Report
For an internal devaluation in a euro-zone country to remain effective into the medium term, it must bring about an increase in productivity gains
The only way for euro-zone countries to restore cost competitiveness is to carry out an internal devaluation (reduce their labour costs). This was done in Germany from 2000 to 2005 and has been done in Spain since 2009. In the short term, the fall in labour costs gives the country a competitive advantage that boosts its exports, investment and production. But this advantage disappears if the country does not use this period of higher growth to lift its productivity gains. If productivity gains remain low, the cost-competitiveness advantage ends up losing its effect and growth returns to the low level of potential growth. Productivity gains picked up in Germany after its internal devaluation; there is no sign of productivity gains picking up in Spain at present, which may be cause for concern over the country’s growth outlook.
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Natixis
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Patrick Artus
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