When people say devalue in the current context, it is a shorthand for the Iceland scenario. What they mean is: moving off the shared currency (EUR) and adopting

When people say devalue in the current context, it is a shorthand for the Iceland scenario. What they mean is: moving off the shared currency (EUR) and adopting a national currency. This generally means a one-off devaluation, because the country moving off it will be weaker, and in their act of moving off the EUR will get stronger, and their new currency will have less purchasing power. [This is not always the case - when people speculate about a German exit, they assume the opposite would happen: strong Mark, weakended Euro.] What you're suggesting here is a bit different: > So we have no idea what would have happened if > every country in Europe still had its own currency > and tried to outdevalue each other China has found a round-about way to do this against the US for the last 30 or so years. But it's no longer viable in free countries. As soon as the state gives citizens access to international financial products, and allows them to move money internationally, it can no effectively control national FX rates. If it were to try it, enterprising citizens would model the real value, and use commodities or similar to arbitrage the peg. Since the 1970s, there has been a migration of countries moving off fixed exchange gearings to flating economies, driven by this dynamic. Some went willingly (Australia), others tried to ignore the inevitable and found themselves forced to it (UK). China has seen the writing on the wall on this and appears to be on an arc towards floating the renmimbi. The nationalist lingo about this will the their hope that it will become a reserve currency (what actual value it has to be used as a reserve currency in a well-oiled system is unclear - probably none). The real story is that they have to do it if they want to continue transitioning to a full import/export economy. They're already leaking heavily (look at the amount of US debt they buy to prop up the peg), and that problem can only get worse as their middle class and financial sectors become more confident. The Euro was a masterful play by German policy makers for maintaining social stability beyond reunification. It works differently to the Chinese mechanism but has a similar outcome: it removes purchasing power from rich Germans, and forces the price down of the goods being produced by poor Germans. Why does Germany still have a strong industrial sector? They chose this over having a strong financial sector. Instead of rich Germans being angry at vast unemployment and benefits in the weaker parts of their own country and thinking about splitting, they have high employment across the nation and get to look down on neighbours instead. But it's not so good for the neighbours. There have been some positive outcomes - the goal of joining the euro has probably had a strong positive effect on good-governance in many countries who had to work hard to join.