Fiscal devaluation as a cure for Eurozone ills – Could it work?

Michael Keen, Ruud de Mooij, 6 April 2012

Troubled Eurozone countries face the difficult challenge of regaining competitiveness without devaluing their currency. Could a fiscal devaluation, shifting taxes from employers to consumers, help? This column presents evidence suggesting that it could, but the devil is in the detail.

Among the traditional necessary conditions for successful membership of a currency union is high labour mobility and/or significant wage and price flexibility to serve as alternative stabilisation mechanisms in the face of a fixed exchange rate. These conditions are absent from many troubled Eurozone countries.

Topics: EU policies, Europe's nations and regions
Tags: Eurozone crisis, Fiscal Devaluation

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For Greece, a “fiscal devaluation” is a better solution than a “temporary holiday” from the Eurozone

Domingo Cavallo, Joaquín Cottani, 22 February 2010

Martin Feldstein argued last week that Greece should take “a temporary leave of absence with the right and the obligation to return at a more competitive exchange rate.” In this column, Argentina’s highly regarded former Minister of the Economy and a co-author argue that the idea won’t work. A better solution would be to adjust the Greek tax system.

Martin Feldstein argues that, to mitigate the costs associated with fiscal adjustment, Greece should ask its Eurozone partners for “a temporary leave of absence with the right and the obligation to return at a more competitive exchange rate” (Feldstein 2010).

Topics: Europe's nations and regions
Tags: eurozone, Fiscal Devaluation, Greece