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Internal vs external devaluation

Author

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  • Sophie Piton
  • Yves-Emmanuel Bara

Abstract

The current crisis revealed the threat posed by current account imbalances on the very existence of the euro area. In the absence of a federal response, national rebalancing efforts will be needed. Two adjustment strategies seem at hand: external or internal devaluation. The Latvian and Irish experiences show that internal devaluation consists in a slow process allowing only limited adjustment to the price of persistent social costs. Argentina and Iceland, who let their currency depreciate, have undergone a radical therapy: immediate adjustment and relatively quick recovery. If more effective, external devaluation does not seem available to euro area countries as exiting the monetary union would entail dramatic costs. Internal devaluation processes must be backed by a cooperative European strategy. French Version

Suggested Citation

  • Sophie Piton & Yves-Emmanuel Bara, 2012. "Internal vs external devaluation," La Lettre du CEPII, CEPII research center, issue 324.
  • Handle: RePEc:cii:cepill:2012-324
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    Citations

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    Cited by:

    1. Ines Kersan-Škabić, 2016. "Is Internal Devaluation Policy In The Eu Effective?," Economic Annals, Faculty of Economics, University of Belgrade, vol. 61(211), pages 29-46, October -.
    2. CHIRIȚOIU Dorin Iulian & BURLACU Rodica, 2015. "Do Austerity Measures Harm International Trade?," European Journal of Interdisciplinary Studies, Bucharest Economic Academy, issue 01, March.

    More about this item

    Keywords

    adjustment; current account balance; fixed exchange rate regime;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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