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‘Internal Devaluation’ and the Crisis in Europe

by Engelbert Stockhammer

The euro area is entering recession again. It’s tempting to call this a double-dip recession, but that is misleading. The first recession never ended: the EU’s output is still below the pre-crisis peak. But still, things are getting worse. It is the Southern European countries and Ireland that are dragging down European growth; but the recession in Europe’s South is now also beginning pull down Germany. Europe’s answer to the crisis has been an orthodox one: sound public finance and ‘internal devalution.’ Internal devaluation is the modern way of saying ‘cut wages.’ And so the Southern European countries have done. In Greece real wages have fallen by no less than 17% since 2008. In Portugal by 4.5%. In Spain and Italy they fell by about half a percentage point and in Cyprus by 1.4%. Among the Western European countries in recession only in Ireland are real wages higher than they were in 2008 (there they increased until 2009 and declined thereafter).

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Engelbert Stockhammer

by Engelbert Stockhammer

Engelbert Stockhammer is Professor of Economics at the School of Economics, Kingston University, U.K. His research areas included macroeconomics, applied econometrics, financial systems, and heterodox economics. His research work includes the books Unemployment in Europe (2004), and the edited 2011 volume, A Modern Guide to Keynesian Macroeconomics and Economic Policies. Engelbert is also a member of the coordination committee of the Research Network on Macroeconomics and Macroeconomic Policy.

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