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

Eszter Boros ()
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Eszter Boros: Institute of Finance, Accounting and Business Law, Corvinus University of Budapest, Fővám tér 8, H-1093, Budapest, Hungary

Acta Oeconomica, 2021, vol. 71, issue 1, 33-57

Abstract: The 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.

Keywords: Euro area; monetary union; euro crisis; price adjustment; internal devaluation (search for similar items in EconPapers)
JEL-codes: E31 E42 E52 F14 F15 F32 F45 (search for similar items in EconPapers)
Date: 2021
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