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Saturday, January 11

11th Jan - Special: Internal Devaluation: Case Estonia

30-Jan-2011 Estonia’s recovery holds little hope for eurozoneFT
It depends on how necessary it is for those countries to have as favourable “initial conditions” as Estonia. Whatever my differences with Mr Krugman over Estonia’s policies, he has been right about the general dangers of “debt overhang”, or the “debt trap”, for internal devaluers.

Described by Irving Fisher in 1933, these overhangs and traps are created as government and private austerity cut household and corporate cash flows, so those borrowers are less able to service their debts. As more of them default or fail, and as wages fall and unemployment rises, the government, in turn, gets less tax revenue to service its debts.

11-Jul-2011 Greece can’t follow Estonian, Latvian recipeMarketWatch
Baltics’ debt problems were on different scale

14-Jul-2011 Estonian exceptionalismThe Economist
A rare bit of good news from a euro-zone economy

02-Feb-2012 Why Estonia Loves the EuroBusinessWeek

20-Apr-2012 Can austerity bring growth?TripleCrisis
European crisis resolution seems to rest on one hope: austerity can bring growth. History and most of economic theory seems to suggest that this is not possible. The Baltics peg to differ. Or so it seems…A closer look shows that the current Baltic recovery has not resulted from the internal devaluation but rather from other factors not under the control of the Baltic governments…If not internal devaluations, then what is behind the Baltic recovery in 2011? There are two key factors: flexible labor markets and integration of export sectors into key European production networks.

May-2012 Austerity that never was? The Baltic states and the crisisLevy Institute
The Baltics ‘outsourced’ their recovery, and they did it very well…the massive use of EU fiscal funds (20 percent of Estonia’s 2012 budget is EU transfers) and extreme integration of the export sector with Scandinavian producers…even if the EU periphery could somehow manage to replicate the political conditions, they still would not have similar economic factors.

Jun-2012 Labour market adjustments in Estonia during the 2008/2011 crisisLevasseur
The strategy of internal devaluation succeeded in shrinking the real (hourly) unit labour costs by 25 % per year in 2010 and 2011.

6-Jun-2012 Why Internal Devaluation Is AdvantageousPIIE
Nominal devaluation has neither been necessary nor beneficial for the regaining of competitiveness. On the contrary, if a country maintains a fixed exchange rate, it is forced to undertake more structural reform, and is more likely to do so.

6-Jul-2012 Internal adjustment of the real exchange rate: Does it work?
Our findings suggest that internal adjustment can work, but is a very painful process. In the Eurozone, these findings call for unit labour cost increases and a slower pace of fiscal consolidation in the ‘core’ countries and a weaker exchange rate of the euro.

6-Jun-2012 Estonian RhapsodyKrugman / NYT

20-Jul-2012 Krugmenistan vs. EstoniaBusinessWeek

Sep-2012 Can struggling eurozone countries achieve necessary ’internal devaluation’ – and at what political cost?Open Europe
The experiences of the Baltic states show that large-scale internal devaluation is both economically possible and desirable, in terms of returning to economic growth. However, the Baltics’ adjustment was preceded by very rapid GDP growth. Significant contraction in wages and GDP had less perceived effect since the population had yet to consider the pre-crisis standard of living as the norm… Crucially all other existing currency unions also rely on a common fiscal backstop, therefore although internal devaluation is necessary it is alone unlikely to be sufficient to solve the eurozone crisis.

17-May-2013 The periphery's problem is an incomplete internal devaluationThe Economist
An “internal devaluation” and a “true devaluation” are different. Both address flow but only a “true devaluation” adjusts stock. Consider a counter-factual, where Spain had remained in Stage 2 of EMU (ie in the ERM, not the euro) and had realigned 30%, rather than “internally devalued”. The effect on flow accounts such as wage costs would be the same, but not on the stock.

13-Nov-2013 Europe: The Failure of Internal DevaluationEconoMonitor
With current policies failing to address internal and external balance requirements, the combination of prices and wages policies and overt money financing of budget deficits would provide a policy mix that would greatly improve the economic prospects of troubled European countries.