Internal devaluation during euro crisis had ‘limited effectiveness’

The policy of internal devaluation in response to the eurozone debt crisis has had only limited effectiveness, according to two World Bank economists.

“The evidence suggests that the policies of internal devaluation implemented in the periphery, with the aim of boosting external competitiveness by curtailing labour costs, may have had only limited effectiveness in restoring the external balance to equilibrium,” said economists José Luiz Diaz Sanchez and Aristomene Varoudakis.

“Internal devaluation may have certainly contributed to a contraction of domestic demand and, through this channel, may have helped absorb external imbalances in the eurozone periphery. However, an unintended consequence of this correction has been a potentially large redistribution of income at the expense of wage earners in the periphery.”