Internal vs external devaluation

Sophie Piton and Yves-Emmanuel Bara

La Lettre du CEPII, 2012, issue 324

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

Keywords: adjustment; current account balance; fixed exchange rate regime (search for similar items in EconPapers)
JEL-codes: E42 F32 (search for similar items in EconPapers)
Date: 2012
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