The adjustment problem in the euro zone

The euro-zone crisis from 2010 to 2014 reminded us that even in a currency area where currency risk has disappeared, countries could not accumulate excessive external debt. The question of current account balance adjustments therefore arises in the euro zone. In a flexible exchange rate regime, this adjustment is made via exchange rates, but this is obviously impossible in a currency area. The usual theory is that in a currency area (in the euro zone), internal devaluations must be used: a country with an external deficit must lower labour costs to improve its cost competitiveness. But the use of internal devaluations raises several problems: If it is not combined with internal appreciations (a rapid rise in labour costs in countries that have external surpluses), it is asymmetric and at equilibrium leads to downward pressure on wages in the currency area, and therefore to a deflationary spiral; The cost (in terms of demand and employment) for the country that carries out an internal devaluation is very significant; it takes a long time for the initial loss of domestic demand to be corrected. It should therefore be noted that the adjustment process is costly in a currency area, especially if there is no agreement to make it symmetrical .