Since the recession began, Ireland - constrained by the euro - has been pursuing a policy of internal devaluation to rebalance the economy. That is to say placing the huge crushing "readjustment" on the shoulders of the public through a massive program of cuts and wage repression thereby making us cheaper relative to everyone else.
If Ireland has its own currency, it would be significantly weaker than the euro is at present. That we are running a current account surplus at all is impressive. This has happened at the cost of mass unemployment and 5 percent wage cuts a year.
This was the aim of the EMU: the "golden straightjacket" as monetarists like Friedman described it. By being unable to devalue your currency, in times of economic difficulty, the only option would be to cut and cut. The thinking behind this was that eventually such cheap and productive labour would be rewarded with a flow of foreign direct investment... with scant regard for the human cost.
However, Ireland has implemented such a program of internal devaluation as far as it can.
We are the second most productive workforce in the economy after Germany and have restored the "competitiveness" (ie. wage levels) we lost during the bubble and then some. The state has been pared back. We remain one of the lowest taxed economies in the industrial world. Government involvement in the economy is also one of the lowest in the world.
Of course these are false readings of what constitutes success as Scandinavian countries with the highest levels of taxes and government involvement also have the strongest economies with the lowest debts. Alas, this is how are politicians see things.
Then I came across this and thought, how has this not been raised as another option?
Then I saw this post in another thread (Hat-tip to Dcon).There might be – artificial devaluation. By imposing a duty on imports and equal subsidy to exports a country can, in effect, devalue its currency without leaving the Eurozone. A, say, 15% surcharge on imports and a 15% subsidy to exports in Greece would be effectively a 15% devaluation in the currency.
Now, certainly internal tariffs are against the current rules of the eurozone.. but so are bailouts and the ECB printing money.But look at the countries thought to be undervalued. Ireland, on the Merrill Lynch analysis, is the most undervalued even though it is undoubtedly completely bust, while Germany, which conventional wisdom would say was massively undervalued as a result of its membership of the euro, is actually only quite marginally undervalued – by around 5pc.
If the "PIIGS" were temporarily allowed to reintroduce import tariffs by 10 percent or so on goods from the core eurozone(maybe the USA) to artificially devalue their currencies, then we would see their internal economies pick up steam fast. Current account imbalances would swing into much healthier positions, budget deficits would be gobbled up quickly by growing tax revenues. It would even be good to place countries closer to a position of leaving the euro, without being so explicit as to cause a run on their banks.
Obviously this is the inverse of the proposal for the German economy to heat up and run at a higher inflationary target... but maybe, is this one more likely?
Does anyone see any pitfalls or problems with the plan?