Italy’s main problem: It is the only euro-zone country to reject an internal devaluation

An internal devaluation is a reduction in labour costs in a country in a currency area, and which restores the country’s cost competitiveness. This could be a reduction (a slowdown) in wages or a reduction in companies’ social contributions. In the four largest euro-zone countries, there has been an internal devaluation in Germany from 2003 to 2007; in Spain since 2009; and in France in 2019. In Italy, where unit labour costs have risen rapidly, there has never been an internal devaluation as such a policy has been rejected. Since Italy’s cost competitiveness has continued to deteriorate, this has inevitably led to further market share losses and deindustrialisation, weak investment and productivity and rising structural unemployment, and therefore the risk of a political and economic crisis in the country. We are not saying that an internal devaluation is a simple or desirable adjustment, but if a country in a currency area is the only member country that does not carry out an internal devaluation, it will be in trouble.