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by _delirium
2422 days ago
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To add to this, one of the parts that's counterintuitive is that in principle currencies are just accounting mechanisms, so you can achieve the same effects in a currency union. The problem is that it requires a lot more coordination. When you devalue a currency, a bunch of things in the country move together: wages go down in external terms (e.g. $ or € denominated terms), but housing costs, domestic service prices, etc., all move together, because they're denominated in the same local currency. So the currency has become worth fewer dollars or euros, but the ratio between wages and rents in local currency is unchanged, so people can still in the immediate future pay their rent out of their wages, the same as before. To accomplish the same without an independent currency requires managing this movement in nominal terms. If the problem is that the country is basically broke or uncompetitive, and needs to solve this by "getting cheaper" compared to other countries, everything in the country has to get cheaper simultaneously. Wages have to go down in €, housing has to go down in €, etc., and this all has to happen in a coordinated way so everyone can still pay their now-lower rent with their now-lower wages, and so on. Economists call this "internal devaluation", i.e. achieving the same effects as a currency devaluation while not having a separate currency, by just lowering actual prices for everything. The consensus seems to be that it's difficult to pull this off successfully, and really good positive examples are rare. It's complicated by just the general difficulty of coordination, as well as longer-term contracts (e.g. most people's rent and wages don't get renegotiated monthly). Greece has been sort of doing this through consistent single-digit deflation, but it draws it out over a long period. Many (though not all) economists think the result is worse than an all-at-once currency devaluation would've been. |
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