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Internal Devaluation and the Crisis in Europe


The Euro area is entering recession again. It’s tempting to call this a double-dip recession, but that would be misleading because the first recession never really ended: the EU’s output is still below the pre-crisis peak. But still, things are getting worse. It is the Southern European countries and Ireland that are dragging down European growth; but the recession in Europe’s South is now also beginning pull Germany down.

Europe’s answer to the crisis has been an orthodox one: sound public finance and ‘internal devaluation’. Internal devaluation is the modern way of saying ‘cut wages’. And this is precisely what the Southern European countries have done. In Greece real wages have fallen by no less than 17% since 2008. In Portugal by 4.5%. In Spain and Italy they fell by about half a percentage point and in Cyprus by 1.4%. Among the Western European countries in recession only in Ireland are real wages higher than they were in 2008 (there they increased until 2009 and declined thereafter).

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