Devaluing Currencies May Not Be Such a Great Economic Cure After All

Reader Swedish Lex points out an important implication of a recent VoxEU post on the Nordic economic model and how it fared in the crisis:

The Nordic countries – Denmark, Finland, Iceland, Norway and Sweden – are champions of free trade and open markets…

The Nordics have all had different monetary regimes since the euro. Given their similarity in other respects, a comparison of Finland and Sweden is especially interesting. It is almost a laboratory experiment. Sweden has a floating exchange rate and an independent central bank geared to price stability, while Finland is part of the Eurozone. Who has made the better choice?

The krona was mostly stable and developments in Finland and Sweden were strikingly similar during the first decade of the euro. Once the crisis erupted, however, the krona fell significantly relative to the euro, thereby strengthening the price competitiveness of Sweden relative to Finland and the euro area. One might expect this to help Sweden come through the crisis at less cost than Finland, arguably benefitting at the expense of its neighbour by capturing market shares.

The decline in exports and output in 2009 was indeed smaller in Sweden than in Finland, and GDP growth is forecast to be somewhat faster. However, the differences do not seem large. Also, manufacturing output shows little response to the change in competitiveness, and unemployment is rising in parallel with developments in Finland.

Either the effects of the improved competitiveness are relatively modest or the lags are long, or a depreciation of a floating currency has less effect on export and output volumes than a devaluation of a pegged currency used to have. What is clear is that the floating exchange rate does not insulate an economy from external shocks, and the economic differences between the two exchange rate regimes seem smaller than often claimed in the heated debate about the Eurozone.

Yves here. A standard remedy for a country faced with an economic crisis, or a mere severe recession, is to break glass, trash currency, and use the resulting export boom as a way to restart growth. But as Swedish Lex notes:

The importance of the “usefulness” to the economy of the de facto devaluation of the Sterling, and of the hypothetical devaluations of Greece etc. should they leave the euro, constitutes a core issue when debating the ifs and buts, pros and cons, of different macro scenarios. This comment posted on VoxEU briefly compares Sweden and Finland, countries with similar economies, and how they have fared inside and outside the euro zone during the crisis. The tentative conclusion seems to be that Sweden, despite a rather massive de facto devaluation did not gain a massive competitive advantage.

Is the Swedish economy too intermingled with the euro economy (and the U.S.) too get the kind of adrenalin kick that the devalulations of of 20 and 30 years ago gave? If this tentative conclusion is extrapolated, it could mean that Greece etc. would not get massive boosts by going back to national currencies followed by significant drops in the vaule of their currencies.

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  1. Bill Wilson

    Greece and Sweden have very different economies. For one Greece relys a lot on tourism (rapid adjustment possible) and has suffered as it has become a more costly destination. An exit from the Euro, and a sharp devaluation would help more, especially if it happened just before tourist season. In addition about 90% of tourists come from Europe, adding another kick.

    A better example exchange rate comparison might be between Canada and the US. The rate has fluctuated a lot over the last 40 years and the one thing that is obvious here is that there were large lag effects to benefits from a depreciating currency.

  2. bb

    i agree devaluation is neither a cure for lost economic competitivness, nor cure for coping with the aftershocks of crises, it is simply another confirmation that something bad had happened and there is a price to be paid in the form of lower purchasing power.

    devaluation works only in textbook examples where totally free trade is present, no politics and no nationalist interests play any role in purchasing decisions, where every business works just-in-time and there is ample supply of every input and total flexibility to adjust supply chains in no time, no hedging takes place, there are no strong relations along the supply chain, and so on… of course no country on the face of earth exhibits such characteristics.

    i will give a fine example in a highly commoditized sector: steel. russia got hit hard by the crisis, but it did not capture market share neither in china, nor europe, nor the u.s. neither did ukraine which got hit by the crisis even harder. with more sophisticated goods the adjustments in the supply chain should be even more complex than with raw materials.

  3. Adam

    I think a key point is that much of the world is trying to deleverage all at the same time. This means demand in general is falling. It doesn’t matter if you devalue your currency if nobody has an demand for your goods. AND, everyones trying to devalue at the same time so it becomes a wash. There are no simple fixes to this mess.

    1. Richard Kline

      So Adam, you summarize the basics well: devalue in what context? A country by itself experiencing a debt/currency crisis might get some advantages by a devaluation. One captures demand. In the present global economy, demand is generally downtrending. Hence less demand to go around; hence no increase of demand captured. What one accomplishes is debt deflation (-currency against same debt if foreign denominted) and import inflation (-currency against same external prices, a near certainty). The advantages of devaluation are not to be found, and the situation may actually be worse. That excludes the _advantages_ of staying in a currency union with a larger economic context. Bailouts, guarantees, stimulus spending, and refinancin are all options which to some extent are possible while staying in a larger group. A go-it-alone type gets none of them.

      If I was a betting man, I’d bet on a currency devaluation/collapse by Japan and the UK both before that of Greece because Greece is part of a larger group which has an incentive in muddling through. Of course, it is far, far easier for currency speculators/pirhanas to attack a small country with big problems, i.e. Greece, than larger countries with the ability to stretch out their even bigger problems over timeframes longer than said pirhanas find palatable.

      One has to look at the whole context, to me.

  4. Kevin de Bruxelles

    There are several drawbacks associated with currency devaluation that seem to get short-shrift in these discussions. The most obvious is that any external debt nominated in foreign currency goes up the inverse amount that the local currency depreciates. So you really need to at least partially default to take full advantage of the depreciation move. The second problem is that the cost of imports go up. Now if these imports can be produced locally then so much the better. But there will be a problem if for example energy, or other raw materials that are required for manufacturing are not locally available. Not to mention the hit people will feel to their standard of living from the suddenly more expensive imported food and consumer electronics that are not locally available.

    In reading “The Wages of Destruction” by Adam Tooze, which studies the economy of Nazi Germany; Hitler and crew resolved this dilemma by not devaluing the Reichsmark at all but instead giving state subsidies to exporters and drastically limiting imports to those vital to the arms industry. I’m not sure these policy choices are a possibility today, but the example does show the problems associated with devaluation.

  5. DoctoRx

    Perhaps what matters most is whether devaluation brings a currency to fair value or temporarily slightly below fair value?

    If deval is to a level well below fair value, all that happens is that the country with the other, now overvalued currency receives a kick in the pants equal and opposite to the stimulus received from the suddenly “poorer” member of this pair.

  6. Bas

    No country seriously contemplates leaving the euro, just as no eurozone country seriously contemplates forcing a member state out. Scenarios like these are dreamt up exclusively by folks in non-euro, english-speaking countries. Economic competitors, so please consider the source.

    Yet the depressing thing to me is that even anglophone papers I trusted and blogs I liked are without exception following this lead. The only contrarian sounds are in German, French and Dutch. It’s massive, it’s monolithic, it’s quite awesome but also utterly ridiculous.

    Whether this is media-assisted hedgefund speculation, currency manipulation by other means, sheer anti-europism or whatever – believe me, it’s all a giant scam. Take your fake disasters and false emergencies back to Britain and America – we’ll just keep the capitalism.
    Thank you. Good luck clearing your own debts.

    1. An angry French taxpayer


      Clearly expressed. My feeling is that:

      1- anglo-saxon wealth taken as whole is speculating heavily on FX-markets. They need this organised and promoted including on the courageous blogosphere,

      2- their relative vested interest in banking is definitely higher than continental Western Europe. They need the “so-genannte” PIIGS bail-out even more than the vested interests of our banks,

      3- the “neo-con” ideology still has the upper hand on the wrecked financial press.

      1. An angry French taxpayer

        Sorry for the poor expression. Correction:

        1- anglo-saxon wealth taken as whole is speculating heavily on FX-markets. They need this “PIGS bashing” heavily organised and promoted ON ALL MEDIA including on the courageous blogosphere,

    2. DownSouth


      Do you really believe that sort of chauvinism is helpful?

      I mean, it’s tantamount to saying “our criminal bankers are better than yours!” It’s the kind of anti-US hyperbole Mexican politicians spout when they want to draw attention away from their own corruption and incompetence.

      Even if it’s true that only Europe’s garage is on fire, whereas in the US and Great Britain the entire house is burning down, what sort of consolation is that?

      1. IF

        Every German knew when the Greek joined the Euro 9 years ago that the Greek faked the statistics and did not clear the stability pact. The stability pact designed by Kohl was designed to keep countries like Greece out of the Euro, but it was circumvented. The point here is, everybody knew. The information did not change in the last month. Nevertheless the price of German and Greek bonds really started moving 2nd week in January.

        Markets being efficient?

        Now, reading reader comments even on somewhat upper class papers like FAZ (don’t get me into the tabloids), you would know that Angela Merkel can’t make promises to Greece, at least yet. So, expect this to go on for a while if the market pressure persists.

        1. charcad

          So, expect this to go on for a while

          This is precisely my expectation. A good long while. Years. Not even the spectacle of wholesale massacre of unarmed civilians was sufficient “stimulus” for the sophisticates (sophists) of European chancellories.

          you would know that Angela Merkel can’t make promises to Greece, at least yet.

          I have trouble seeing any German chancellor acquiring the power to make such promises to or for other countries, no matter where they’re located in Europe. At least without fresh parliamentary elections where this trans-euro bailout topic is front and center on the agenda.

          Guido Westerwelle’s Free Democratic Party (Merkel’s coalition partner) won a record 14% in German parliamentary elections late last year. And they ran on a platform of Ebeneezer Scrooge fiscal austerity. I’m sure he’s laid down fluorescent safety lines for Merkel to walk between on this subject of financial guarantees for high deficit Club Med states.

          1. owning_to_rent

            ‘Guido Westerwelle’s Free Democratic Party (Merkel’s coalition partner) won a record 14% in German parliamentary elections late last year.’

            Yep – and if the SWR radio news reporting last week about how 50% of the voters that comprised that record breaking 14% FDP result have abandoned the FDP in disgust at their policies is as reliable as most of the other reporting from them is, then you may want to consider how past performance is not a promise of present, much less future, performance.

            The reporting in Germany from a media source such as SWR is quite a bit bit different than the U.S. press. For example, have you heard anything about how the LBBW offices were massively searched about a month ago for documents concerning financial transactions with American banks in the 2006-2007 time frame, involving the crime of Untreue? Which is both what Ackermann of Deutsche Bank fame was found guilty of in the Mannesman trial – where he proclaimed that his prosecution would signal that Germany was excluding itself from the modern practice of capitalism as routine in such leading lights of financial engineering as the U.S. – and a very hard crime to translate into English, as the terms perfidy, breach of trust, betrayal of trust, disloyalty all reflect what is being prosecuted. That is, betraying your responsibilities to those who you owe faith, such as shareholders, depositors, employees, management. The LBBW employees are being investigated because signing contracts with American institutions in that time frame was clearly a reckless and irresponsible act, motivated by something other than prudent concern for one’s own employer or those depositors and creditors who rely on sound banking practices.

            Some places, however flawed and hesitant the process is at times, seem to have a much clearer view of what happened, and the need to punish, at least to a degree, those involved in creating the situation. Yes, I know, something Americans are certain will happen at some point in their fine country, while not even noticing something like how the EU just rejected the SWIFT agreement, basically telling the U.S. that the season for free fishing in the pool of international financial transactions is now over. Yes, yes – the euro is going to collapse any day now, or East European banks/markets/nations are going to implode this spring in the way they didn’t implode last spring, as so widely anticipated then – in the English language press, at least. Other countries tend to have a slightly different focus on their reporting, which goes along with the fact they also have different interests. And quite honestly, angering Washington these days is seen as much as a matter of simple self-preservation as anything else. Just because the U.S. decides to torture, funnel huge amounts of money to those who caused the problems, and maintains assassination lists of its own citizens is no reason for other countries to follow suit, regardless of how much Washington minds.

        2. DownSouth

          Well if “Every German knew when the Greek joined the Euro 9 years ago that the Greek faked the statistics and did not clear the stability pact,” and yet the big German banks broke two pairs of high heels in their rush to get down to Greece to loan them money, then it sounds to me like rank and file Germans are as big of chumps as rank and file Americans are.

          But this attitude of blaming the Greeks really is stupid. Face it, it’s not the Greeks that made fools of the Germans, it’s their own German bankers. You know if you go around indiscriminately handing out money, somebody’s going to take it. I’ll guarantee it.

          Now don’t get me wrong. I don’t at all hold rank and file Germans accountable for this situation. I’m not too familiar with the political situation there, but I assume the German people are up against the same sort of juggernaut that we in the US are.

          So I’m for the German people. But I’m also for the Greek people. But I’m against the international criminal banking cartel. I just wish people could have as much compassion for the Greeks as they do the homeowners who fell into the bankers’ trap.

          And thank heavens the Europeans are showing a little more spunk in standing up to the international criminal banking cartel, unlike the Americans who seem to be euthanized. So I very much admire the Europeans, including the Greeks, who are hitting the streets. My position regarding Europeans is therefore one of esteem, and I wish them all the luck in the world in their struggle against the banksters.

          1. IF

            I don’t blame the Greek! They did what they thought was best for them. Now I hope that the Germans will do what is best for themselves.

            Right now the situation feels like an orchestrated extortion. First buy greek debt at too low spread (booking a profit and bonus for party a) then bet against greek debt (booking a profit and bonus for party b, but a loss to party a), then let the taxpayer rescue party a) and wash rinse repeat. The Germans know they are the mark in this game. Its got to end!

            I’ve seen the small, rusty cars Germans drive. As a true Keynesian I demand the German government to buy a BMW for each German! (Maybe a Mercedes for age > 50 and a VW as a starter for the young generation.) Lets shortcut the disfunctional banking system that does such a poor job allocating these fine cars and use the government! No more vehicles delivered in lieu of paper promises, neither to the US nor Greece. German consumption now! (Do I sound convincing?)

            As owning_to_rent pointed out, the German legal system might have bad teeth, but it still is hungry. I still have my hopes. Something I don’t have with regards to the US.

          2. charcad


            Yep – and if the SWR radio news reporting last week about how 50% of the voters that comprised that record breaking 14% FDP result have abandoned the FDP in disgust at their policies is as reliable as most of the other reporting from them is, then you may want to consider how past performance is not a promise of present, much less future, performance.

            The only problem here is the poll last fall was legally binding and produced seats in the Bundestag. Radio and TV network polls aren’t. Poll results like these work just like European style options. They can only be exercised one day during the entire contract.

            involving the crime of Untreue?

            Old American would have translated this term as “fiduciary duty.” No longer applicable in the era of Goldman Sachs. Our political and economic norms have moved a lot closer to Greece, Italy and Spain. I don’t disagree with your point here overall.

            It highlights what a poor fit Germany and the Club Med states are. The question is how long most Germans will accept the rusty old cars many drive to prop up the Brussels elite’s conceit of imperium built with someone else’s money and troops.

    3. Richard Kline

      So Bas, I agree strongly with most of what you’re saying and all of what you’re implying. No one is leaving the eurozone. No one is going to force anyone out of the eurozone. The ‘sudden panic’ stinks, and speaks _highly_ of manipulation by ghouls for their own interest. But to me, the howling int he Anglo-American press isn’t simply euro-bashing or for the reasons just mentioned: it’s to deflect attention away from the incipient currency crisis _in the UK_. They have a sovereing currency, and a debt situation which screams that that currency is overvalued and an excellent candidate to crater. Yet all we here is railing about a small country (with many problems) using the much better backstopped Euro. Hmmm. Dead white elephant in the middle of the City, anyone?

  7. m west

    BREAKING NEWS FROM EUROPE: The EU has announced its plan for help with the Greek debt crisis. A spokesman (unidentified) said: “We will supply any troops or equipment needed when riots or unrest breaks out as a result of the rigid cuts Greece will have to implement because we will NOT give them any more money to flush down their toilet”. ….. Please, this is just a joke.

    1. alex

      Protectionism! “We will supply any troops or equipment needed when riots or unrest breaks out …”. But the US can competitively export such capabilities. References available upon request.

      1. charcad

        “There is an agreement on the Greek situation,” EU President Herman Van Rompuy told reporters gathered at a summit of leaders from the 27-nation EU in Brussels. “Euro area member states will take determined and coordinated action if needed to safeguard stability in the euro area as a whole,” he said.”

        When I read this today my first thought was Vinny Goldberg & Family need to start making emergency preparations to flee the region. This was the Headline du Jour from Europe on the Balkans from roughly 1991 to 1999.

        Protectionism! “We will supply any troops or equipment needed when riots or unrest breaks out …”. But the US can competitively export such capabilities. References available upon request.

        Don’t laugh. We ended up doing exactly this a little while back in Bosnia and Kosovo. In fact, we still have some left there at Camp Bondsteel. This was after “sophisticated” (translate sophist) European Policy over the course of three years promoted piles of civilian bodies as high as small hills.

        Had the Bosniaks been told up front they would get no effective support from western Europe they could have negotiated a far better deal with the Serbs than they ultimately got.

        Under the UNPROFOR we witnessed every possible expedient adopted, including a form of gated communities that weren’t effectively secured. Everything was tried except overwhelming force able to impose a solution come hell or high water.

        Things didn’t calm down until the USA imposed the usual “cowboy” solution of the type Euro sophisticates (sophists) always love to sneer at. i.e. we rolled the 1st Armored Division into town and offered death under our tracks and guns to anyone not playing by our rules.

        1. alex

          Our intervention in Kosovo was one of the better uses of our military. Unfortunately the Iraq2 venture has somewhat tarnished our image.

  8. Siggy

    Could somebody explain how devaluation is a choice by which one improves its competitive position?

    My observation is that devaluation is a market imposed reality that is being acknowledged by the devaluing party. Implicit in the devaluation is the acceptance of a lowered standard of living.

    Given the lowered standard of living, I find it hard to conceptualize that there is an economic cure in the exercise.

    1. Swedish Lex

      There is no economic cure other than the placebo effect and the political implications which can be significant and hence impact the economy as such.

    2. alex


      If by devaluing you increase exports (or reduce imports via substitution) and a bunch of previously unemployed people get jobs in exporting (or import substituting) sectors, it’s good for the economy.

      Yes, it may mean a short term reduction in standard of living for those who kept their jobs, but their ain’t nothing perfect. Longer term, high unemployment and/or a currency crisis wouldn’t be too great for those that kept their jobs either.

  9. alex

    Seems like the report itself gives a pretty good indication of why krona deval hasn’t had more effect:

    “the Nordics, with their high dependence on exports of investment goods and consumer durables, were particularly hard hit”

    But there ain’t nobody buying that stuff nowhere!

    Many of the above comments are quite insightful, and a pleasant change from the mindless “strong dollar good” that I often hear. I remain a big advocate of USD deval, particularly with respect to the renminbi, but it ain’t all gravy. First, a well managed deval takes several years. There are also lag effects (J-curve) beyond how long the currency reval takes. It will be worse than after the Plaza Accords because we’ve lost so much manufacturing capacity (in the mid-1980’s we had a lot of idle capacity, as opposed to whole factories being exported).

    So a USD deval won’t have an immediate effect, and isn’t the answer to the immediate unemployment problem. Nevertheless it’s an essential part of a decent plan for say, 5 years out. I would hope that if companies sense that the US is seriously committed to deval, it would at least help slow the export of manufacturing capacity in a shorter term.

    Also, currency rates aren’t the only issue. Any hint of domestic content requirements for stimulus spending are met with howls of “protectionism”! Yet China, in for example their wind power projects, unabashedly requires 80% domestic content. Sorry folks, but you can’t fight mercantilism with one-sided free trade.

  10. GA

    This is an interesting attempt to consider differences between two ‘otherwise similar’ economies, but there are differences apart from currency regime that matter a lot.

    First, Sweden’s banking sector is far more exposed to the Baltics – and hence to indirect currency risk. One way or another, this has to have hit lending in Sweden.

    Second, Sweden’s economy does more direct manufacturing – it should be enough to consider the potential impact on domestic investment and confidence that the pending (for all of the time period considered) closure of Saab and uncertainty about Volvo must have had. Finland’s presence in and exposure to the auto sector is tiny in comparison.

    Plus, remember that the effect of Sweden’s devaluation would be more muted than expected – one of its ‘natural markets’, the Baltics, was going through ‘internal devaluation.’

    I’d love to see a proper regression of the effect of floating/Euro exchange rates, but taking a single ‘comparison case’ and expecting it to be meaningful is absurd. You’d need a lot more paired panels/cases.

    In the meantime, the more reliable, larger-sample studies are pretty clear: devaluation helps. Sweden just fails the ceteris paribus condition.

  11. steve from virginia

    The fly in the devaluation ointment is the fact that ALL the major nations and trading blocs HAVE to import oil – mostly from the Middle East.

    Devaluing currencies – as is taking place right now in the Eurozone – makes oil prices rise. Since the Saudis are pegging each barrel of oil to dollars – roughly $75- 83 a barrel – the US has a de facto Super Hard Dollar.

    The leaves the euro out in the cold. The reason for the euro in the first place was to allow European nations to import crude without having to buy dollars first.

    There is no way around the super hard dollar: the US is lip- locked with Saudi Arabia with its massive fleet of gas guzzlers, no energy policy, no conservation plan, no coherent government grand strategy and no real foreign policy other than to start wars in dismal, far away places. The US is locked into deflation and there is no way out! Oil prices and demurrage costs are high enough to keep demand from exploding and allows the Saudis to use the Brent market to manipulate the crude price and fix a trading range.

    US monetary policy is made in Riyadh. Bernanke, Yves 2d favorite whipping boy ot Obama is irrelevant.

    The Euro storm is the result of the New Super Hard Dollar. All the dollar carry and short dollar trades worldwide are unwinding. There is no exporting out of this particular situaltion. This is true even for China because so many countries have to import fuel.

    Shrinking energy availability has made the global economy a zero- sum operation. Nobody can spend their way of their national dilemmas because the spending raises oil prices and allocates away from goods to energy. Nobody can export out either because raising energy prices take away consumers for the exports.

    There is no end to this until the crisis is properly identified as an energy – not credit – crisis and real conservation enacted.

    We either embrace the 19th century and make the best of it or circumstances push us into the 14th century.

  12. i on the ball patriot

    Neo-con global financial shock and awe.

    Easy credit bubble bombs – boom!
    Counterfeit derivative product bombs – boom!
    “Too Big to Fail” bombs – boom!


    Boom, boom, boom,
    Demand is down,
    Why cheapen your currency?
    Its not the only game in town,

    If you want a lasting,
    Economic cure,
    Get to the cause,
    It will work for sure,

    Kill off the bombers,
    In the central banks,
    End the corruption,
    It will end the pranks!

    Deception is the strongest political force on the planet.

  13. fresno dan

    I never see in these discussions exactly how much of a countries GDP is due to exports to begin with. If it is 20% and there is a 20% devaluation currency, would that mean that the GDP goes down 4% if there is no change in exports? Or would it go up due to the fact that you are exporting more, albeit it at a cheaper price (i.e., devalued dollars)? And are all exports equal in effect? If Sweden exports trees, (a pure currency effect I would presume) I could see the number of trees exported increasing, but it may not be enough to offset the lower price, so GDP could go up, or down, or neither.
    With multinational firms, I also wonder about the accounting: if Volvo imports engines from China, how much GDP accrues to Volvo (Sweden) and how much to China? When you sell the car for GDP calculations, is the cost of imported parts accounted for? How about “imported” financing? How much profit accrues to Volvo (Sweden) in such a case?

    Finally, I wonder about New York and Alabama. No currency difference, no export or import tariffs. If lower prices of land and labor are important, why hasn’t the standard of living equilibrated between New York and Alabama? Shouldn’t the low land, labor, and tax costs pull capital from New York until the returns are equal for both regions? Just wondering.

  14. DR

    How much of exports have imports components? In a global supply chain, I wonder if devaluing your way to prosperity really works. For example if the US devalues and China gives up on it’s US peg, the price of import components will increase which would subdue any advantage to lower export prices.

    1. charcad

      “Moral support but no money, EU says to Greece”

      Hmph. This was right in character. They previously offered high sounding words (but no meaningful military intervention) to the peoples in the Balkans. For years.

      Bruce Krasting said a few days ago he expects coordinated central bank FX intervention to start managing changes in USD-Euro rates. I think he’s correct and that this will prove the first substantive response to Semi-Sovereign debt crises.

  15. Vinny

    Very interesting post. Thank you, Yves.

    I wonder whether devaluing one’s own currency is a strategy that only works in less widespread crisis than the current one.


  16. Edward Krowitz

    If a country buys more from the outside world than it sells, it becomes a net debtor. By tying itself to the Euro the Greeks paid for the excess of consumption by the hard work and savings of their Euro partners, mainly the frugal Germans, who refrained from consuming more than they produced.
    Devaluation forces the Greeks to consume less, through higher domestic prices and lower real wages. Either thru lower incomes in Euro’s or lower real incomes in drachmas that lose value through inflation.
    Domestic dislocations force uneconomic enterprises out of the market resulting in unemployment. The party ends, holders of Greek debt either must take a haircut or wait until the Bundesbank decides to bail out the Greek government.
    Whatever the case, Greek citizens have to adjust their living standards to what they themselves produce. No more living beyond ones means and depending on German industriousness and frugality to pay for their overconsumption.
    That is what Angela Merkel is telling the ECB.

  17. Doc at the Radar Station

    You need to differentiate between a “devaluation” that is either:
    1) An attempt to balance other countries’ attempt to peg or fix their value below yours in an unreasonable manner.
    2) A devaluation that is in response to a currency crisis.
    3) An attempt to peg *your* currency to gain some advantage.

  18. psychohistorian

    What I haven’t seen discussed here is the effects of the US dollar being the international Reserve Currency on devaluation both internally to the US and the more significant impact on the rest of the world.

    I believe that the printing of US dollars that has occurred since the bailouts has reduced the value of the dollar as the Reserve Currency and all related currencies proportionally. Is that not to be expected? Call it inflation or deflation….bottom line is trillions more dollars out there in relation to the same amount of everything else.

    Given the international market manipulation that is occurring now answers what Wall St. is doing with their ill gotten gains. They expect to blow up the markets in the rest of the world to cover their exploitation of the US public and others. It seems America’s imperialism is turning into international financial terrorism. Since we have all the guns, are we going to be confronted or will the banksters just end up getting more control of the world economies?

    Interesting times…

  19. a

    Just to emphasize the point about the importance of the denomination of debt that KdB mentioned above.

    If Greece were to leave the euro-zone and start a new currency, then it would presumably try to cram through a redonomination of its debt from euro into the new Greek currency. It might even use the currency rate which was used when it entered the euro, which would be very disadvantageous for creditors. *This would help Greece*, if it could do it.

    If leaving the euro-zone doesn’t give Greece this opportunity, then there is no advantage to leaving. It would simply gag on its euro debt and have to default in any case. Better to stay in the zone and default.

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