Chronicles of the Second Great Depression (7). Price levels.
There is quite some discussion about ‘internal devaluation’. As we know,
eternal internal devaluation policies aim at lowering the price level of a Eurozone countries vis-a vis other Eurozone countries, mainly by slashing wages (much less by, for instance, slashing rents). Does this work? Is it possible to engineer a fast decrease of the price level of a country, using ‘austerity policies’? Eurostat has published new data on price levels in EU countries for 2011 which enable us to answer this question (remember: the idea was that austerity policies could engineer a fast decrease in the price level!). What do the data show (source: Eurostat)?
1. Ireland did manage to decrease the price level. In 2008 it however did have the highest price level of the entire Eurozone
2. Non of the other Euro countries pursuing austerity policies managed to do this in a serious way – initial declines of the price level were often quickly followed by subsequent increases. Take note of the difference in levels, compared with Ireland!
3. Direct competitors of the austerity states like Turkey (compeets with Greece and Spain, tourism!) and Poland (direct competitor of the Baltic states) with flexible exchange rates did however manage to reduce their internal price level, vis-a-vis the Eurozone, using ‘external devaluation’ as a policy tool.
This leads to a clear conclusion. For countries which already have a relatively low price level, internal devaluation seems very hard to engineer, at least in the short-term. And in Europe any hard-won success can be easily countered by direct competitors who happen to have a flexible exchange rate.