IMF: The “internal devaluation” in Greece is unstable

Internal devaluation in Greece has been made so far through job cuts and compressing internal demand rather than through structural changes that could increase productivity, the analysts of IMF noted on a new report issued analyzing the responsibility that countries of North Europe bear.

The report mentioned also that “There has only been limited progress with reforms though, the note said, as while exports have rebounded manufacturing sectors typically remain smaller than before the crisis.

The IMF notes that deficit eurozone countries have implemented painful external and internal adjustments following strategies of internal devaluation. As it is highlighted, promoting labor market reforms in Greece and other “deficit” economies of the eurozone is necessary, but this does not mean cutting wages. And that’s because, as it is noted, if wages are decreased, labor market would be more flexible and unemployment rate might decrease, but at the same there would be a great impact on the demand and the return of the countries in “internal balance”.

Instead, analysts suggested reducing taxes withheld from wages, which would lead to increased net earnings, and increasing consumption tax.

The IMF analysts noted that the internal devaluation in Greece has become “mainly” through job cuts and shrinking domestic demand, rather than through structural changes that could increase productivity and reallocate workers in export industries economy.