An obvious and often lamented rigidity resulting from the adoption of the Euro currency is the inability of a struggling country to become more competitive via currency devaluation. I wonder if some of the smarter eggs here could comment on whether a country could nonetheless devalue within the Euro by simply marking down wages paid in Euros - example: you were paid $X Euros per annum, now you are paid $0.9 Euros per annum. Why wouldn't that work? What are the practical difficulties?

I think it would be significantly easier and less painful to exit the Euro zone and (re-)establish your own currency than to engineer a cram down on all nominal contracts to reduce their value by 10%. To mimic a devaluation, you would have to apply your haircut to bank balances, the face value of bonds, accrued pension rights, prices of all goods and services, and undoubtedly a bunch of other things that I have overlooked. If you literally just did it to wages you would effectively be taxing wage earners and handing the proceeds to employers. I can't really think of many Euro zone countries where that would be politically palatable.

An obvious and often lamented rigidity resulting from the adoption of the Euro currency is the inability of a struggling country to become more competitive via currency devaluation. I wonder if some of the smarter eggs here could comment on whether a country could nonetheless devalue within the Euro by simply marking down wages paid in Euros - example: you were paid $X Euros per annum, now you are paid $0.9 Euros per annum. Why wouldn't that work? What are the practical difficulties?

Didn't Greece try that with pensions and government worker salaries? Humans seem very sensitive to "getting less than they used to" and reacting poorly to such changes.

Perhaps the better policy would be a EU-mandate to boost wages in the non-struggling countries.

Yes, that was a specific attempt (and it seems it didn't work per se) but I was thinking more broadly, I mean why just screw over public sector workers regardless what we might think of them? I agree with your point that this would be a terrifically difficult sell job.

 Getting Germany and other stronger Eurozone countries to inflate relatively to recreate a wage gap seems to be the implicit policy but it doesn't seem to be working either as no economy seems to be able to grow faster than a basic pulse rate. Anyway, you have made interesting observations and thank you for that. I guess I was just looking for a quick magical bullet!

Just noticed bearish's post. Yes, it might just be easier to exit and devalue.

Just noticed bearish's post. Yes, it might just be easier to exit and devalue.

I also agree with bearish point. It seems that in agreement countries agreed to have less than 3% debt of their GDP. They replaced many degrees of freedom presented by multicurrency world by one and financial market loss its stability. Many degrees of freedom make financial system more stable to external/internal forces.

 What is the compelling economic/soclal/political reason to devalue?

There seems to be an implicit assumption that devaluation is somehow 'good'.

 What is the compelling economic/soclal/political reason to devalue?

There seems to be an implicit assumption that devaluation is somehow 'good'.

The cost of a currency is defined by its exchange rate and correspondent bonds values. By using these two 'independent' parameters countries can manipulate their financing. The euro innovation replaced multi currency market within EU. Now only bonds rate is available for financial sovereign country control. It might be possible to present theoretical or real world scenario which could work quite smoothly in multi currency sovereign financial market and could lead to contradiction in a single currency EU.  

 What is the compelling economic/soclal/political reason to devalue?

There seems to be an implicit assumption that devaluation is somehow 'good'.

The traditional reason is to rebalance imports and exports by making the country's products relatively less expensive to outsiders and making imports relatively more expensive to citizens which favors greater volumes of local industry to serve incremental demand from exports and substitutes for imports.

Here's another idea: what about changing the VAT rates? If the struggling country lowers their VAT rate (and assuming VAT is paid based on the seller's domicile), it would have a similar effect to devaluation for intra-EU trade.

I see the process but what's the goal?

I see the process but what's the goal?

The goal is to prevent accelerating divergence of two regional sub-economies in which the stronger sub-economy enjoys the GDP-boosting effects of a slightly under-valued currency and the weaker one suffers from the GDP-sapping effects of what for that region is an over-valued currency.

I see the process but what's the goal?

The goal is to prevent accelerating divergence of two regional sub-economies in which the stronger sub-economy enjoys the GDP-boosting effects of a slightly under-valued currency and the weaker one suffers from the GDP-sapping effects of what for that region is an over-valued currency.

There two relationships which bind economy and finance. These are International Fisher Effect (IFE) and Purchasing Power Parity. Interest Rate Parity is a pure Financial issue. These three relationships worked in the real world in multi currency financial market in pre-euro Europe. Presenting a single currency one can theoretically present calculation of heuristic local currency. Changes and deviations in application original rules which represent euro value is an illustration of the wrong way that was used in a single currency substitute of the multi currency market. VAT is a kind of adjustment used that looks cover the loss of PPP in Euro Zone.  

Why wouldn't that work? What are the practical difficulties?

Unions and political consequences.

The traditional reason is to rebalance imports and exports by making the country's products relatively less expensive to outsiders and making imports relatively more expensive to citizens which favors greater volumes of local industry to serve incremental demand from exports and substitutes for imports.

Devaluation can lead to imported inflation.

Q – what about domestic debt?

Why wouldn't that work? What are the practical difficulties?

Unions and political consequences.

The traditional reason is to rebalance imports and exports by making the country's products relatively less expensive to outsiders and making imports relatively more expensive to citizens which favors greater volumes of local industry to serve incremental demand from exports and substitutes for imports.

Devaluation can lead to imported inflation.

Q – what about domestic debt?

Devaluation could lead to exported deflation, too, no? It depends on the balance of trade. Of course the real story is more subtle because every industry (and every consumer) has a different balance of trade -- consumers in healthcare and technology (which are often reliant on imports) would suffer inflation whilst consumers and producers in globally competitive products (e.g., Greek Feta, Portuguese Amontillado) might see deflation. That implies that devaluation would have the greatest chance of benefits if the country's export-industries were also it's most labor-intensive industries and the country's import-dependent industries were less labor-intensive.

I'm not sure about the effects on domestic debt beyond the effects of any net inflation/deflation. Of course, any debts denominated in foreign currency could get ugly and there might be secondary impacts on the domestic pools of capital if foreign lenders/investors pull out of the country.

I see the process but what's the goal?

The goal is to prevent accelerating divergence of two regional sub-economies in which the stronger sub-economy enjoys the GDP-boosting effects of a slightly under-valued currency and the weaker one suffers from the GDP-sapping effects of what for that region is an over-valued currency.

I am sure such disparities are also seen in the states off the USA? Oregon and Maine, for example to take two random examples.