Chart: Internal vs. External Devaluation25 May, 2012, 16:22. Posted by Zarathustra
Tags: Euro Crisis
The solutions so-far for the European peripheral countries are known as austerity. Or in other words, internal devaluation, as opposed to so-called external devaluation, i.e. currency depreciation.
Morgan Stanley has a few slides on comparing the outcomes between these two options in the past. The chart below shows that internal devaluation produces far more increase in unemployment rate vs. external devaluation. In other words, for average workers, internal devaluation or austerity is far more painful than external devaluation or currency depreciation. That less painful option, unfortunately, is not available for countries like Greece, Spain and others.
Source: Morgan Stanley