Are France and Italy right to reject internal devaluations?

The COVID crisis will drive up cost competition between the euro-zone countries, as companies will seek to reduce their production costs in order to restore their profitability. When Germany (in 2000) and Spain (in 2009) found themselves with excessive production costs, they chose to carry out an internal devaluation (a reduction in labour costs). France and Italy have always refused to do so (reduce wages; France has reduced corporate social contributions). In an environment of strong cost competition, is France’s and Italy’s position tenable ? The cases of Germany and Spain show that it takes five to six years for a country that carries out an internal devaluation to regain its initial standard of living. To be sure, the improvement in cost competitiveness ends up boosting exports, investment and employment . B ut the internal devaluation comes at a very high initial cost. If France and Italy continue to reject this policy, then their only alternatives are to: Reduce corporate taxes; Move up the value chain.