People keep bringing up that, if only Greece had its own currency, it could devalue it in order to make its exports cheaper by comparison, and this would increase exports and help the economy. Since Greece is in the Euro, it can’t use this tactic.
But, if you think about it, the effect of a currency devaluation is to make everyone’s effective salary lower (which is why goods will cost less to produce, and thus increase exports)
Since Greece can’t devalue the Euro, and alternative way to achieve the above would be to decree that all salaries starting tomorrow will be 15% lower (which would be similar to it devaluing its currency by 15%)
I can see lots of problems with this, including the legality of whether the government can do such a thing. But fundamentally, if it could legally do it and implemented it, would it have the same effect as currency devaluation?
Is currency devaluation just a legal and (mostly) frictionless way for a government to lower everyone’s wages?
The Greek government has the power to decrease the Greek public sector wages. Private wages will follow. This is sometimes known as internal devaluation and has proved effective in other nations. In fact, much of Germany’s current success rest on they having held down wage increase for many years. It is preferable to devaluation in that it does not destroy savings, however it does also not lower debt.
Wages can be tough to lower for a variety of reasons, such as existing contracts or a general unwillingness by the currently employed to agree to a pay cut. Internal devaluations eventually work in bringing back full employment, but the operative word is “eventually,” and it’s a bit of a weasel word because internal devaluations can be a slow, grinding, miserable process, which is why a currency devaluation is preferable. It’s quick, it affects everyone at the same time, and as a bonus it decreases the real value of debt. The prime drawback is inflation.
That’s only one of the effects. Devaluing the currency does far more than that. Most importantly it makes having money expensive but investing and borrowing becomes cheaper. The goal is to get money moving again.
True. During the Asian financial crisis, the strengthening dollar hurt the exports of countries whose currency was pegged at a fixed value to the dollar. When they abandoned the pegs, the value of their currency plummeted, which made their foreign denominated debt that much harder to pay back. But this isn’t a concern for Greece, as the bulk of their debt is in euros.