Friday, October 28, 2011

The Economics of Internal Devaluation

Today’s post by Henry Kaspar for Kantoos Economics,  here, is well worth reading.

“Internal devaluation is tough. Assume Portugal is overvalued by 20 percent, and suppose it maintains its current speed of adjustment, i.e. – 0.9 percent per year. If unit labor costs for the average of the euro area continues to grow by just 0.8 percent annually, it will take 14 years until Portugal has restored a competitive position. Neither investors nor the Portuguese and wider European public will grant the process that much time.”

The punch line:
“there are few (if any) examples in history of heterogeneous countries that were able to tie their currencies together for long periods.”

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