Once upon a time, a country up the economic creek could devalue its way down again. The rewards – more competitive exports and a bouncing economy – were well worth the cost of more expensive imports. Troubled eurozone members do not have that option. Their challenge is to achieve the effects of devaluation without altering the exchange rate. Such “internal devaluation” is painful but the rewards can be quick and striking. Trouble is, you might have to move to Estonia.
The Baltic state has moved from a severe recession – gross domestic product shrank 14 per cent in 2009 – to growth of an expected 1 per cent this year. To get there, nominal wages have shrunk enough to bring unit labour costs down by 7 per cent this year. That has damped domestic demand but boosted exports. A current account deficit of 17 per cent of GDP in 2007 became a surplus of 4.7 per cent last year. Estonia's rewards: joining the eurozone next January, and a credit rating upgrade from Standard & Poor's in June.
Estonia has advantages. Its 1.3m people are used to hardship and debt is only 10 per cent of GDP. Greece's level is 12 times that.