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Tuesday, October 2, 2012

Internal Devaluation: Krugman and Open Europe paper

Paul Krugman comments on an IMF working paper about the EZ Imbalances
 internal devaluation becomes even more necessary
He ends his column thus;

Food for thought – and for even more europessimism.

 I must come back on this
In the meantime, Open Europe has a paper out here about the necessity, and the necessary internal devaluation the EZ periphery countries must achieve in order to have any hope of staying in the EZ, in the case they want to.
Here's some of the exec.summary:
 Struggling countries in the eurozone – Portugal, Italy, Ireland, Greece and Spain (PIIGS) 
– do not have the option of currency devaluation to get their economies back on track. All 
adjustment must instead be achieved by nominal prices, wages and asset values falling 
– so-called ‘internal devaluation’. This means that the population will have to pick up all 
the slack through falling wages, fewer social benefits and less job security. Therefore, 
the risk of political and social fallout – through strikes, riots or even wider political unrest 
– increases massively.  
 It is clear that the PIIGS need to undergo far-reaching structural reforms to improve their 
labour and product markets in order to regain competitiveness. Failing this, the stronger 
euro countries will be paying for the weaker ones indefinitely in a transfer union. The 
alternative is a eurozone break-up.  
 Spain, Italy and Ireland, in particular, can s 

Check it out... it's only eleven pages.

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