Internal devaluation: A controversial effort for adjustment within the Euro area

Eszter Boros

doi:10.1556/032.2021.00002

Abstract

AbstractThe euro crisis and its lessons are still not a closed chapter for economists and policy makers. The challenge to find the most appropriate ways to prevent intra-area imbalances is still on the top of the agenda. Nominal adjustment (internal devaluation) remains one of the most critical aspects of this debate. Many are indeed interested in whether austerity measures in several countries “made sense.” But much more is at stake here than evaluating the past. The true question is whether the eurozone can rely on nominal adjustment to align internal economic fluctuations. This paper contributes to the answer by investigating the size of price changes and their impacts on output and trade in the wake of the euro crisis. Selecting the most appropriate variables to measure competitive outcomes, the basic idea of “expansionary contraction” is tested. We rely on a comprehensive panel of all Eurozone member states in the post-crisis years (2010–2017). The results suggest that flexible price levels cannot be taken for granted, and a link to competitiveness is not self-evident, either. Other channels of adjustment may prove to be more important, but scaling them up will ultimately require a sound consensus on the future architecture of the euro.

Highlights

The euro crisis and its myriad corollaries turned into one of the most striking problems of the last decade
This paper aims to contribute to that understanding by investigating the effectiveness of price adjustment in the EMU during and after the euro crisis (2010–2017)
This paper examined the outcomes of price adjustment in the euro area in the aftermath of the crisis

Summary

Introduction

The euro crisis and its myriad corollaries turned into one of the most striking problems of the last decade. A key aspect of the issue is related to the euro as a common currency. Studies have extensively discussed whether the uniform monetary framework had contributed to rising intraarea imbalances leading up to the 2010–2012 crisis. Years after the turmoil and several bailout packages, it is essential to evaluate the core idea underlying the policies of the EU-IMF creditors. This is key because the future of the Eurozone (EMU) largely depends on finding the most effective ways to align intra-area economic fluctuations

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Conclusion