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The role of internal devaluation on the correction of the Spanish external deficit


  • Paloma Villanueva

    (Instituto Complutense de Estudios Internacionales (ICEI), Universidad Complutense de Madrid.)

  • Luis Cárdenas del Rey

    (Universidad Isabel I e Instituto Complutense de Estudios Internacionales (ICEI), Universidad Complutense de Madrid.)

  • Jorge Uxó

    (Departamento de Análisis Económico y Finanzas, Universidad de Castilla – La Mancha.)

  • Ignacio Álvarez

    (Instituto Complutense de Estudios Internacionales (ICEI). Departamento de Estructura Económica y Economía del Desarrollo, Universidad Autónoma de Madrid.)


The Spanish economy has been one of the EU’s most affected by the Great Recession of 2008, recording a rate of unemployment of 26.2% in 2013. However, since 2014 Spain is growing faster than most Euro Area countries, reaching an annual growth rate over 3% during the period 2015- 2017. Moreover, it has turned its historical current account deficit, which peaked in 2007, into a surplus of 2 % of GDP in 2017. International and Spanish institutions, as well as some scholars, have rooted this readjustment of the current account in the “internal devaluation strategy”. Consisting in the reduction of wages, this strategy is supposed to have boosted exports and therefore Spanish economic activity, through the reversion of the accumulated loss of price-competitiveness since the creation of the European Monetary Union. Nevertheless, empirical evidence shows that changes in demand (and some exceptional factors as the recent evolution of oil prices) are much more important to explain the evolution of Spanish net exports than changes in price competitiveness. Based on an extended version of the Bhaduri-Marglin model, which enables the disentangling of the price effect from the demand effect, this paper sheds light on the true influence of internal devaluation on the deficit correction occurred in the Spanish external sector. It reveals that wage restraint has meant only limited gains in price-competitiveness, having affected external balance mainly through a “demand effect” on imports, although to a limited extent. The estimations carried out show that the internal devaluation strategy readjusted the Spanish external sector by 1.74 p.p. during the period of 2010-2017. Of all this correction, 98% is induced by a change in the demand of the economy, and only 2% is due to the effect on prices. It makes also clear that although exports performance has been remarkable during last years in Spain, it does not differ much from the previous decade, and it cannot be explained by internal devaluation.

Suggested Citation

  • Paloma Villanueva & Luis Cárdenas del Rey & Jorge Uxó & Ignacio Álvarez, 2018. "The role of internal devaluation on the correction of the Spanish external deficit," Working Papers del Instituto Complutense de Estudios Internacionales 1805, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales.
  • Handle: RePEc:ucm:wpaper:1805

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    Blog mentions

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    1. Das gefährliche Beispiel Spaniens
      by Markus Diem Meier in Never mind the markets on 2020-06-23 03:00:17


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    Cited by:

    1. Luis Cárdenas & Paloma Villanueva & Ignacio Álvarez & Jorge Uxó, 2018. "Peripheral Europe beyond the Troika. Assessing the 'success' of structural reforms in driving the Spanish recovery," FMM Working Paper 40-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

    More about this item


    Spanish current account; Wage share; Price-cost competitiveness; Internal devaluation; Bhaduri-Marglin.;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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