fiscal trouble in the long run, so Poland becoming insolvent is certainly not an impossibility.

Before I go on to consider if this scenario could actually happen, two things need to be set straight. First, Germany doesn't actually want Greece to sell any assets, at least not officially and not yet. Those quotes I was talking about are just cheap talk that politics is full of; they've appeared in press interviews with German MPs, and no member of the German government has ever said anything like that. Second, even those quotes do not say anything about Greece selling assets to Germany; rather, the point they make is that Greece should try to sell them to its creditors.

But forget for a moment that what the bloggers fear is happening actually isn't, and think about if it could happen. Suppose the German government does (unofficially) make a threat like that. Would this be a viable way for Germany to blackmail Greece or Poland, or whoever, into doing something that Germany wants?

The answer is no, and here's why. The German government wouldn't be able to force Greek or Polish governments to do anything that would be hugely unpopular in the eyes of Greek or Polish voters, because even a government that is completely insolvent has some options and doesn't have to accept a bailout on arbitrarily bad terms. And, the German government wouldn't want to force Greek or Polish governments comply with its smaller-scale demands, because that would in all likelihood not be worth the money that Germany would need to spend on paying down Greek or Polish debt.

Suppose Poland is insolvent; the government can't borrow anymore, at any interest rate, nor does it have the money to pay down any of its public debt. Then, Angela Merkel comes and says, "We'll pay down enough of your debt so that you'll reattain liquidity--but only if you give us some of your land that we feel belongs to us." What happens next? The government of Poland definitely does not want to default; that would mean not being able to cover budget deficits, huge riots on the streets, etc. It's almost certainly impossible for any government in Poland to survive politically after defaulting on its debt. But, it's also almost certainly impossible for any government in Poland to survive politically after giving land away to Germany in exchange for debt relief. So, the government would tell Angela Merkel, "Screw you, we're going to the IMF." Now IMF emergency loans are no fun; they come with many strings attached, in the form of having to implement some very unpopular policies. But, from the point of view of a hypothetical Polish government, they're still much better than either defaulting or selling off to the Germans. (And if Merkel's offer is rejected, Germany couldn't force Poland to comply anyway--because if they could, then why on Earth would they be offering to pay Polish debts in the first place?)

The same is true for Greece now; as soon as Germany started making any demands for "uninhabited islands" or some such, Greece would leave the Eurozone and go to the IMF for help instead. That's not a real possibility, however, because Germany isn't demanding any islands, because they know they can't get them. And that's also why the Greeks want Germany to help them instead of the IMF--they think that German bailout will have better terms than the IMF one would.

What if, instead of demanding half of Poland, Germany demanded that Polish government do something less spectacular, something that perhaps Polish voters wouldn't even be aware of? As opposed to the first scenario, this one isn't an outright impossibility; but I'd still argue that it's extremely unlikely. What type of favor would it be that Germany could want? Large shares in government-owned companies? You can't keep transactions like that a secret, even if they're done secretly. And transactions that you can keep secret are most likely too small to be worth the price. Again, the example of Greece is useful. German government does not seem to think their helping Greece is a good deal at all. They don't want to do it. It's expensive, plus German voters are angry at the thought of their tax money being used to pay Greek pensions and public sector wages. Merkel's government is probably going to have to bite the bullet on this, but it's already taking measures to ensure that if this sort of thing happens again, they won't be the ones stuck with most of the bill. Now Greek debt amounts to about $350 billion (which is 110% of their GDP). Polish economy is bigger; its GDP is about $450 billion and, presumably, its debt would have to get somewhere close to that level for insolvency to become a real possibility. (Currently it is at about half that amount.) In other words, bailing out Poland would be considerably more expensive than bailing out Greece for the Germans. I don't think they'd want to pay that much for anything they could realistically get in exchange for such bailout.