In line with the orientation of EU economic policy, the Spanish government has favoured a strategy of internal devaluation as a way of adjusting price levels within the currency union and offsetting the fall in competitiveness accumulated over time, as evidenced by the persistent trade deficit. The results of comparative empirical studies indicate that the internal wage devaluation applied in Spain as a crisis exit strategy (in the form of labour reforms and, in general, measures to contain labour costs) does not seem to have attained the desired goals in terms of reducing the relative prices of exports and consolidating a model of growth based on external demand. Indeed, the estimates drawn up show that tailwinds – the depreciation of the euro as a result of the measures taken by the ECB, greater economic activity by trading partners and the fall in the price of oil – exercised a decisive influence in the trends followed by the prices of exports and the balance of trade during the period of crisis management in Spain.
- The first recommendation is aimed at EU institutions. A monetary area with heterogeneous structural characteristics such as the EU needs to set up an adequate permanent mechanism for stabilisation to guard against asymmetric shocks that can enable anti-cyclical measures to be introduced, especially if the countries affected have no tax margin. As pointed out by the staff of the European Stability Mechanism, ‘A euro area fiscal stabilisation capacity is one of the missing pieces in the euro area architecture, and filling that gap now is more important than ever’ (Misch & Rey, 2022, p. 24).
- The second recommendation is aimed at national governments within a monetary union. They need to coordinate policies and avoid unilateral measures that may cancel each other out, for example, the simultaneous implementation of wage devaluation policies in countries with similar fabrics of production or patterns of specialisation.
- The third recommendation is also aimed at national governments in a monetary union. If demand contracts, they need to avoid adopting measures that substantially decrease the total payroll, particularly in the case of wage-led economies such as those of the euro area (demand appears to be more relevant than relative prices).
- The fourth recommendation is also for national governments: attention needs to be paid to export price formation mechanisms to determine whether wage containment efforts intended to improve competitiveness are passed on to prices or offset by rises in other costs and margins.
- The fifth recommendation, also for national governments, is that income policies need to be activated to offset the sacrifices of the groups hardest hit by adjustments, e.g. wage earners in the case of internal devaluation policies.
Photo by Alex Azabache