IAI Actuarial Core Principles · Business Economics · Recent macroeconomic history
During the Eurozone sovereign debt crisis, Greece, Ireland and Portugal could not use a particular macroeconomic tool to help restore competitiveness, because they shared a common currency. Which tool was unavailable?
The unavailable tool was independent currency devaluation. Because Eurozone members share the euro and a single monetary policy, crisis countries could not depreciate to regain export competitiveness and instead relied on internal devaluation through wage and price falls, alongside austerity.
- ARaising income tax rates
- BCutting public spending
- CIndependent devaluation of their own national currencyCorrect
- DNegotiating bailout loans from international lenders
- Structural labour market reforms
Explanation
Members of a monetary union cannot devalue their own currency to cut relative export prices. Fiscal measures, bailout negotiation and structural reforms remained available and were in fact used. This forced adjustment onto wages and prices, known as internal devaluation.
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