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"Isn't it like the state forcing exporting and tourism companies to lower their prices (by devaluating the currency)? Why is that the states job instead of the
by bainsfather 7y ago
"Isn't it like the state forcing exporting and tourism companies to lower their prices (by devaluating the currency)? Why is that the states job instead of the individual companies'?"
With a free-floating currency, prices for foreign buyers can change overnight. This can allow quick responses to shocks. In contrast, internal devaluation (deflation) is a very slow process (how do you coordinate everyone in a country to reduce their prices).
e.g. for the UK circa 2008 the economy had problems (more reliant on finance sector than most other countries) and the currency dropped, making UK exporters more competitive. Italy or Greece a few years later would have also seen their currencies fall, had they not been locked into the same currency as Germany. Instead, their exporters have problems with competitiveness which take many years to equilibrate (they must have lower inflation or deflation relative to Germany).
There is a subject called 'Optimum Currency Areas'. As always, there are tradeoffs, more homogeneous economic areas face this particular problem less and so are more likely to benefit from a single currency.
- vnorilo 7y agoThank you for the insights. Any thoughts on how it went down in Latvia, sometimes cited as a success story but also criticized [1]? [1]: http://cepr.net/publications/reports/latvias-internal-devaluation-a-success-story http://cepr.net/publications/reports/latvias-internal-devalu...
- bainsfather 7y agoI am sorry, no. I do not have such expertise. When I read economics textbooks, I see a marked contrast to physics textbooks. e.g. in physics, they might explain about a pendulum using equations etc, but then they show you real experimental data, to show that your equations about period vs pendulum length are correct. I have not found economics textbooks that do that. The more basic thing that economics gives me is akin to this: when iron ships were first proposed, sceptics might say 'iron sinks, so iron ships are impossible, you are crazy'. You can answer this by putting an iron saucepan in the kitchen sink, and showing that it floats. So (macro) economics can tell me some basic things about 'which way is up'. But putting even half-accurate numbers on things is difficult. imo economics is often done best when you view it using historical case studies + theory to know which way each effect acts. This is not to say that what you ask is impossible, but when that is done (by experts, not me), it is not convincing enough to convince others that it is right.
- Double_a_92 7y ago> Instead, their exporters have problems with competitiveness which take many years to equilibrate (they must have lower inflation or deflation relative to Germany). Then why don't they lower their prices? Why do they need to rely on a devaluating currency (which might come automatically from the market, or from the central bank actively buying foreign currency at high price)?
- bainsfather 7y agoSo, you need to lower all prices - i.e. as an exporter you ask your workers to take wage cuts, they must ask their landlords to reduce their rents, shopkeepers to reduce prices etc. This is a slow process (especially because many contracts run for a fixed period so cannot be changed until the next contract is signed). Internal devaluation can be done, it is just a slow and painful process (usually including higher unemployment).