Internal devaluation

Internal devaluation is an economic and social policy option whose aim is to restore the international competitiveness of some country mainly by reducing its labour costs – either wages or the indirect costs of employers. Sometimes internal devaluation is considered as alternative to 'standard' external devaluation when nominal exchange rates are fixed, although social implications and speed of economic recovery can significantly differ between the two options. While proponents usually blame fiscal profligacy or loss of competitiveness as the reason for a need to devalue internally, critics oftentimes view macroeconomic imbalances and the absence of a fiscal transfer mechanism within a currency union as culprits.

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