Devaluation is often part of the remedy for a country in financial trouble. Devaluation boosts the competitiveness of a country’s exports and curtails imports by making them more costly. Together, the higher exports and the reduced imports generate some of the financial resources needed to help the country get out of trouble.
For countries that belong to—and want to stay in—a currency union, however, devaluation is not an option. This was the situation facing several euro area economies at the onset of the global financial crisis: capital had been flowing into these countries before the crisis but much of it fled when the crisis hit.
Filed under: Advanced Economies, Economic outlook, Economic research, Emerging Markets, Employment, Europe, Financial Crisis, Fiscal policy, growth, IMF, Inequality, International Monetary Fund | Tagged: central bank, euro area, spillover, structural reforms, wage moderation, wages | Leave a comment »